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Wednesday, November 26, 2008

Money and Markets -- Financial Mayhem & Gold's Next Surge

Here is my latest Money and Markets piece ...

by Sean Brodrick
Wednesday, November 26, 2008 | 7:30 AM

Last week, I wrote about how our oil-rich friends in the Middle East are buying gold hand over fist. It turns out they’re not the only ones. The latest figures from the World Gold Council show a frenzy of activity … [More...]

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Getting Ready for Turkey Day

I am seeing a flurry of stories that base metals miners are rushing to shut down. Just look at some of the headlines from the past couple days:

Zambian copper workers face layoffs ... Indefinite shutdown for world top
tantalum miner ... Mwana Africa shuts Zimbabwe nickel mines ... Denison Mines delays uranium project ... Norilsk Idles Two Mines ... I could go on, but you get the picture. This is happening because the global economy is tumbling into recession (See the China story linked below). But down the road, this is also setting up a supply squeeze and subsequent rebound.

And it's not just base metals:
Australia's 2008 gold output may fall to lowest level since '89 .

In Other News ...

Gold equities expected to pay off for the patient

Scotia Capital analyst Trevor Turnbull remains bullish on gold, noting that dollar demand for the metal reached an all-time quarterly record of US$32-billion in the third quarter as investors flocked to safety. He also highlighted the identifiable investment demand gold offers, which includes ETFs, bars and coins.

XX Sean's note -- this guy's picks will look familiar to buyers of my gold report.
By the way, did you get yesterday's update to "Your Golden Parachute for 2009"? It's an important one!

Gold is the answer. Now what was the question? While gold has hardly been seen to be performing well in recent months, and has failed to meet gold optimists' more extreme, or even more mild, expectations, it has still performed less badly than most other sectors of the market. As has been noted here on several occasions actual physical demand has remained extremely strong, both in eastern and western markets. Major gold suppliers have run out of inventory and seem to be having difficulty replacing it, while ETF demand remains very positive.

Synchronized Recession, Synchronized Stimulus?

If all the countries (or all the relevant countries) were to stimulate simultaneously, then the aggregate world economy would look a lot more like a closed economy, and the multiplier would be larger yet again.

Figure 1: From visualization of OECD Economic Outlook 84 [link]. Blue is negative growth, darkest blue is -9.335%; orange is positive growth, most orange is +9.335%. White is zero; gray is "no forecast".

A Global Downturn Puts the Brakes on China's Industry It is happening faster than most anyone predicted: China’s economy, long the world’s fastest-growing major economy, is slowing down. Economists are forecasting that after growing nearly 12 percent last year, China’s economy could slow to 5.5 percent in the fourth quarter of this year — a stunning retreat for a country accustomed to boom times.

The Western Financial System We Knew Has Collapsed

Getting banks to lend again is even more essential than getting primary and secondary markets for illiquid structured financial products going again. It may be even more important than getting the regular commercial paper market going again, important though that is. Small and medium enterprises rely overwhelmingly on banks for external finance. Without access to bank loans, credit lines and overdraft facilities, countless SMEs that would be perfectly viable with a functional financial and banking system are threatened with bankruptcy. Without working capital, businesses go out of business. Banks are essential. But they are not lending. Why? A number of possible explanations suggest themselves.

And now for some good news ...

U.S. Mortgage Rates Fall on $600 Billion Fed Plan U.S. mortgage rates fell more than three-quarters of a percentage point today ... The average U.S. rate for a 30-year fixed mortgage ended the day at about 5.5 percent after falling to as low as 5.25 percent, according to Bankrate Inc. It was 6.38 percent this morning.

XX Sean's note -- I'll be traveling for Thanksgiving, so my computer access over the long weekend will be very restricted. Have a great holiday, stuff yourself silly, and I'll talk to you on Monday.

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Monday, November 24, 2008

Great Looking Gold Chart!

We try to use technical analysis for forecasting, but it’s better used as a rear-view mirror. Here is a daily chart of gold by the numbers ...

#1 – the second part of a double-top. This signaled (in retrospect) gold’s upcoming, steep decline.

#2 – a pivot point. Measuring from 1 to 2, we get a retracement down to 720.

#3 -- 720 – which also happens to be the bottom of gold’s range.

#4 – the top of gold’s recent range. It has consolidated in a base since October 23rd, but has broken out of that range now.

#5 RSI, an oscillator that measures momentum. It is more bullish now than since any time since mid-September.

But what about the dollar? It’s usually on the opposite end of the see-saw of pain with gold. The US dollar is showing short-term weakness – giving a daily “sell” signal – but remains in a long-term, strong uptrend. If the US dollar does consolidate its gains by pulling back, the 83-84 area would be my target.

We are conditioned to think that gold and the US dollar have to move in opposite directions. But they don’t have to. Gold and the US dollar could both go higher if investors flee the major stock indices and look for safety.

It may see crazy talking about the investors fleeing stocks when the futures are up so much this morning. What is moving the market? The New York Times reports news on President-elect Barack Obama that is giving investors the holiday spirit ...

In the Democrats’ weekly radio address, Mr. Obama said he would direct his economic team to craft a two-year stimulus plan with the goal of saving or creating 2.5 million jobs. He said it would be “a plan big enough to meet the challenges we face.

Although advisers say they have not begun to fill in the details, Mr. Obama’s proposal would go beyond the $175 billion stimulus plan he proposed in October. That included a $3,000 tax credit to employers for each new hire above their current work force and billions in aid to states and cities.

Some Republicans might be won over should Mr. Obama decide not to repeal the Bush tax cuts for those making more than $250,000. By simply letting the cuts expire after 2010, as the law now provides, Mr. Obama would in effect delay the tax increase that high-income taxpayers would have faced in the next year or two under his original plan.
The rumor flying on the street now is that Obama will NOT repeal the Bush tax cuts. And that makes Wall Street very happy. They're all happy talk about Obama on CNBC now, when they were calling him a socialist just two weeks ago.

But if you look at Obama's political appointments so far, he's not progressive at all -- he's very middle of the road, and seeks a consensus.

