Why the real bubble may be confidence in the Fed

31-Jul (CNBC) — At the end of the day, it’s really all about the Fed for most investors.

Forget Ukraine, forget Israel—forget pretty much everything else, in fact. When it comes to what investors think will spoil the 6-year-old bull market, most point directly to the Federal Reserve.

“Everybody I talk to to, every new prospect and client, they think the same thing: Another crash is around the corner and they want to be prepared for it,” said Keith Springer, who runs Springer Financial Advisory in Sacramento, California. “Everyone believes that … the Fed has created this bubble, because that’s what they’ve done for the last 25 years is create bubbles. And bubbles don’t deflate—they burst.”

…Of the 236 market participants who responded, Fed policy outweighed, with 51 percent of responses, every other macro factor combined when it came to evaluating probable causes of near-term market volatility. That’s more than the bloody strife in Ukraine (14 percent) or Israel (16 percent), more than what other central banks do (4 percent), and more than the catch-all “other” category (15 percent), all rolled into one.

In a similar vein, respondents strongly agreed that markets are too complacent about the threats, in whatever form they take. Asked to describe the level of apathy toward threats, 50 percent replied “complacent” while 16 percent said “much too complacent.”

Put the heavy reliance on the Fed’s ability to manage the economy with worry from the professionals surveyed by ConvergEx over market complacency and it adds up to a potentially jarring scenario.

“People talk about a bubble in stocks or biotech or a bubble in bonds—if there’s a bubble right now it’s a bubble in the confidence of central bankers,” said Gary Flam, portfolio manager at Bel Air Investment Advisors in Los Angeles. “It’s just the belief that they will solve all of life’s ills.”


Posted in Central Banks, Monetary Policy |

U.S. Stocks Tumble, Snapping Five-Month Win Streak

31-Jul (The Wall Street Journal) — U.S. stocks ended July with a more than 300-point selloff for the Dow Jones Industrial Average, a swoon that snapped a five-month winning streak for the broader market.

Traders said there was no single catalyst for the stumble, though selling started early and accelerated into Thursday’s closing bell, dragging the Dow into negative territory, down 0.1%, for 2014.

Investors said an upbeat reading from the labor market sowed concerns about the Federal Reserve possibly raising rates quicker than many investors anticipate. Some pointed to disappointing earnings reports from U.S. companies Thursday, which disrupted what has been a strong season for corporate profits. Others pointed to Argentina’s default on some bonds and fresh worries that the euro zone’s central bank will need to provide more stimulus.

The Dow Jones Industrial Average fell 317.06 points, or 1.9%, to 16563.30. The S&P 500 shed 39.40 points, or 2%, to 1930.67 and the Nasdaq Composite Index dropped 93.13 points, or 2.1%, to 4369.77.


PG View:

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The Daily Market Report: Gold Drops as Dollar Jumps to 10-month High

31-Jul (USAGOLD) — Gold retreated on Thursday to a new low for the month, weighed by rising expectations that the Fed may initiate ‘lift-off’ on rates sooner rather than later. That has pushed the dollar index to a new 11-month high of 81.57.

Shifting Fed expectations are premised on the sharp GDP rebound seen in Q2 and perhaps some hope for a July nonfarm payrolls beat tomorrow. The median forecast for payrolls is +225k. The unemployment rate is expected to hold steady at 6.1%. Not bad, but certainly not great either.

What the market will be watching are the data behind the headline numbers. How many of the new jobs are part-time, versus full-time? What’s the labor force participation rate?

Initial jobless claims rose 23k to 302k for the week ended 26-July. That was slightly above expectations, but some even viewed a claims print back above 300k as supportive to a sooner-than-expected rate hike.

Today’s report “supports the view that the Fed will raise rates sooner than expected, and that’s the reason for the decline in gold prices here,” Blake Robben, a senior market strategist at Archer Financial Services in Chicago, said in a telephone interview. “Obviously, when they start raising rates, gold will not perform in that environment. It never has.”

