-- Posted Monday, 5 July 2010 | | Source: GoldSeek.com

US MARKETS

The Fed says US unemployment is likely to stay high for a long time, and that justifies zero interest rates indefinitely.

The US stock market seems to have a case on indigestion. The Dow continues to struggle just above 10,000 and is getting ready for another test of recent lows, which we believe could very well be broken. Markets worldwide share the downward pressure. We predicted a lower Chinese market in September and it has since fallen 23%, as China prepares for the bursting of their recent real estate bubble caused by the injection of $1.8 trillion into the economy. It could be that debt restructuring could be needed by the five PIIGS of the euro zone. The elitists are talking in terms of five years when that problem may have to be faced over the next six months to a year. There is the call for great fiscal centralization and the final death of sovereignty. Europe did not do well for ten years; they just hid their problems, much as other nations have. The euro has proven to be another unnatural creation engineered to bring about a world currency.

As sovereign debt problems rage across the world financial scene, the prices of stocks and commodities are fading and bonds could be topping out. Who would be willing to accept a yield of slightly under 3% for a US Treasury note? In addition, commodity currencies are under pressure. The dollar remains relatively firm after having fallen to 85.42 on the USDX from a recent high of 89. In that process the dollar cold be completing a head and shoulders, which could in time portend a much lower dollar. There are certainly lots of uncertainties out there, as volume increases each time the market falls, a sign that the natural direction is downward. AAA companies have done well in the recent past in part due to plenty of cheap money. In the second half of the year their earnings should begin to fade as GDP falls into the minus column. That fall can be stopped if more stimulus is added or if the Fed injects $2 trillion more into the economy.

The unemployed won’t get extended benefits, but the bankers and Wall Street got most of what they wanted in the financial reform package. That includes making the Fed, which is privately owned, into a tyrannical, financial monopoly. The unemployed don’t contribute to campaigns, Wall Street and banking does. The reality is special interest money controls our House and Senate, and that is why incumbents have to be kicked out of office in November.

The $8,000 real estate stimulus is gone and sales are falling in spite of 30-year fixed rate loans at 4.69%. Inventory and shadow inventory grows with each passing day. It should be noted that Fannie, Freddie, Ginnie and FHA are buying and guaranteeing 95% of mortgages, a good part of which are subprime. The $860 billion stimulus looked good and sounded good, but in part it was neutralized by cutbacks in state spending. It simply wasn’t strong enough to overcome underlying negative factors. That left the Fed with the job of keeping the recovery going. Even spending more than $2 trillion couldn’t ignite a permanent stage of growth. Worse yet, the refusal of the Senate to extend unemployment benefits will put 1.3 million Americans in a dire situation. It’s food stamps and nothing else. Americans for years have been just weeks from being broke. Now many of then are broke. Finding a place under a bridge is going to become more difficult.

            Unemployment is likely to stay high for a long time, two Federal Reserve officials said on Wednesday, suggesting the U.S. central bank is in no rush to raise its ultra-low interest-rate policy.

            The dovish comments, from Chicago Federal Reserve President Charles Evans and Federal Reserve Governor Elizabeth Duke, came two days before a government report expected to show that U.S. non-farm payrolls fell in June. If that occurs, June will mark the first decline in monthly non-farm payrolls this year.

The Chicago Fed's Evans said the economic recovery is "definitely on," with growth expected at 3.5 percent this year.

            But inflation is dropping, and he expects it to run below his guideline of 2 percent for the next three years or more.

            Meanwhile, unemployment is at 9.7 percent, "and it's going to be a number of years before it's going to get down to any type of rate that we might almost say is acceptable," he said in a rare 30-minute live interview on CNBC.

Taken together, low inflation and high unemployment mean that the Fed's current accommodative monetary policy is still needed, he said.

The Fed cut interest rates to near zero in December 2008 to help reverse the worst economic downturn in decades, and pumped more than $1 trillion into the financial system with purchases of mortgage-backed assets. Last week, it reiterated a vow to keep interest rates low for "an extended period."

            Just before sunset on April 10, 2006, a DC-9 jet landed at the international airport in the port city of Ciudad del Carmen, 500 miles east of Mexico City. As soldiers on the ground approached the plane, the crew tried to shoo them away, saying there was a dangerous oil leak. So the troops grew suspicious and searched the jet.

They found 128 black suitcases, packed with 5.7 tons of cocaine, valued at $100 million. The stash was supposed to have been delivered from Caracas to drug traffickers in Toluca, near Mexico City, Mexican prosecutors later found. Law enforcement officials also discovered something else.