Not to be the voice of misery at the party, but I will point out that our country and the world still has major economic problems that some tax breaks won't fix. Still, psychology is 90% of the market, and in the short-term, psychology should be bullish. We'll see how we end the day.
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Friday, November 21, 2008

Drowning Market Grabs for a Lifeline

There's not much I could say about the markets today that can't be said in charts. All the major averages gave weekly sell signals at the end of day yesterday.
One thing isn't going down -- gold. It is showing strength today -- maybe it's the fear trade, maybe it's just options expiration craziness. We'll have to see if there's follow-through, so stay tuned on that.

Here are the charts ...

The Progress of the Financial Crisis in One Picture: Mortgages, Flight to Safety, Credit Lock

Interest Rate Spreads. The top panel shows the LIBOR-OIS spread (dark shaded area). The TED spread (LIBOR minus the Treasury bill rate) is given by the sum of two shaded areas. It also captures the fact that Treasury bonds are especially sought-after collateral in times of crisis.
And here's the yield on T-Bills ...

The commentary on this chart: “Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors.

It sure seems like the current move is driven by something other than fundamentals. A negative swap spread — according to the FT – implies that “investors are somehow reckoning that they are more likely to be paid back by a private counterparty than by the government.” That doesn’t seem consistent with what the rest of the market is telling us.

XX Sean's note -- I talked to a broker in Chicago this morning. He says the rumor in the pits is that there could be a default on delivery of December Treasury bond Futures. That may or not be true, but someone may be pricing it in. Get a load of the TLT ...
In other news worth reading, Naked Capitalism takes a look at The Ill-Considered Problem of a GM Bankruptcy .

And Bloomberg says the collapse of GM alone would cost taxpayers about $200 billion.
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Thursday, November 20, 2008

Gold, Cars and Government Bailouts

Deflationary forces are pushing the price of gold lower. However, beyond the short-term price for paper gold, some of the news is surprisingly bullish. I'm putting out an update to my recent gold report today, with some very interesting news on supply and demand. The director of the World Gold Council was on CNBC yesterday talking about it. You can see that video here:

Some of the bullish news for gold ...
* Global demand rose 18% to 1,133.4 metric tonnes from 963.3 tonnes a year earlier.

* In dollar terms, the jump in demand was even bigger. Dollar demand for gold reached an all time quarterly record of $32 billion in the third quarter, a whopping 45% higher than the previous record … set in the second quarter.

* Identifiable investment, which includes purchases through exchange-traded funds and of bars and coins, climbed 56% year over year to 382.1 tons.
There's a lot more in the update. Look for it today.

In other news, the Big 3 Automakers left Washington empty-handed after Congress couldn't agree on a$25 billion rescue plan. Apparently the lawmakers were upset that the car manufacturing CEOs flew to Washington on private jets. I don't remember anyone asking if bankers used private jets when we handed them $700 billion. The real argument against it is that even if we loan them $25 billion, the automakers' business model is broken and they'll be back with begging bowl in hand pretty soon. Even the automakers admit that $25 billion is only a bridge to the next step.

It's already been shown that it will cost the government more than $25 billion if we don't give loans to the Big 3. The auto industry is 4% of our GDP. Not bailing it out will probably cost $400 billion to $750 billion in unemployment insurance, welfare payments, related businesses going broke, etc. So opponents of the plan must be thinking that the eventual cost of the bailout will be more than $750 billion. Still, you have to wonder why they're balking at $25 billion when the US government has already spent $4.3 TRILLION in bailouts.

UNLESS ... the real opposition to the bailout is that letting the car companies go bankrupt is a chance to break the back of organized labor. And some people feel that's a worthy goal no matter what the cost. After all, if they can pay American workers the same wage they pay Mexicans, then car companies won't have to ship any more production to Mexico.

I was in favor of the bailout, with many strings attached. Those strings would include ...

* Increase American automobile fuel efficiency by an average 10 mpg over the next 10 years and 20 mpg in 15 years.
* Combine the big 3 into big 2, and start laying off non-essential personnel.
* No more executive bonuses until the crisis is passed, and any percentage wage cuts for workers is matched by at least double that in percentage wage cut for top executives. After all, GM line workers make $27.81 an hour, while the CEOs of Chrysler, Ford and GM earn a combined $24.5 million per year.
* No more foreign outsourcing of jobs.
* Cut advertising budgets to 1/10th of what they are now and put the saved money into building cars, not marketing them.

There are other strings I'd attach, but you get the basic idea. Bailouts have worked in the past. Chrysler was given a government loan back in the early 1980s and this helped Chrysler survive at the time. Lee Iacocca said, "We borrow money the old fashioned way. We pay it back". In his first year, Iacocca fired 33 of the 36 vice presidents and streamlined the management. He cut workers' salaries, but they couldn't really complain because he set his own salary the first year at only $1.

There are still many problems that car makers will have to overcome, including their staggering legacy costs. But I think failure is a very bad option. America is a country that runs on cars. I think we need a car industry, and I don't want to see our manufacturing base hollowed out any more than it is, because at some point, we'll need it. After all, if there's a war, are we going to buy our tanks from China?

Meanwhile, at the US EconoMonitor, Robert Reich makes some good points about the massive TARP bailout of Wall Street's biggest banks:
Hank Paulson has just about burned through $300 billion, and it's not clear what the public has got out of it. Perhaps things would be worse without the bailout but they're certainly no better. Wall Street banks have not significantly stepped up their loans to small businesses, college students, car buyers, or distressed homeowners. Much of the auto industry is on the verge of bankruptcy. And the rate of foreclosures is rising.What happened to all the money? About a third has gone into dividends the banks are paying their shareholders. Some of the rest into executive salaries and bonuses. Another portion toward acquisitions designed to raise share values. Another chunk for bailing out giant insurer, AIG. That's not what taxpayers bargained for.
Mr. Reich's proposal: Force the banks to stop paying dividends, executive compensation or deferred bonuses, or doing any more acquisitions, and instead use their money to start lending. To that, I'd add the proposal that any company living on government handouts can't use private jets. If it's a good enough rule for car manufacturers, it's good enough for banks.


Consumer Prices Fall Record 1% as Energy Plunges The overall and energy decreases were the biggest since the government began keeping such records. Data on the overall CPI date back to 1947, and the energy data go back to 1957.