Wait a sec! Gold has never risen when rates were rising? Nonsense!

This chart of the Effective Fed Funds Rate and the price of gold makes it pretty apparent that rising interest rates does not necessarily imply a falling gold price. I’ll have more on this topic tomorrow.

Geopolitical risks are still seen as broadly supportive to gold. Today’s Argentine default and fresh worries about the Portuguese banking system, stemming from the 50% collapse of Banco Espírito Santo shares, have further stoked uncertainty.

Posted in Daily Market Report, Gold News, Gold Views |

200-Day Moving Average Offering Good Support For Gold

31-Jul (KitcoNews) — Gold dipped below its 50-day moving average overnight but the 200-day average continues to offer good support, says MKS (Switzerland) SA. For spot gold, the 200-day average currently lies near $1,285, and gold has not been below this average since a sharp rally back on June 19. “A brief move through the 50 DMA sent gold down to a session low of USD $1,291, but support was quickly found around these levels, particularly out of China with the physical premium touching USD $4,” MKS says. The 50-day average lies at $1,294.15, and gold bounced back to around this. With the metal range-bound for some time, all of the widely followed moving averages are bunched within $25 of one another. The 100-day is at $1,298.75, the 10-day at $1,302.55 and the 20-day at $1,310.


Posted in Gold News, Gold Views |

QE: New York Fed purchases $1.133 billion in Treasury coupons.

Posted in Central Banks, Monetary Policy, QE |

US Chicago ISM plunged to 52.6 in Jul, well below expectations of 63.0, vs 62.6 in Jun.

Posted in Economic Data |

US Civilian ECI +0.7% in Q2, above expectations of +0.5%, vs +0.3% in Q1; +2.0% y/y, up from +1.8% y/y in Q1.

Posted in Economic Data |

Banco Espírito Santo Shares Plummet

31-Jul (The Wall Street Journal) — Shares in Banco Espírito Santo SA BES.LB -37.46% plummeted more than 50% Thursday while its bonds also plunged, suggesting the most resilient shareholders are finally yanking their money out of the troubled lender in a long-drawn-out Portuguese banking drama.

Late on Wednesday, Portugal’s No. 2 lender by assets, which brought in new management earlier this month, reported a record €3.49 billion ($4.68 billion) net loss for the second quarter, after it found more exposure to its troubled parent than it previously expected.

On Thursday morning, shares were suspended, but more than halved in value on the previous day’s closing price when trading resumed around two hours later.

Year-to-date, the stock has now depreciated by around 80%, compared with a 9% decline in the country’s PSI 20 stock index.


PG Review: Talk of a possible ‘bail-in’ is already circulating.

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No deal: Argentina in default as talks fail

31-Jul (CNNMoney) — Argentina has defaulted for the second time in 13 years after officials failed to come to an agreement with the country’s bondholders.

After frantic last minute talks failed to produce a deal late Wednesday, Standard & Poor’s deemed the country to be in default on some of its obligations. The change in credit rating could hike Argentina’s borrowing costs, and put even more pressure on the country’s already-struggling economy.

The crisis stems from a legal battle with a small group of “holdout” creditors that had demanded payment of about $1.5 billion on bonds they bought after the $144 billion default in 2001. That standoff has blocked payments to other creditors.


Posted in Debt |

US initial jobless claims +23k to 302k for the week ended 26-Jul, in line with expectations, vs downward revised 279k in the previous week.

Posted in Economic Data |

Richard Russell says stick with gold and silver

King World News/7-30-2014

Richard Russell remains one of my favorite analysts simply because he is about as down-to-earth as they come.  In the KWN post linked above, he warns of a stock market crash saying that “trees don’t grow to the sky.”  He advises: “Stay with silver and gold and pray for the good of the nation. I must say that I’m fascinated to see how the US will deal with its surging and compounding debts. What worries me is the continuousness of those two eternals — Inflation and War.”

