-- Posted Wednesday, 14 February 2007 | Digg This Article
London, England
Wednesday, February 14, 2007 - Valentine's Day
---------------------
*** Trade deficit meter maids…an old shoe or an old spouse…
*** Everything's fine as long as nothing blows up…choose your illusion…
*** Cracking a rib from laughter…smoking in a huge pit of animal waste…and more!
---------------------
Yesterday's big news barely sent a ripple of disquiet through the world's great pool of liquidity. The report came that the U.S. trade deficit hit a new record last year, and the markets shrugged. Who cares?
Funny the way things work. As time goes by people stop caring about things. Since this is Valentine's Day we will pass along this little story.
"A guy found out his wife was having an affair with the butcher," said a Frenchmen at a dinner party last weekend. "So he went to the butcher and said, 'I have only one demand to make…that you keep her.'"
This brought a roar of laughter. We're not sure why. It didn't seem that funny to us. But it shows that people lose interest.
As we age, our passions become fewer and less intense. Finally, we don't care about anything at all - then, we're dead.
There was a time when people worried desperately about the U.S. money supply figures. A little blip up would send the bond market into fits of hysteria. Investors (the so-called 'bond vigilantes') would rush to dump their bonds, thereby sending yields upwards. Higher yields cooled economic activity, which had the effect of reducing inflation.
But who pays any attention to money supply numbers any more? No one. They're forgotten; considered irrelevant.
People used to worry about paying too much for stocks, too. But the Dow has been above 10,000 for so long - with the average stock trading at around 20 times earnings - people have come to expect it. They think it is normal.
And the federal budget! We remember when Republican politicians would get worked up into a hot sweat over a budget deficit. They felt it was irresponsible to spend more than was taken in. It was a stain on your record…a blemish on your honor. It was dangerous to the nation's credit…it was a burden upon the taxpayers…and it was a threat to the dollar.
Now, a Republican president proposes the biggest deficits…the biggest budgets…and the biggest national debts in history…and every pet political hack in Washington - Republican and Democrat - purrs with cool contentment. 'Deficits don't matter,' they've learned.
Decent, sober citizens used to fear war, too. No public issue was more important - it was not only a matter of life and death, but of national honor. For the first 150 years of its existence, the United States avoided foreign wars. Even as recently as the 1960s Lyndon Johnson had to bamboozle the American people to get the country into Vietnam. LBJ said that he wouldn't send American boys to do the fighting that Vietnamese boys should do. And then, when he did send American boys, the public put up such a howl that they had to be pulled out.
Now, American boys are garrisoned all over the world. And now they fight enemies that can never be defeated…so the wars can go on forever. But who worries? Perpetual war is considered normal.
There was a time, too, when the trade deficit numbers came around like meter maids. People kept an eye on them…and rushed to get out of their way. Now, they show up and nobody even bothers to look up. It is as if all the parking tickets had already been fixed, even before they were written.
What is the penalty for running a $763.6 billion trade deficit? Has anyone asked? Does anyone care? People have come to take trade deficits for granted - like an old shoe or an old spouse. Yes, they get a little bigger every year, but that just makes them more comfortable, doesn't it?
Stock market buyers paid no notice to the higher trade deficit numbers. They sent the Dow up 102 points. Bonds held their ground. Even more remarkably, the dollar stayed about where it was.
When nothing bad happens for a very long time, people come to assume that nothing bad ever will. It is as if they closed the windows and turned the gas on. The slow hiss of the gas worries them at first. But as long as nothing blows up, they get used to it. Finally, 'It's no problem,' they say to themselves…
…and light up a cigarette.
More news:
--------------
Eric Fry, reporting from sunny Laguna Beach…
"…the stock market might soon retreat from its highs. The "smart money" Commercial traders have been increasing their net-short position in S&P 500 futures contracts for several weeks."
For the rest of this story, see today's issue of
The Rude Awakening
--------------
And more views:
From Addison Wiggin, snowbound in New Hampshire:
*** "So, David, how did we get in this mess anyway?"
Our documentary team had been following David Walker and the Concord Coalition around New Hampshire on the latest leg of their Fiscal Wake-Up Tour. This particular question came from the raucous host of Wake Up New Hampshire, a radio show.
"We got in this mess for three reasons," David Walker answered with unrestrained aplomb.
"One. Unlike New Hampshire, the Federal government doesn't have a constitutional amendment requiring law makers to produce a balanced budget.
"B. Unlike New Hampshire, the Federal government can print money at will.
"…and 3. Unlike New Hampshire, the Federal Government is presumed to have an impeccable credit rating, so it can borrow money in perpetuity at very low interest rates.