Crude Oil Falls, Approaching $50 a Barrel, as Slowing Growth Saps Demand Crude oil fell for a fifth day, approaching $50 a barrel, as the weakening world economy increased concerns that demand for fuels will slow.

Goldman Cuts 2009 Oil Forecast, Closes All Its Oil Trading Recommendations Goldman Sachs Group Inc. cut its forecast for the average price of New York-traded crude oil in 2009 to $80 a barrel from $86, adding that it was closing all its trading recommendations for oil.

China Plans First Fuel-Price Cut in Two Years to Help Stimulate Economy China, the world's second-largest energy user after the U.S., is accelerating plans to cut fuel prices for the first time in two years as the nation's economy slows and oil costs fall, the country's top planner said.

Corn, Soybeans Fall a Third Day as Stocks Rout Increases Demand Concerns Corn and soybeans dropped for a third day as stock markets slumped, increasing concern that a worsening global economy will curb demand for food, feed and fuel. Wheat prices declined for a fourth day.

Bernanke May Find Deflation `Back on the Table' as Threat to U.S. Economy Five years after Federal Reserve Chairman Ben S. Bernanke helped stamp out the risk of deflation, the threat is returning as the financial crisis and a worsening economic slump pull inflation lower.

Ecuador Audit Commission Finds `Illegality, Illegitimacy' in Foreign Debt Ecuador's debt audit commission said it uncovered ``illegality and illegitimacy'' in the country's foreign obligations, findings that may give President Rafael Correa the legal basis he's sought to halt bond payments.
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Wednesday, November 19, 2008

My Latest Interview

The market is depressing the hell out of me, so it's good to share some laughs with Phil. We also cover some important topics, too. You can listen at:
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Charts of S&P and Vix, and the Search for a Market Bottom

My column today, Are Oil-Rich Sheiks Being Scared Into Gold?, is pretty bearish on everything but gold. That said, I also wouldn't be surprised to see a broad market rally this next week. In 13 of the last 15 years, the week before Thanksgiving has been a positive one in the market.

And that, in turn, could be the basis for a Santa Claus rally in a very oversold market.Three common indicators used to find a bottom are the bull/bear ratio, convergence/divergence, and capitulation as measured by the VIX (or fear) Index.

Note that I'm talking about "a" bottom, not "the" bottom. The Dow’s low of 1932 was preceded by at least seven levels that were considered major market bottoms. Looking at today’s market, we aren't looking for THE bottom, we're looking for a tradeable bottom that can be a springboard for a sustainable (several weeks to several months) counter trend rally.

Bull/Bear Ratio: Investors Intelligence surveys 140 financial newsletter writers to determine whether they are leaning bullish or bearish in their opinions to subscribers. The current bull/bear ratio of 0.44 is one of the lowest on record.

Verdict: the bull/bear ratio is a contrary indicator, so this is bullish.

Convergence/Divergence: A unanimous signal from the major benchmarks carries more weight than a fragmented signal. The markets all put in significant lows on October 27th. The Dow hasn't tested that low yet, but both the the Nasdaq (QQQQ) and S&P 500 did. Some will say the Dow has come close enough, others say not yet.

Verdict: Jury is still out. If they all make new lows, or bounce from their recent levels, that will tell us something.

Capitulation is somewhat linked to the VIX, which hit a record intraday level on October 24th and closed at a record level on October 27th. Futures were down limit the night before. There were some indications of panic but when the pit session opened, the stock market rallied back, showing limited downside market action. What we didn’t see was a record spike in volume.
Looking at the chart, you can see that the VIX has backed off its highs. However, I wouldn't be surprised to see it test those highs again -- probably accompanying a swoon in the market.

Verdict: Jury still out. If the VIX trends lower again, that would be a bullish sign.

So far, the evidence is inconclusive. We could see the regular Thankgiving rally and that could lead to a Santa Claus rally. Or we could plunge to new lows pretty quickly.

I think external forces that could move the market is news on the potential auto industry bailout, which could go either way; better news on the dismal international trade picture, which I covered in today's Money and Markets column, which could send the market higher; and a worsening economic picture in China or the global economy generally, which could send it lower.

So many uncertainties! Stay tuned!
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Tuesday, November 18, 2008

Groping Through the Murk and Risk

The US is probably going to join the rest of the industrialized world in recession and all the bad news probably isn’t priced in yet. However, it would not be surprising to see a rally soon.

We’re approaching Thanksgiving. In 13 of the last 15 years the Dow has been up the week before Thanksgiving. Combined with the light volume around the Thanksgiving holiday – there’s an old saying on the Street, “never short a dull market” – we could see a powerful move to the upside before the Dow, the S&P 500 and the Nasdaq finally hold hands and jump off the next cliff.

And then there are commodities. Crude oil fell to the lowest closing price since January 2007 as Japan entered a recession for the first time since 2001. Meanwhile, China National Petroleum, that country’s largest petroleum producer, said demand has dropped “sharply.''

The collapse in crude and other commodities was accompanied by a rip-roaring rally in the U.S. dollar. But now here’s an interesting thing. The U.S. dollar has not been able to capitalize on its recent breakout – stalling at overhead resistance – and yet commodities continue to go lower. This shows that commodities are weak all on their own – they can’t blame all their troubles on the greenback.

The fact that the dollar broke out to the upside and is now consolidating those gains rather than taking off is perplexing, considering the bad news pouring in about other economies. There was bad news for the U.S.yesterday beyond the massive layoffs by Citigroup. The New York Federal Reserve Bank's Empire State Manufacturing Index fell 0.8 points to -25.43. That's the third consecutive month in negative territory and a record low in the seven-year history of the survey.

But bad economic news hasn’t dragged on the U.S. dollar previously, because the news from other economies is so much worse. Like I said, it’s puzzling. Well, if this were easy, everyone would be millionaires. Instead, we grope through a market that is murky with risk.

Here are some stories that I find interesting ...