Some hard won wisdom from a money master:

“I have picked silver and gold as my form of capital preservation. Both are trading solidly in fixed ranges, which is fine with me. If the stock market drops 25% and a money manager is down 23%, he considers it a good performance. That’s not the way I see it. If the stock market is down 25%, and gold remains in its trading range, I consider that an excellent outcome. “

Please visit the link highlighted above.  It is worth the trip.

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Fed holds steady on rates, tapers by an additional $10 bln per month, in line with expectations.

Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has moved somewhat closer to the Committee’s longer-run objective. Longer-term inflation expectations have remained stable.

[Full FOMC Statement]

PG View: Status quo. Still concern about labor market slack, but inflation is closer to target.

Posted in Central Banks, Monetary Policy |

The Daily Market Report: Gold Range Bound After GDP Beat, Awaits Fed

30-Jul (USAGOLD) — Gold remains within the recent range, but has been somewhat choppy intraday after a better than expected advance Q2 GDP report and as the market awaits the FOMC policy statement. Geopolitical tensions continue to underpin the yellow metal.

GDP rebounded to a 4.0% annual pace in Q2. That was much better than the +2.9% the market was expecting and goes a long way toward offsetting the dismal decline in Q1. However, the beat has been largely dismissed by the market.

Gold sold off initially down to 1291.50, but then popped back above $1300, before settling into a narrow range just below $1300. Stocks gave back early gains as analysts noted that much of the Q2 rebound was attributable to inventory building.

“We do not view the outperformance in this report as a signal that the outlook for growth has improved,” said Barclays. A Wall Street Journal headline read: Modest Growth Beneath the Surface Keeps Fed on Track. The implication being that the initial Q2 number was not so great as to change what the Fed has been doing of late.

The Fed is expected to hold steady on rates later today and reduce asset purchases by another $10 bln. Treasury yields suggest that forecasts for a rate hike early in 2015 perhaps gained a little credence today.

Posted in Daily Market Report, Gold News, Gold Views |

Gold and the subjective theory of value


Ron Paul made an interesting comment in a CNBC interview yesterday:

“Timing is the only thing. I remember watching gold when it was 35 dollars an ounce and we thought if it ever hit a hundred dollars, the world would come to an end. And then a thousand dollars, so; no, it’s good as long as we continue to do this [print money], you know, it could go to infinity because when people just leave the dollar, who knows what …”

“But that won’t happen if we finally wake up and do something.  But if we can keep this together, if the money managers can keep it together and it doesn’t collapse, yes, gold is gonna keep creeping up, but, you know, as weak as gold looks right now, it’s up a hundred dollars for this year so…”

The interviewer (Jackie DeAngelis) interrupts to say:

“It’s roughly I think up 8% year-to-date. It’s not a horrible move for gold but I think a lot of people were expecting to see a little bit more, especially with the instability that we’re seeing in terms of the geopolitical situation. A lot of conflict around the world — you’d expect gold to be higher right now.”

To which Paul replies:

“Yeah, but if you understand the subjective theory of value, you don’t get too concerned about that because, yes, increasing the money supply weakens the dollar and a weaker dollar raises the price of gold and it’s a long term measurement. But you can’t measure, you can’t say that the money supply went up a certain amount, and gold is going to go up, so there’s a subjective element in that.”

“But long term…and economic law says, if you keep printing a lot of paper money, the value of that dollar and currency will go down, and things and most prices will go up and indeed gold always goes up against that currency.”

“But you don’t, I don’t get in the business of saying in a year or two or three it’s going to be two or three or four thousand dollars because it really challenges the basic fundamental beliefs of the Austrian school, to make these kinds of predictions.”