            The smugglers had bought the DC-9 with laundered funds they transferred through two of the biggest banks in the U.S.: Wachovia Corp. and Bank of America Corp., Bloomberg Markets magazine reports in its August 2010 issue.

This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine.

            The admission came in an agreement that Charlotte, North Carolina-based Wachovia struck with federal prosecutors in March, and it sheds light on the largely undocumented role of U.S. banks in contributing to the violent drug trade that has convulsed Mexico for the past four years.

            Refinancing drove total U.S. mortgage applications to an eight-month peak, as loan rates fell to or near record lows, but demand to buy homes sank toward 13-year lows last week, the Mortgage Bankers Association said on Wednesday.

The U.S. housing market continued to deflate after a spring sales spree, fueled by now-expired federal tax credits of up to $8,000, robbed from summer home buying.

The upside is now limited by unemployment stuck near 10 percent, heavy foreclosure supply and pent-up selling from owners just waiting for the right time to put their homes back on the market.

            Mortgage refinancing requests jumped 12.6 percent in the week ended June 25 to the highest level since May 2009, as average 30-year mortgage rates slid 0.08 percentage point to 4.67 percent, the industry group said.

            In its just released Long-Term Budget Outlook, the CBO has come out with the most dire warnings on the US projected debt to date. In summary, the healthcare spending and the Social Security will consume an increasing portion of the budget and will push the national debt up sharply unless lawmakers act, CBO Director Douglas Elmendorf warned. "CBO projects, the aging of the population and the rising cost of health care will cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 16 percent of GDP 25 years from now if current laws are not changed." While this does not sound too dramatic, the way it is attained is with the following ludicrous assumptions (which Paul Krugman would certainly call perfectly normal): "government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II." Good luck with that. In the more realistic, alternative fiscal scenario, the CBO observes that "with significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and non-interest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035." The CBO's conclusion is a nightmare to each and every hard-core Keynesian fundamentalist (you know who you are): "the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them."

          A month ago, Sarkozy was disturbed that Merkel had dared to take the initiative over him and to ban naked CDS trading. Being a stubborn reactionary, this action only prolonged his inevitable decision to do the same (because politicians, being the wise Ph.D's they are, realize fully all the nuances of screwing around with the financial ecosystem). However, looking at this week's DTCC data, we have a feeling he may accelerate his decision to join the CDS-ban team. With a total of 456 million in net notional de-risking, France was the top entity in which protection was sought in the past week. In a very quiet week, where the 5th most active name did not even make it past the $100 mm threshold, France was more than double the number two sovereign - Mexico (we are unclear if this is some sort of contrarian move to the Yuan, which Goldman was pitching as MXN positive, which means traders likely hedged by loading up on Mexican CDS). But what is probably most notable, is the sudden and dramatic appearance of China in the top 3rd position. Welcome China! And after tonight's surprise PMI miss and the resulting market drubbing, we are confident within a week or two, China will promptly become a mainstay of the top 3, and will quickly rise to the top position, where it rightfully belongs. We are also confident those perennial Eastern European underdogs, Romania and Bulgaria will shyly make an entrance in the top 10 next week.

GOLD, SILVER, PLATINUM AND PALLADIUM

 

          Ten days ago we reported the most recent data on gold reserve holdings as presented by the World Gold Council, where we pointed out that Russia had purchased 27.6 tons of gold in the most recent reporting period, bringing its total to 668.6 tons. It appears Russia is only getting started. According to the latest IMF data, in the period between April and May, Russia added another 22.5 tons, bringing its May total to a fresh record of 703.1 tons. Russia "has added gold every month since at least February." At the same time, The International Monetary Fund’s gold holdings fell by 15.25 metric tons (490,286 ounces). "Reserves of gold at the IMF were 2,951.58 tons at the end of May compared with 2,966.83 tons at the end of April, data on the IMF’s website show." Good thing the world's bailout cop is doing all it can to keep gold prices low by transacting in the open market instead of in pre-negotiated transaction, This “is an indication that they will continue to sell the remaining 137.5 tons on-market as opposed to via off-market transactions with other central banks,” said Daniel Major, an analyst at Royal Bank of Scotland Group Plc in London. “Indeed the decline in gold sales from European central banks and purchases from India, Russia and China in recent years demonstrates gold’s growing popularity with central banks.” Well, all Central Banks except those that are printer happy of course, and are now loaded to the gills with toxic debt that will continue to impair their currencies until the bitter Keynesian end.