Why the Energy Crisis Will Oulast the Credit Crisis
The International Energy Agency's annual World Energy Outlook, released on Wednesday, predicts that oil prices will start a steep climb soon, and by 2030 will settle around $120 a barrel — more than double this week's price — as producers face rocketing costs of equipment such as drills and rigs, and are forced into the increasingly expensive business of extracting oil from less accessible fields, many of them far out at sea. Added to that, the world economy continues to grow — albeit at a slower rate — which will likely accelerate again at some point in the coming years — prompting billions more people to drive cars and burn electricity at home during the next two decades.

Big Oil: We told you so
With prices sharply lower from the summer's highs, Big Oil's decision to hold off on new production now seems rather wise.

S&P Notes Surge In Defaults
A total of 85 companies defaulted on bond debt worth $284 billion through Nov. 11, according to Standard & Poor’s, which estimates that the default rate could increase to as much as 9.6% by October of 2009. The rise in defaults contrasts with last year, in which 22 companies defaulted, and 2006, in which there were 30 defaults.

The Six Unknowns That Are Roiling the Stock Market BusinessWeek asked stock market experts to identify the biggest unknowns facing investors. These factors will be crucial to clearing up a foggy outlook. Unfortunately, it could take months—if not years—to resolve them.

Nyrstar to Cut Zinc Output 28% at Belgian, Dutch Smelters to Conserve Cash Nyrstar NV, the world's largest zinc producer, will slash output of the metal at smelters in Belgium and the Netherlands by 28 percent and may extend cuts next year to reduce costs and debt.

China May Need to Offer Grain Export Rebates to Ease Glut, Researcher Says China may need to introduce rebates to boost grain shipments and ease a glut of wheat, rice and corn as a cut in export taxes announced last week won't be sufficient to have an impact, a commodity researcher said.
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Monday, November 17, 2008

3 Charts -- Gold, Dollar and Crude

Today, the markets look to open lower as the parade of pain continues around the world. Japan has joined Europe in recession, President Bush lets slip that he is worried we are facing a depression "greater than the Great Depression", and China's consumption of commodities is running off the rails.

I'll have links to all these stories in a moment. First, let's look at a chart of gold.Gold may be hammering out a base. Its price action has improved enough that it is now above its 10- and 20-day moving averages, and the 10-day moving average looks ready to cross above the 20-day moving average. We'll need follow-through to be sure.

Meanwhile, momentum is improving. Gold is still in a downtrend -- we don't have a weekly buy signal -- but this looks encouraging. What could be driving it? How about reports that the Arab oil sheiks and Iran are piling into gold right now. Why would they be doing that? I'll explore that more in this week's column.

Now, let's look at a chart of the US dollar ...
The dollar broke out to the upside and is now consolidating those gains rather than taking off. This is perplexing, considering the bad news pouring in about other economies. But if this were easy, everyone would be millionaires.

As the US dollar goes up, usually gold and oil go down. Let's look at crude oil ...
Oil seems to be going lower as demand falls around the world and OPEC seems to be backing off from a potential cut this month. What will turn crude oil around? Probably when it reaches new equilibrium in supply and demand. We are already seeing many new oil projects delayed or canceled due to falling oil prices, lack of finances, and so on. This is future supply that is being destroyed, just as present demand is being destroyed now. The two shall meet ... and maybe sooner rather than later.

Here is some news I find interesting ...

Japan joins Europe in recession - International Herald Tribune
Japan became the latest major economy to fall into recession on Monday with France close behind, and the IMF said it needed at least $100 billion (67 billion pounds) to fight the billowing economic crisis enveloping the world.
The euro zone is also in formal recession, with two consecutive quarters of contraction, Britain and the United States are on the brink and China is slowing sharply.

Bush: We're Trying to Avoid a Depression Greater Than the Great Depression

"I'm a free market person," President Bush told reporters after the summit ended, "until you're told that if you don't take decisive measures then it's conceivable that our country could go into a depression greater than the Great Depression."

Long, painful recession is likely - survey A survey of leading economists showed Monday that the likelihood of a prolonged recession has increased significantly as economic conditions continue to deteriorate.

Copper Drop to Deepen as China Spending Overwhelmed by Deflating `Bubble' Not even $586 billion of emergency spending by China can slow the plunge in copper, the worst- performing metal since the commodities market crashed in July.

U.S. Cotton Exports Drop at Fastest Pace in Decade as Chinese Demand Slows Cotton users are halting orders from the U.S., the world's biggest exporter, at the fastest pace in at least a decade as the economic slowdown erodes demand from China and sends prices to a six-year low.

Aluminum Falls to Three-Year Low as China May Increase Supply; Copper Down Aluminum fell to a three-year low and copper declined in London on speculation more metal will be shipped out of China, adding to global supplies as demand falters. Zinc also fell.

China Reduced Gasoline, Diesel Imports in October Because of Weaker Demand China, the world's second-biggest energy consumer after the U.S., cut diesel and gasoline imports for a third month as the economic slowdown damped fuel demand growth.

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Thursday, November 13, 2008

2 Charts and News for Today

Yesterday we moved to the low end of the recent trading range, the 850 area of the S&P 500 (SPX) or 85 area of the SPY. Whether that constitutes a successful test of the area or not is an open question. Given that weekly oscillators reflect a deeply oversold condition, we may see a bounce attempt. From a technical standpoint, the risks seem equally balanced either way. A breakdown below the lows might well increase selling pressure and lead to much lower levels.
Members of Congress, taxpayers and investors urged the Federal Reserve to provide details of almost $2 trillion in emergency loans and the collateral it has accepted to protect against losses.

Total Fed lending topped $2 trillion for the first time last week and had risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.

XX Sean's note -- it's more like $2.3 trillion, but what's $300 billion between friends.

Trade Deficit Narrowed 4.4% in September on Declines in Crude-Oil Imports The U.S. trade deficit in September narrowed more than forecast as a record decline in the cost of foreign crude oil caused fuel imports to tumble.
XX Sean's note -- check out this chart of US crude oil imports. It's like Wile E. Coyote running off a cliff!

IEA Cuts Global Oil Demand Forecast the Most in 12 Years as Economies Slow The International Energy Agency, an adviser to 28 nations, cut its global oil demand forecast the most in 12 years as world economic growth deteriorates.