Some of you might recall this excerpt from the June issue of USAGOLD Review & Outlook (available here):

“Simply put, gold’s tendency under a fiat monetary regime is to rise – market pressure is constantly pushing the metal in an upward direction as the currency is debased.  One could even make the argument that as long as we have a fiat monetary system, gold’s inherent tendency will be to rise. Long term graphs of both the dollar and gold since 1971 are testament to this inverse correlation. Any attempt to hold down the price in such an environment unavoidably comes with risks and consequences as natural market forces dish out their own brand of economic justice.”

Gold is a long-term portfolio holding, and when assessing whether or not it makes sense  to own it, one must take a long-term view.  In other words, gold is a form of savings and wealth insurance, not a short term speculative bet.  If the world were still on the gold standard, there would be little need for gold in the personal portfolio.  On the other hand, as long as we are forced to operate in a fiat money regime, the demand for gold globally will remain strong among those who understand its efficiency as a hedge.  In this context, Paul makes the point that “gold could go to infinity.” By that he doesn’t mean to say that gold is going to $10,000, or anything of the sort.  Another way to make the same point is to say that if the money supply goes to infinity as it did in Germany’s Weimar Republic, gold could do the same though, as Paul points out, the two will not move in sync.

This simple chart which I put together for The ABCs of Gold Investing tells the tale in graphic form:


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Greenspan sees significant stock market decline in future


“Greenspan said equity markets will see a decline at some point after surging for the past several years, ‘The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction.’

Greenspan also said:

  • Sees near-term economic momentum continuing.
  • ‘Key question’ is whether U.S. faces false dawn.
  • ‘Open question’ whether inflation will surprise.
  • Concerned economy may hit ‘upside resistance.’
  • ‘We have a lot of uncertainty out there.’
  • Equity premium is ‘closer to normal.’
  • Predicts at some point equities to have correction.
  • Oil market has excess capacity, slack.
  • Without Middle East tension oil prices would fall.
  • Not at point where taper will turn around.
  • Sees problem moving toward ‘normalized’ policy.
  • Fiscal policy may put status of dollar at risk.”
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Under threat of tit-for-tat sanctions, hold some gold

Lawrence Williams/Mineweb/7-30-2014

“Russia obviously believes in gold – as seemingly does China, the other modern day superpower.  Does the West believe in it any longer?  It’s hard to tell.  On the face of things no.   But who knows what is said behind closed doors except those directly involved – and they aren’t saying.  Thus it is still perhaps a good idea to hedge one’s bets and hold some gold against yet another global financial crisis precipitated by tit for tat sanctions.  Particularly when one is aware that today’s fiat currencies have virtually no backing at all and could revert to the value of the paper on which they are printed.  Let’s hope it doesn’t happen, but it may be better to be safe than sorry.”

USAGOLD Note:  A different view from across the pond in Londontown. . . . . . Pete Grant, our resident economist, put together a solid report for yesterday’s DMR on potential effects from sanctions.  A good many, including a number of prominent analysts, have added their voices to the chorus on potential collateral damage to the West from sanctions on Russia — including the potential for a Russian debt default. Whenever something like that happens, it is difficult to know who in the financial business is going to be affected.  That’s not to say that sanctions should not be imposed.  We simply point out that there might be side effects not contemplated.

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How much did subprime loans fuel the GDP boom?

30-Jul (MarketWatch) — It’d be tempting to think that the days of subprime loans fueling the economy were a product of the era of the aged or departed Ace Greenberg, Alan Greenspan and Angelo Mozilo.

Except when you break down the growth in GDP, it’s clear that car and light truck purchases played a major role. And subprime loans, in turn, are financing those transactions.

In the second quarter, motor vehicle and parts spending grew an annual 17.5%. Put another way, cars made up 3.7% of all consumer spending, the highest rate since the first quarter of 2008.

Subprime loans make up about a third of new car-sales and two-thirds of used cars, according to data from Experian Automotive, at the end of last year. The New York Times, in a story about the subprime loan sector , pointed out that growth has climbed more than 130% in the five years since the crisis.