            Central banks have been adding to reserves and gold-backed exchange-traded fund assets have advanced to a record as investors sought an alternative to currencies and a protection of wealth from Europe’s debt crisis. Gold traded at $1,243.45 an ounce at 4:16 p.m. in London and reached a record $1,265.30 on June 21.

            While the paradoxical IMF's agenda is all too clear (sell gold, get cash, but help the CB's by keeping price low), that of Russia is even clearer- never mind all time record gold prices. Buy. In that, Putin's country is a spitting image of the GLD, which has added almost a hundred tons of gold in recent weeks, price considerations be damned.

 

            The gold contract for August delivery rose to a new intraday high of $1248.80 directly following a rosy Chicago PMI result which saw manufacturing dip slightly yet less than expected. Since the gold bullion has consolidated slightly below, but still trades higher on the day at $1242.00 a troy ounce.

 

            A little under two years ago, there was a big debate in the precious metals community, in which two groups of individuals were arguing for and against possible silver market manipulation, via arbing the COMEX and the OTC. On one hand you had such distinguished economists/bloggers as Mish (here and here) and Jon Nadler of Kitco (here) claiming there is no such thing as a COMEX-OTC arb because markets are ultimately efficient, and the second a trade is effected in one market, it implicitly affects all other markets, making spread arbing, and thus "manipulation" impossible. On the other hand, you had C.Loeb making precisely the opposite argument (here). After a brief flare up, the debate died down, with a partial win acceded to Nadler, who ended the debate with the following rhetorical statement: "Also, by the way, why not NAME the sinister manipulative banks in question? Why not ask them outright as to the motives behind their positions (or better yet, who their clients were) and whether or not they acted in a "willfully nefarious" manner? Conclusion: One can take any database and make it suit their conspiracy argument. That, however, does not make for proof of any kind." In other words, Mr. Nadler was asking for a bank to confirm it was arbing the COMEX-OTC spread, which in turn would unwind his defense argument, and lend credence to the claim that some players, due to their massive scale or otherwise, succeed in manipulating the silver (or gold) market by profitably spreading the legs of the trade in two completely different markets and arbing this spread. For the longest time people looked exclusively at JPMorgan for clues. Boy, were they wrong... and are they about to be surprised that in addition to almost blowing up the world, AIG FP has admitted that it itself, as the defacto risk mastodon and suicide bomber under Joe Cassano, with "$426 billion in total on and off balance sheet risk equivalent delta," was precisely just this spread manipulator. But don't take our word for it. Take AIG's.

Presenting exhibit A: AIG production document FRBNY-TOWNS-R1-210712 (pp 34-35)

 

ENGLAND

 

            A BRITISH trader sent oil prices soaring when he bought more than seven million barrels after a boozy golf weekend.

 

            Steven Perkins, a former broker with PVM Oil, has been banned at least five years and fined £72,000 ($137,000) after the financial watchdog ruled that he poses "an extreme risk to the market when drunk".

 

            The alcoholic trader cost his firm £6million last summer after going on an unauthorized trading splurge after a drinking binge at a PVM golf weekend.

 

            Perkins took the Monday, June 29, 2009 off work but continued to drink from around midday onwards, and in the early hours of the next day, he bought a net 7.13 million barrels of oil.

 

            The unusually high trading volume in the typically quiet overnight period sent prices surging, and pushed up the price of Brent crude by more than £1.30 to an eight-month high.

 

            Perkins repeatedly lied to PVM about the unauthorized activity until admitting what he had done later, when his trading access was suspended and the company sold off the oil.

 

            The FSA said Perkins, from Essex, southern England, was "not a fit and proper person" to work in the industry due to his alcoholism.

 

            Perkins has stopped drinking since the incident and joined a rehabilitation program for alcoholics.

 

            Alexander Justham, director of markets at the FSA, said: "The FSA views market manipulation extremely seriously. Perkins' trading caused disruption to the market and has been met with both a fine and prohibition.

 

            "This reinforces the fact that a severe sanction will apply in cases of market manipulation, even where no profit is made."

 

            He added: "Perkins' drunkenness does not excuse his market abuse. Perkins has been banned because he is not a fit and proper person to be involved in regulated activities, and his behavior posed a risk to the proper functioning of the market."

 

THE INTERNATIONAL FORECASTER

SATURDAY, JULY 3, 2010

070310(1) IF

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-- Posted Monday, 5 July 2010 | Digg This Article | Source: GoldSeek.com

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