Oil Gains, Rebounding From 21-Month Low, on Proposal for Early OPEC Meet Crude oil rose, rebounding from its lowest in 21 months, after an OPEC delegate said that the group may hold a full meeting in Cairo this month before its scheduled December gathering.

Copper, Aluminum Rebound From Three-Year Lows in London as Dollar Drops Copper and aluminum rebounded from three-year lows in London as a drop in the dollar may help revive demand for industrial metals. Zinc and nickel also rose.

Australia Stocks Tumble to Four-Year Low, Led by Banks, Resource Companies Australian stocks plunged, led by banks and resource companies, after Commonwealth Bank of Australia said bad debts may double, the U.S. Treasury scrapped plans to buy mortgage assets, and metals prices dived.

Commodity prices, measured by the Standard & Poor's GSCI Index of 24 raw materials, have plunged by more than half from their record on July 3 as the global credit crisis threatens to push the world into a recession, reducing demand for raw materials. Crude oil has slumped 63 percent in four months.
China's 4 trillion yuan ($586 billion) stimulus package "puts a floor on Chinese growth of around 7 percent,'' said Roach. "That will provide some support and limit the correction of commodity prices from being absolutely catastrophic.''

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Wednesday, November 12, 2008

US Dollar Breakout


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Wednesday News Roundup

The US government is bankrupting our economy by burning through hundreds of billions of taxpayer dollars in the form of bailouts to Paulson and Cheney cronies. American Express is getting bailout money? Seriously? American Express could vanish off the face of the Earth and we'd hardly notice. I think it telling though, that American Express' customers can't pay their bills.

The government needs to focus on saving businesses that could still be saved and are worth saving. And Robert Reich has some choice words about the bailout ...

When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it - called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers' heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn't pay a penny.

So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street's major banks and insurance giant AIG are so important to the national and global economy that they can't be allowed to fail, that doesn't mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they're taking now that taxpayers are bailing them out. But they're the ones who took the risk. We didn't.

The Treasury seems to have lost sight of its real client. It's client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.

So is the automobile industry one of those industries that should be saved with bailout money rather than through bankrupcty? I don't know. But I do notice that people who were amazingly eager to throw bailout money at banks, money which then went to pay for fatcats' bonuses, are lining up in lockstep to say the automobile industry can't be saved.

Here are some news stories I find interesting today ...

Best Buy Cuts Full-Year Profit Forecast on `Seismic' Slowdown in Spending Best Buy Co., the largest U.S. electronics retailer, said full-year profit will be lower than it expected because of the recent turmoil in the financial markets and the U.S. economic slump
U.S. Slump May Be Longest in Three Decades as Economy `Fell Off a Cliff' The U.S. downturn will be the longest in three decades, and the drought in consumer spending may be the worst ever, according to economists surveyed by Bloomberg News.

BHP's West Australian Iron Ore Exports Decline 7.6% as China Demand Wanes BHP Billiton Ltd., the world's biggest mining company, exported 7.6 percent less iron ore from Western Australia in October amid a slowdown in demand from China.
Retail Sales Climb 22% in China as Crisis Fails to Damp Consumer Spending China's retail sales rose 22 percent, close to the fastest pace in nine years, signaling that domestic demand may help the fourth-biggest economy withstand a looming global recession.

Oil Falls to 20-Month Low on Expected U.S. Supply Gain as Demand Weakens Crude oil fell to a 20-month low on forecasts that a report will show U.S. crude inventories grew last week as the worsening economy wears down energy demand.
World Must Find a Kuwait a Year to Meet Demand, Replace Fields, IEA Says The world must find an extra 64 million barrels a day of oil production by 2030, equivalent to replacing Kuwait's output every year, to meet demand growth and counter the decline of existing fields, the International Energy Agency said.
China Plans to Spend at Least $27 Billion on Energy Projects in Future China, the world's second-biggest oil consumer, will spend at least 188.5 billion yuan ($27 billion) to build six energy projects including a natural gas link and nuclear power plants to spur economic expansion.
OPEC President: We May Cut Again If Oil Falls Further
"If the prices continue their decline most probably OPEC will have to take a further decision on a cut in supply," Khelil told Reuters.
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Tuesday, November 11, 2008

3 ETF Stories

Here are some stories on the latest developments in ETFs and ETNs ...

Investors Sour on Exchange-Traded Notes

Investors yanked about $460 million from the 90 ETNs tracked by fund researcher Morningstar in September, a chunk of their $5.5 billion in overall assets.
October figures aren't yet available, but an early snapshot suggests they could be worse. About 12% of outstanding shares at iPath Dow Jones-AIG Commodity Index Total Return, the largest single ETN by far with $2.7 billion and run by a unit of Barclays PLC, were redeemed during the month through Thursday.
"We believe the outflows across commodity investment products, such as ETNs or ETFs, are only temporary," Barclays said. "The exchange-traded product market will continue to grow and there will continue to be new products offered to investors."
XX Sean's note -- I wonder how much of that rush to redemption has to do with the fact that AIG's name is on the fund, and AIG is about as popular on Wall Street right now as a leper at a nudist colony.

Triple Leverage ETFs Maximize Market Directions
Direxion has launched eight ETFs that are leveraged bull and bear funds designed to seek 300% of the daily performance, or 300% of the inverse of the daily performance, of the four indexes they track.

The new funds are:
Direxion Large Cap Bull 3X Shares (BGU)
Direxion Small Cap Bull 3x Shares (TNA)
Direxion Energy Bull 3x Shares (ERX)
Direxion Financial Bull 3x Shares (FAS)
Direxion Large Cap Bear 3x Shares (BGZ)
Direxion Small Cap Bear 3x Shares (TZA)
Direxion Energy Bear 3x Shares (ERY)
Direxion Financial Bear 3x Shares (FAZ)

Many ETFs Hit 52-Week Lows in October
Fears of a global slowdown and a strengthening dollar triggered a sell-off across all commodities, including gold, typically considered a safe haven amid uncertainty.
Inflows And Outflows
While investors dumped mutual funds this year, they bought ETFs.
They pulled $73.01 billion out of mutual funds across all categories in October, according to TrimTabs Data Research estimates. But they poured $4.33 billion into ETFs. Year to date investors took a net $199.37 billion out of mutual funds and put a net $83.60 billion into ETFs.