"Frankly, because of these three factors, there are a lot of people in Washington spending other people's money on all kinds of fraudulent and wasteful things. Other people's money… like your kids and grandkids money."
Later at a "town hall" meeting at St. Anselm's College in Manchester, Walker finished his speech with this nugget: He put a picture of his three grand-children on the big screen behind him; girls aged from four months to seven years. "These are my grandchildren. They can't vote. They don't have a voice. I am their voice."
More from the snowy hinterlands tomorrow…
*** The U.S. public and politic is becoming polarized by money. There are those who still believe in our system of late, degenerate capitalism…and those who don't believe. The former are represented, more or less, by the Republicans, and the latter, more or less, by the Democrats.
Choose your illusion, dear reader.
Of the fifth annual record trade deficit, an administration spokesman said it reflected "more rapid growth" in the United States. We don't know what air they breathe in Washington, but we suggest it be checked. The biggest single segment of the trade deficit is with China, a country that is growing at least three times as fast as the United States. The trade deficit with China alone reached $232.5 billion last year - up 15% from the year before.
Democratic spokesperson Nancy Pelosi, meanwhile, said this:
"The consequences of these persistent and massive trade deficits include not only failed businesses, displaced workers, lower real wages and rising inequality, but also permanent devastation of our communities." She and 13 of her colleagues addressed a letter to the White House, noting that more than three million manufacturing jobs have been lost since Bush took office, with about one-third of those losses attributed to the rising deficit in manufactured goods.
This may be true, but it is not BECAUSE of the trade deficit. Rather, both the trade deficit and the financial damage Pelosi sees are symptoms and consequences of ailments. Now, will they be cured by the Democrat's horse pills?
The Republicans maintain that the trade deficits are natural and healthy. Stick with 'free trade,' they say.
But there's nothing in the theory or the history of free trade that describes what is going on today. The central bank of the world's largest economy has fixed the price of its currency at artificially low levels. The central bank of the world's second largest economy has fixed the price of its currency even lower. And with all this artificially cheap money and credit available to them, the world's financial intermediaries have run wild.
But do the Democrats have any shadow of understanding of what is going on? Do they have any chemical trace of real will to do anything about it - that is, to put the dollar or the U.S. government on sound financial footing?
Ha…ha…ha… Oh stop it! You're going to make us crack a rib, laughing so hard…
*** Subprime borrowers are having a rough time. Subprime lenders too. But not to worry, dear reader, neither this…nor trade deficits…nor stock prices…nor the dollar…nor foreign 'forever wars'…nor the federal debt - NONE OF IT is worth a worry or a care.
We're headed for a 'soft landing' in the housing market. Everyone says so.
Who are we to argue with them?
*** On the subject of smoking, a Dear Reader writes:
"Out here in Indiana we have CAFOs (Concentrated Animal Feeding Operations). Neighbors are always complaining about the foul odor and groundwater contamination coming from the CAFOs' 'lagoons' (huge pits filled with animal wastes).
"My guess is that the smoker, if a CAFO moved in next door, would not like to hear his own arguments thrown back at him. He'd be glad that there are zoning laws, thanks to all the idiots who pass laws for 'the public good'.
"He wouldn't want to hear, 'You don't operate a CAFO and that's your decision; I do and that's mine. That's why this (was called) the land of the free at one time in history.'
"Nor would he want to hear, 'I'm not saying a CAFO is good, but I should have the freedom to choose.'
"Instead he'd say, 'What you are doing is fouling the air I'm breathing. You have no right to do that. So take your CAFO away from me and make your odor where I can't smell it.'
"To any smokers who disagree with my comments, I hope a lead smelter operates on one side of your home, and a CAFO on the other. If you accept that without complaint, I'll let you smoke anywhere you want."
--- Advertisement ---
Uncovered: The Six Invisible Investments that Wall Street's Elite Loves to Own
Wall Street's "Big Dogs" build fortunes using 6 hidden kinds of investments the rest of us rarely discover.
Today, I'm spilling their secrets…
http://www.isecureonline.com/Reports/MSS/EMSSH299
---------------------
The Daily Reckoning PRESENTS: A blue-ribbon panel recently advised the IMF to sell gold as a way of trying to clean up its finances. The news initially spooked some weaker holders and hedge fund managers, most of whom are clueless about the overarching trends driving gold. However, as Doug Hornig asserts, the proposed IMF sales represent much ado about nothing… other than perhaps creating a buying opportunity, that is…
ABOUT THOSE PROPOSED IMF GOLD SALES
by Doug Hornig
Lately the metals markets have been abuzz with speculation about the meaning, and implications, of proposed gold sales by the International Monetary Fund (IMF). It's a subject about which many of our readers are probably concerned, so we decided to take a look.