No prizes, by the way, for guessing which sector was cut out of regulation by the Consumer Financial Protection Bureau in an amendment tacked onto the Dodd-Frank bank reform law.


Posted in Economy |

Gold drops after U.S. economic growth tops forecasts

30-Jul (MarketWatch) — Gold prices pulled back Wednesday as a stronger-than-expected report on the U.S. economy dampened demand for safety plays.

Gold for August delivery GCQ4 -0.36% dropped $3.40, or 0.3%, to $1,294.90 an ounce, while September silver SIU4 +0.01% edged up 3 cents, or 0.2%, to $20.61 an ounce.

The U.S. economy grew by a 4% annual pace in the second quarter, recovering from contraction in the first quarter, said a preliminary government estimate Wednesday. Economists polled by MarketWatch had expected 3.2% growth.

But geopolitical risks also remained in focus. Israeli artillery on Wednesday hit a United Nations school sheltering more than 3,000 Palestinians in the Gaza Strip and at least 15 were reported killed, said a Wall Street Journal report.


Posted in Gold News, Gold Views |

There’s One Big Problem With Today’s Strong GDP Report

30-Jul (BusinessInsider) — We just learned GDP climbed 4% in Q2, which was much higher than the 3% growth rate expected.

There’s only one problem: Growth in inventories contributed 1.66 percentage points.

Inventory investment is one of the most volatile components of GDP. As the Bureau of Economic analysis notes, unanticipated buildups in inventories can signal future cutbacks in production, while unanticipated shortages in inventories may signal future pickups in production.

“The change in real private inventories added 1.66 percentage points to the second-quarter change in real GDP after subtracting 1.16 percentage points from the first-quarter change,” the BEA said. “Private businesses increased inventories $93.4 billion in the second quarter, following increases of $35.2 billion in the first quarter and $81.8 billion in the fourth quarter of 2013.”

So a surge now may mean Q3 growth will slow.


Posted in Economy |

German HICP inflation (prelim) fell to +0.8% y/y in Jun, below expectations of +0.9% y/y, vs +1.0% in May. Spain drops to -0.3%.

Posted in Economic Data |

US ADP employment survey +218k in Jul, below expectations of +250k, vs +281k in Jun.

Posted in Economic Data |

Gold dipped to 1291.50 on the GDP beat, but quickly rebounded back above $1300.

Posted in Gold News |

US advance Q2 GDP rebounded 4.0%, above expectations of +2.9%. Q1 revised to -2.1% from -2.9% previously.

Posted in Economic Data |

Things That Make You Go Hmmm… Anne Elk’s Theory On Brontosauruses

28-Jul (USAGOLD) — If you, like me, are troubled by the record low yields in the still struggling economies of the eurozone periphery, then the latest Things That Make You Go Hmmm… by Grant Williams is a must read.

“Make no mistake, folks, Europe is back — and not in the good way,” says Williams. He goes on to clearly illustrate the dangerous game being played by Mario Draghi and the ECB. It is the same dangerous game being played by Janet Yellen and the Fed, Mark Carney and the BoE, as well as Haruhiko Kuroda and the BoJ.

It is a house of cards, built on what Williams calls the ‘Annie Elk Theories’ (harkening back to an old Monty Python skit) about economies and monetary policy. Theories that are more “minimal accounts” than actual theory.

Our policymakers have been able to keep all the plates spinning because thus far, “the public’s buying into whatever they spin.” But what happens when it is revealed that a fraud has been perpetrated? The whole charade could unravel quite quickly indeed, with devastating global implications.

Another must read by Grant Williams, via our friends at Mauldin Economics.


Posted in Central Banks, Economy, Monetary Policy |

Gold may soon break out of its bear market

29-Jul (CNBC) — If ever there was a time to own gold as a safe haven alternative to other financial assets during tumultuous times, there’s no time like the present.

… For investors, uncertainty is high and fears are rising about trade wars, isolationist policies, higher energy prices, sanctions and large-scale attacks—all threatening a fragile global recovery.