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China, China, China!

More on the China Stimulus Plan ...

$586 billion is a massive number for an economy the size of China's. Recall our first stimulus package here was $150 billion, and a second that is assumed to total $300 billion is under discussion. China's economy on a purchasing power parity basis is estimated to be about $7 trillion dollars as of 2007, versus its size at then current exchange rates of just under $3 trillion. By contrast, the US economy was just under $13 trillion, so if you accept the larger PPP value, the Chinese stimulus package would be tantamount to a $1.1 trillion program here (and even larger if you use the nominal exchange rate).

XX Sean's note -- the question now being asked on Wall Street is how is China going to pay or this plan? Maybe by selling some of those $541 bilion in US Treasuries they have stashed away as part of their $2 trillion in foreign reserves? What would that do to the price of U.S. Treasuries?

Copper Falls on Concern China's Consumption Will Take Months to Rebound Copper fell in London on speculation China's $586 billion spending to support its economy will take months to spur demand for the metal used in cars and homes.

China Stocks May Need More Than Stimulus to Lure Investors After 66% Drop China may have more work ahead to revive investors’ confidence in the world’s worst-performing major stock market after unveiling a 4 trillion yuan ($586 billion) stimulus plan.

Noble Says Commodities Bottoming, to Rebound on Government Spending Plans Noble Group Ltd., the commodity supplier that more than doubled third-quarter profit, forecast a rebound in demand for metals and grains over the next 12 to 18 months as government investment programs boost economic growth.


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Saturday, November 08, 2008

DC Money Show and more

I spent the weekend at the Washington D.C., Money show. The show has shrunk from last year, and the opinions ranged from "this is an incredible time to buy" to "Aaaaaaiiiiiii!!!!!" I'll have more about that in Wednesday's Money and Markets column.

This morning, the market is rising on news of a $586 stimulus plan in China and a new A.I.G. bailout in Washington. I'm not sure why the market thinks this is good news. Last time I looked, the Federal Debt had soared to such levels that each American now owes over $32,000. I think that's unsustainable, as long as the US dollar holds its present value.

In other words, it would be a lot easier to bear if that debt was only (in relative terms), $3,200. That's not so scary, is it? I wonder if Uncle Sam is thinking the same thing. The Russians are already letting the ruble devalue like a stone falling from heaven.

You could say that Paulson's hand-outs of billions of dollars at a time are just the latest twist in the Bush gang's efforts to loot the public purse before they leave office. Jerome at DailyKos asks: Can Obama Stop the Looting Before It's Too Late? I don't think Jerome should get his hopes up -- the handover of power seems to be much too friendly for there to be a disruption of the pigs at the trough -- and I found especially interesting this line from a Bloomberg story that Jerome links to: Americans have no idea where their money is going or what securities the banks are pledging in return.

Here's the news I'm reading now ...

AIG May Get More in Bailout
When the restructured deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise. It is a stark reversal of the government’s assurance that its earlier moves had stabilized A.I.G.
XX Sean's note -- Funny, isn't it, how eager Treasury Secretary Paulson is to throw $40 billion at a pop at A.I.G, but there's great rending of garments and gnashing of teeth over a proposed $50 billion loan package for the auto industry. Heck, even Australia is giving its car makers $6 billion over 15 years.

Europe, Asia Markets Surge on China Stimulus Plan
The gains come in the wake of Chinese government's unveiling of a massive 4 trillion yuan ($586 billion) stimulus package to help stave off much of the economic slowdown. The package involves a mix of spending, subsidies, looser credit policies and tax cuts.

China's economic growth slowed to 9 percent in the third quarter, the lowest level in five years and a sharp decline from 11.9 percent the year before -- perilously low for a government that needs to create jobs for millions of new workers and for other Asian countries that have come to depend heavily on Chinese demand.

Believing in Estimates Means 20% Advance for S&P 500

The average Wall Street forecast calls for the S&P 500 to break out of a bear market and surge 20 percent to 1,118 by Dec. 31 -- more than twice as much as the biggest-ever advance to close out a year, according to data compiled by Bloomberg. Strategists were even more bullish at the beginning of the year, predicting that the S&P 500 would end 2008 at a record 1,632.

OPEC president: Oil cuts likely if no price rally
OPEC nations could further reduce oil output if moves last month to slash production do not bolster plummeting oil prices, OPEC president Chakib Khelil said Saturday.
Saudi Aramco Says Oil Price Falls May Curb Investment

(Bloomberg) -- Saudi Aramco, the world's biggest state-owned oil company, said a further drop in crude oil prices may curtail investments needed to offset declining output in aging fields.

Investment is also needed to expand production capacity to meet long-term demand growth, Chief Executive Officer Abdallah Jum'ah said in a handout distributed today at an industry summit in Beijing.

Saudi Aramco to Cut December Crude Oil Supplies to Asia by as Much as 6% Saudi Aramco, the world's biggest state oil company, will cut crude supplies to Asia in December for the first time in at least a year as demand slumps for naphtha and diesel fuel.

Gold Advances in London Trading as Higher Oil, Weaker Dollar Boost Demand Gold rose for a second day in London as higher crude-oil prices and a weaker dollar boosted demand for the metal as a hedge against inflation.

Finally, in Sunday's New York Times, Al Gore proposes "a five-part plan to repower America with a commitment to producing 100% of our electricity from carbon-free sources within 10 years."

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Thursday, November 06, 2008

Ugly Thursday

The morning rally in gold has faded. The market is going downhill in a hurry. Whatever bounce associated with the election seems to be fading.

Barack Obama's Yuan Calls May Place U.S. on Collision Course With China Barack Obama's calls for changes in China's yuan policy may put the president-elect on a collision course with the U.S.'s second-largest trade partner, which is holding the currency stable to support its export-led economy.

Euro Falls Against Dollar After ECB Cuts Rate to Lowest Level in Two Years The euro fell against the dollar, the yen and the pound after European Central Bank President Jean- Claude Trichet said the economy ``weakened significantly'' and the International Monetary Fund cut growth forecasts for the region.