This potential development came about because the IMF finds itself on shaky financial ground. It is facing a shortfall of about $105 million this fiscal year (ending April 30, 2007), a deficit which is projected to balloon to $185 million in 2008 and $244 million by '09.
There are any number of reasons advanced for this deteriorating balance sheet, the most common one being that many formerly cash-strapped Third World countries are experiencing enough prosperity to make early repayment of loans-Indonesia, Serbia, Uruguay and Ecuador are among those doing so this year-thereby cutting down on the interest income the IMF relies upon to cover operating expenses.
Though that may be a central part of the problem, the IMF should take a long look at its own bloat as well. In the past ten years, its annual budget has doubled to nearly $1 billion. As Devesh Kapur, an economist at the University of Pennsylvania, puts it, "Costs at the fund have been allowed to get out of control. It now has a bigger staff and budget than its role justifies."
Be that as it may, IMF officials determined that sources of revenue other than lending income needed to be developed. And thus the Committee to Study Sustainable Long-Term Financing was convened last May by IMF Chief Rodrigo Rato. Also known as the Crockett Committee-after Chairman Andrew Crockett, former director of the Bank for International Settlements and now President of JPMorgan Chase-it consisted of a small group of eight "eminent persons," namely: Crockett; former Fed Chair Alan Greenspan; Mohamed el-Erian, CEO of Harvard Management Co.; Tito Mboweni, governor of the South African Reserve Bank; Guillermo Ortiz, governor of the Bank of Mexico; Hamad al-Sayari, governor of the Saudi Monetary Agency; Jean-Claude Trichet, president of the European Central Bank; and Zhou Xiaochuan, governor of the People's Bank of China. The committee released its report on January 31 of this year.
During the press briefing that followed, Crockett said that the committee favored the "creation of an endowment-were it to be possible-that would provide income that could be relied upon over a period of time without having to ask members."
The "more attractive source" for this "is to use the fund's resources of gold, and so the report does suggest that it would be appropriate and possible to […] sell a part of the fund's gold holdings, and to devote the resources obtained from that to the creation of an endowment."
The sale could be as much as 400 metric tons (12.9 million ounces), which, valuing the metal at a conservative $500/ounce (the past two years' average), would net the IMF a minimum of $6.6 billion. That amount, invested, would be expected to generate $195 million in annual income. Of course, if current prices hold for the duration of the sales period, those numbers would be substantially higher.
Crockett noted that the 400-ton figure corresponds to IMF gold that was sold and repurchased in an off-market transaction about 6 years ago. It is about 12.5% of the Fund's total holdings.
The Committee, whose recommendations have been referred to the IMF's executive committee for debate, took care to emphasize that the proposed sales should be "ring-fenced […] to limit their market impacts." (Longtime Fed watchers chuckled at the wording, noting that such phrases are a dead giveaway of Greenspan participation.) To this end, Crockett promised the following safeguards:
"In the first instance, the amount should be limited to the 400 tonnes I mentioned without envisaging any additional sales.
"Secondly, the sales should take place within the existing Central Bank Gold Agreement [CBGA], that is to say it would not be additional to sales already programmed by central banks, but would be accommodated by reductions in the amounts of gold that central banks might sell under the [CBGA].
"And thirdly, we have emphasized that the sale should be undertaken in a very careful way in terms of their periodicity amounts and manner of sale such as not to disturb the market."
The CBGA limits signatory central banks (all of the major ones, excluding only the U.S.) to sales of 500 tons/year. In 2006, however, the banks released only about 350 tons. Thus, the IMF committee appears to be saying that it proposes taking up whatever slack exists this year, while not allowing its sales to push the amount of new gold coming to market over the pre-set 500-ton limit.
It is important to remember a couple of things here.
First, it's not the IMF's gold. The metal belongs to the depositor nations, the largest of which is the U.S. We the taxpayers own that gold, and thus have a very real interest in what happens to it.
Second, the IMF is prohibited from trading in gold. Its bylaws state that it does not "have the authority to buy gold," nor may it "engage in any other gold transactions-such as loans, leases, swaps, or use of gold as collateral."
What it can do is "accept gold in the discharge of a member's obligations" and "sell gold outright," but the latter requires "an 85% majority of total voting power." Since the U.S. controls about 17% of voting power, it can't by itself make a deal happen. But it has the absolute authority to block one.
The Crockett Committee report is not the first time the notion of IMF gold sales has been floated. It's an idea that has cropped up repeatedly in the past but has always failed, either because of American opposition or because of opposition among the more general membership, which includes many gold-producing nations that have an interest in keeping a floor under prices.