Oil Falls, Tracking Equity Prices, on Concern Slowdown Is Cutting Demand Crude oil fell to an 18-month low, following equities, on signs that fuel demand will contract as the global economy slows.

Market paralysis ignores uranium's compelling projections The Melbourne-based financial services group BGF Capital Group says that the frozen minds of investors and developers may well see a critical shortage of uranium in two to four years time.

Global Oil Demand May Contract In 2009, 1st Time In 26 Years A starker economic outlook has some high-profile energy analysts predicting the world will consume less oil next year than this year, notching the first annual contraction since the early 1980s as emerging markets, led by China, cool off.

CIBC World Markets, in a recent report, is now saying that the current recession is caused by high oil prices. Here's a chart from the report, which shows that four of the past five recessions have followed oil price spikes ...

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Wednesday, November 05, 2008

Why I Like Gold Here ... and News for Today

If you subscribe to one of my premium services, you'll have noticed that we've added a bullish gold position or two lately. Let's look at a daily chart of gold to see why.

You can see that gold is still channeling lower, but has touched the bottom of its recent downtrend. When it has done this in the past, it usually goes higher for quite some time.

At the same time, we are getting a buy signal from the MACD indicator on the bottom -- another indicator of the shift in short-term trend. And gold is now above its 10-day moving average. This usually indicates higher prices ahead.

However, I still haven't given buyers of my recent gold report the "all clear" to buy gold and silver positions. That's because the weekly indicator I told you about in that report has still not given a buy signal. It may be close, but we don't buy until we get that signal.

The reason for this discrepancy between my premium services and the gold report is that the services can trade gold's short-term moves -- the gold report is designed to trade gold's long-term moves. You may give up a piece of gold's early move, but you'll still ride the long-term trend. And the longer-term trend gives more reliable signals.

In other news ...

Some nice young guy from Chicago got a new job. Meanwhile, many Americans continue to lose their jobs. I'd say his job isn't going to be easy.

Commodities in recession as speculative bubble bursts - but the purge is over With commodity prices now back to their January 2007 levels, "this portion of the purge should now be over", but the next two quarters are likely to see further price declines reflecting the amplitude of the recession in different parts of the world.

U.S. gasoline demand up as prices fall: MasterCard

NEW YORK (Reuters) - U.S. retail gasoline demand edged up 1.3 percent last week from the previous week as national average prices for the fuel dropped, MasterCard Advisors said on Tuesday.

But gasoline demand remained 3.9 percent below year-ago levels, said Michael McNamara, vice president of research and analysis at MasterCard Advisors, citing the economic slowdown.

IEA Report Underlines Long Term Supply Side Challenge for Oil Markets
The IEA World Energy Outlook highlights long-term supply side constraints, showing that current depletion rates outstrip future demand. On the face of it, this is welcome succour for 'peak oil' theorists, who have long been arguing that the world is actually running out of physical reserves. However, the IEA is not focusing on a shortage in the physical element, but rather in the necessary levels of investment that will be needed to meet energy demand going forward, amid high rates of depletion. According to the report, conventional production will effectively remain static, rising from 70.4m barrels per day (b/d) in 2007 to just 75.2m b/d in 2030, as 'new gains' and 'old losses' balance out.
Almost Half of New US Debt to Mature Within a Year

Anthony Ryan, the acting undersecretary for domestic finance at the U.S. Treasury, wonders how to sell all the debt securities needed to fund the Troubled Asset Relief program (TARP), the Federal Reserve's various emergency lending facilities, and the federal government's increasingly wide budget deficit for 2009.

The Treasury has borrowed $877 billion since the end of Aug - including $500 billion from the public - to boost the Federal Reserve's balance sheet and start funding the TARP.

But almost all of this borrowing has been done in the form of very short-term cash management bills - with $320 billion issued in September and another $520 billion issued in October. Little or none of it has been replaced yet with longer-dated bills, notes and bonds in the regular series.

After Worst Year Since 1937, Obama May Wind Up Inheriting Next Bull Market When it comes to the U.S. stock market, Barack Obama has time on his side. XX Sean's note -- "may" is the operative word here.

Also, here is today's column: Funding America’s Future Can Make You a Whole Lot Richer …

Finally, I'm scheduled to be on Fox Business TV at 1:20 pm, discussing oil prices.
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Tuesday, November 04, 2008

Go Vote!

If you haven't already, go vote!

And here's a little something to make you smile.

Sorry, embedding it didn't work. Here's a link:
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2 Forces Driving Oil Higher Today

Crude oil is up about $7 a barrel as I write this. What the heck is going on? I'll show you.

First, we have the bearish outside reversal in the U.S. dollar.

Since crude oil (as well as gold) is priced in dollars, as the dollar goes lower, crude tends to go higher.

Second, we have this story: "Oil Jumps 11 Percent on Saudi Supply Cuts."
Oil jumped more than 11 percent on Tuesday on signs Saudi Arabia had made substantial cuts in crude supplies and as global financial markets rallied.
Saudi Arabia, the world's biggest oil exporter, has reduced exports by around 900,000 barrels per day from a peak in August, one source estimated.

This one-two combo is giving crude oil its own outside reversal -- a bullish one:

Also you'll note that crude oil's recent downtrend is over. This doesn't mean crude oil is going back to triple digits (soon, anyway). But we could see a playable rally.

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Election Day Reading -- Chill Out Edition

Sorry I didn't post yesterday. I spent much of the day wrestling with a magnum-opus, way-the-heck too-long Money and Markets column, which I have since dumped on my long-suffering editor's lap. The best way to cut it would be with a straight razor and a bottle of whiskey. Better him than me.

Anyway, it's election day. Tally the votes. It took me half an hour to get into a voting booth today; longer than last time but still shorter than my wife's wait time of an hour and a half last week for early voting.

I doubt the votes will be tallied before charges of cheating or electioneering (whatever that is) fly from one side or the other. I think we should take the advice of the National Commercial Bank of Jamaica which, when the world was running around in circles in full-scale panic mode during the credit crisis meltdown, issued a statement that "everyone should just chill out."

Here's the news that I'm reading today ...