What will be the U.S. position this time around? We'll have to wait and see, but if the past is prologue, there will be stiff opposition. The final decision on whether to veto or not rests with Congress, where Democrats in the past have fought IMF gold sales on the grounds that they would hurt impoverished nations. Sen. Harry Reid voted against them as minority whip, and might be expected to be consistent now that he's majority leader. Or perhaps not, depending on which way present political winds are blowing.
While the IMF's announced motive seems to make fiscal sense-provided one accepts that it has any need to be as big and meddlesome as it is-gold bugs immediately began looking for the story behind the story.
If the Gold Anti-Trust Action Committee (GATA) is correct in their contention that the American government has acted deliberately, in concert with the major central banks, to suppress the price of gold in order to mask the dollar's inherent weakness (an effort in which Mr. Greenspan is alleged to have been a willing participant), then the IMF proposal plays right into such a conspiracy. Its hidden meaning could be that the IMF must help out with gold sales, because the CBGA signatories have become reluctant to part with enough of their reserves to keep a lid on prices and, in fact, may be pleased with the appreciation of their assets. Yearly sales boosted to the full 500 tons, thanks to IMF participation, should contribute to further price suppression. It'd be no great shocker if the IMF were doing the U.S.' bidding.
In addition, it's possible that some depositors, holding dollars and nervous about their decline, are making noise about getting their gold back. Propping up the buck through gold sales could be viewed as an aid to easing their fears.
Then there's the China factor. Analyst Michael Kosares, writing on USAgold.com, says that, "There is no doubt in my mind that China would like to see the IMF sell all its 3,217 tonnes of gold, particularly if China might become a primary recipient. Without any fanfare China would happily write the check for all 3,217 tonnes. Otherwise, I can't imagine why the Chinese central bank might have been included on this IMF committee, unless it was to demonstrate that the system is at least trying to get them some gold."
Whatever the case, our readers are apt to be most interested in what happens next. Not an easy call, given that neither the IMF nor the international gold trade are particularly transparent.
Many analysts, though, feel that the proposal will never fly. For example, Julian Phillips of GoldForecaster.com writes: "Should the member nations of the IMF find themselves in disagreement with a decision of the IMF to sell their gold, the possibility of this gold being returned to them is there. But should this option be used, the damage to the IMF of such a position [a minority objecting to the majority] would produce disunity in the global monetary system, which could prove extremely disruptive. [I] expect that the mere possibility of such a disruption, of itself, would persuade the majority not to sell any gold, but at best to revalue it."
Even if a sale does come about, will it matter?
Many feel that the IMF's actions are not liable to have much impact on gold, arguing that the distortions of the CBGA, even at maximum 500-ton strength, have already been fully factored into the current price and its trend line.
This is not to say that there couldn't be a short-term downdraught. Sure there could be, especially as the IMF sales are formally announced. Some holders of gold, maybe a significant number, can be expected to sell into the news.
But with countries such as China, Russia and the nations of the Middle East itching to add to their reserves, even a large dump of physical metal onto the market is certain to be absorbed in short order.
Nor will countries be the only buyers. Beverly Hills investments manager Kenneth Gerbino wrote in 2005 about a similar IMF sales speculation, saying that any additional supply "would surely be snapped up by the bullion banks and mining companies that are 'short' somewhere between 10,000 and 12,000 tonnes, according to some very savvy analysts." There's no reason to think that's changed much in the interim.
Gerbino could have been writing about the IMF when he concluded, "Central bankers will most likely continue, as usual, to scare the price of gold down from time to time by statements of gold sales. But they are all too keenly aware of the growing number of people who realize that the gold, not paper and ink, is the real stable monetary element."
Finally, it is important to keep the relatively miniscule amount of gold sales we are talking about in perspective. In an era where over $1 trillion in derivatives trade globally each day, $6.6 billion in sales is just not that much money when compared to potential investor demand once the U.S. dollar goes into the free fall that Doug Casey, among others, now believe is imminent.
In other words, if IMF sales do happen, and if they depress gold's price, that's a buying opportunity… for bullion and especially for the high-quality junior exploration stocks that pack the most punch in a rising gold market.
Regards,
Doug Hornig
for The Daily Reckoning
Editor's Note: Doug Hornig is a senior editor for Casey Research, publishers of Doug Casey's International Speculator… for over 27 years providing investors with unbiased and carefully researched recommendations for high-quality gold and other natural resource stocks with the very real opportunity for a 100% or better gain within a 12-month horizon. Hornig also writes the Daily Resource, a daily column that appears on the KitcoCasey and CaseyResearch.com web sites.
To learn more about International Speculator, see here:
Most Investors Are Clueless About Gold!
-- Posted Wednesday, 14 February 2007 | Digg This Article