Credit Suisse Cuts Oil Forecasts
The broker now sees global demand for oil in 2009 down by 300,000 barrels a day year over year, the sharpest drop since 1982, as demand growth from China slows.
Meanwhile, Financial Sense Online says oil prices are being manipulated around the voting cycle.

From the story:

Just think of it; two price collapses in Crude Oil, each of them commencing – almost to the day – the same amount of time prior to November Elections in the U.S.A.
With U.S. elections out of the way tomorrow, it seems we can all look forward to a new Administration, a jolly holiday season and the likelihood of increased heating costs to keep us warm through the upcoming winter months.

Robert Rapier disagrees. In "The Myth of Election Year Price Manipulation," he says:
The biggest price drop happened in a non-election year, albeit it was an anomaly caused by 9/11. Of the thirteen years recorded, gasoline prices fell between Memorial Day and November during nine of the years. This is what I generally tell people: Prices fall for seasonal reasons, and do so even when there are no elections. The reason prices fall is that demand for gasoline falls after the summer.
In other news, USA Today asks: "Is Today's Economic Crisis Another Great Depression?"
Few people deny, however, that the current economic climate bears disturbing similarities to the start of the Great Depression:
1) Big declines in the stock market reduced people's wealth and decreased spending.
2) The Dow fell 42% from its Oct. 9, 2007, high to its Oct. 27, 2008, low, roughly equal to the market's initial tumble in 1929.
3) The banking system was crippled by bad loans and speculation.
The Automatic Earth offers unsolicited advice to President Obama on how to handle the economic shitstorm that is George W. Bush's legacy. Just part of this cheery note from TAE...

Your task will be far more formidable than I think you realize. It's not Franklin D. Roosevelt that you should look at for an example, it's not about turning the economy around, this is not the 1930's. The problems you will soon face are much worse than the ones he dealt with.

If you're looking to find a presidential role model for what you are about to face, you need to go back much further in history. You have to look at Abraham Lincoln for guidance. Your most daunting task is not turning the economy around. You will be remembered in history as the man who either did or did not save the Republic.

China Slowdown May Delay Metals Recovery The consensus view in the market has been that China's consumption of metals would offset the weakness in export-sector demand, but that now seems optimistic. Demand growth isn't expected to recover until mid- to late 2009 at the earliest and possibly will recover only once there is a global economic recovery, even if China introduces a fiscal-stimulus package as many expect.

A much anticipated report from the International Energy Agency (IEA), World Energy Outlook, has been obtained in draft by Financial Times. The headline says it all:World will struggle to meet oil demand
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Sunday, November 02, 2008

Sunday Reading -- Linkfest

If you want to put that extra hour you gained from the time change last night to good use, here is some interesting reading for a Sunday. Some of it is quite grim, so I'll open with a joke ...

Joke of the day
Hedge Fund Managers Mowed Down by Porsche...

'What's the difference between a hedge fund manager and a pigeon? A pigeon can still place a deposit on a Porsche.'

National Debt Soars $500B In Under A Month. Never before in U.S. history has the national debt increased as much and as rapidly as it has over the past month. Since September 30, the day the national debt hit the $10-trillion mark for the first time, the government has run up over $500 billion in new debt. That’s more than the federal deficit for the entire 2008 fiscal year, which ended September 30. And it’s the most rapid increase in the national debt ever: over half a trillion dollars in less than a month - 23 days to be exact.

Fear of Deflation Lurks as Global Demand Drops
As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.

XX Sean's note -- And now for an opposing view ...

The Problem Is The Crash of the Housing Bubble: Not Deflation
In a weak economy prices may be falling. But it is not falling prices that make the economy weak. The bulk of the economics profession, as well as the media, somehow managed to overlook an $8 trillion housing bubble as it was growing. Even as it is now collapsing, they are still missing it.

The economy is taking a big hit for an incredibly simple reason. Homeowners have lost an enormous amount of equity and therefore they are cutting back their consumption. When they cut back their consumption, companies lose business and profits. Some go out of business. This will lead to sharp declines in investment, which we have already been seeing.

There is no need to look to credit crunches or deflation. The problem is quite simply a massive lost of housing wealth, compounded by the recent loss of stock wealth. The only cure will be finding alternative sources of demand. In the short-term, government will have to fill the gap. In the longer term, it will be necessary to get the dollar down so that the country's trade is closer to balance.

Finance Crises Could Hit More Often
No matter how you arrange the data, the message is the same: The modern American financial system is unstable. During the life of the current system, it has been beset by recurrent booms and busts (e.g. the Internet-stock bubble, the housing boom and the subprime mortgage bust) and by events that might have triggered a system-wide shutdown (e.g. the collapse in the late 1990s of the hedge fund Long Term Capital Management).

CDS Pricing in Increasing Treasury Default Risk

The cost of insuring against a US government default has risen by 25 times in little over a year.

Source: Prudent Bear via Naked Capitalism.

How could the US government ever renege on its debts? After all, it supplies the world’s reserve currency, and the Federal Reserve Chairman reminded us a few years ago of the US authorities’ ability to print money in unlimited quantities. Any “default” would at least be through the time-tested mechanism of inflation and currency devaluation, according to this view.

On the other hand a longer-term examination of debt markets reminds us that, throughout human history, regular default is the rule than the exception. And while sovereign defaults on external, foreign-currency debt are most common, Carmen Reinhart and Kenneth Rogoff demonstrated in a paper released earlier this year that defaults on domestic debt have happened far more often than might have been expected, particularly in times of severe economic duress.

20% of U.S. Homeowners Have Mortgage Higher Than House Is Worth
Almost 20 percent of U.S. mortgage borrowers owed more on their loans in the third quarter than their house was worth as foreclosures depressed prices and the economy weakened, according to First American CoreLogic. More than 7.5 million properties already have negative equity and another 2.1 million will follow should home prices decline another 5 percent, Santa Ana, California-based First American, a seller of economic and real estate data, said in a report today.

Two two-trillionaires

The Fed’s balance sheet just surpassed 2 trillion dollars. It has grown by a trillion dollars over the course of the year. Literally. See “total factors supplying reserve balances” at the close of business on October 29. That growth was financed by Treasury bill issuance ($560b from the supplementary financing facility) and a large rise in banks deposits at the Fed ($405b).
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