“While gold benefits from geopolitical tensions, such tensions are usually limited in scope, thus making only a mediocre argument to buy gold. Having said that, I think we are entering an era of increased instability. Such an environment will warrant an expansion risk premium, causing headwinds to most asset prices,” said Axel Merk, who runs the Merk Funds, including Merk Gold Trust.


Posted in Gold News, Gold Views |

Clashes kill 30 in Benghazi in escalating Libya turmoil

29-Jul (Reuters) – Libyan forces on Tuesday battled Islamist militants with rockets and warplanes for control of an army base in the eastern city of Benghazi after at least 30 people were killed in overnight fighting.

Intense fighting in Benghazi, Libya’s second city, and battles between rival militias in the capital Tripoli have pushed Libya deeper into chaos after two weeks of the fiercest violence since the 2011 civil war ousted Muammar Gaddafi.


Posted in Geopolitical Risks |

Argentina’s President Is Spending The Last Few Hours Before Her Country’s Default Among Friends

29-Jul (BusinessInsider) — Bar any last minute heroics from a delegation meeting with negotiators in New York City, Argentina is set to default tomorrow. Ironically, it will default on debt dating back to its last default in 2001.

…Now Argentina has until Wednesday to pay up, according to a New York Judge. A delegation has been sent from the country to try to convince the Court to instate a stay on all payment to bondholders — Argentina’s condition for negotiating — but so far it’s been unsuccessful.


Posted in Debt |

Russia sanctions threaten to blow euro zone off course

29-Jul (Reuters) – The knock to confidence from harsher European sanctions on Russia could spoil the euro zone’s budding economic recovery even if it shrugs off the fallout on trade.

Following months of hesitation, the European Union will seek on Tuesday to seal the first broad economic sanctions on Russia – its third-biggest trading partner – following the downing of a Malaysian airliner over territory controlled by pro-Moscow rebels in eastern Ukraine.

If endorsed by ambassadors from 28 European Union countries, Europe could limit access to capital markets by Russian state banks, impose an embargo on arms sales and restrict trade of high-tech energy technologies and “dual use” technology that has both civilian and defence applications.

Even if these measures are diluted, they will mark a fundamental change in how Europe deals with Russia, one which carries risks not just for Moscow but for Europe itself.


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Russia Risk Propels Europe Bonds to Record Highs

29-Jul (The Wall Street Journal) — Government bonds in the euro area have been on the up for months. Now the threat of wider sanctions against Russia and its implications for Europe is propelling them to record highs.

An anemic economic recovery and stubbornly weak inflation prompted a package of easing measures from the European Central Bank in June, further fuelling a rally in 2014 that has taken in euro-zone bonds of all stripes.

More recently, some investors, unnerved by persistent worries over Russia, are heading to the safety of German Bunds, Europe’s premier safe retreat. In addition, some are betting that any damage to the region’s economy from tougher western sanctions against Russia could prompt an even more robust response from the central bank—including the possibility of a large-scale bond-buying stimulus program, which the ECB has so far avoided.

“There is a definitely risk of a blow-back into the European economy [from Russian sanctions] and that is why Bunds are rallying,” said Alastair Thomas, head of rates and treasury management at ECM Asset Management.


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EU reaches deal on fresh Russian sanctions

29-Jul (Financial Times) — Ambassadors from all 28 EU countries have reached a deal on wide-ranging sanctions against Russia that include a ban on the country’s biggest state-owned banks from selling stock or long-term debt on European markets, according to EU diplomats.

The agreement comes after more than seven hours of deliberations in Brussels in which negotiators made only minor modifications to legislation proposed by the European Commission which would also hit exports to Russian oil exploration projects and impose a blanket arms embargo on future weapons shipments, reports Peter Spiegel from Brussels.

The ratcheting up of sanctions comes almost two weeks after a Malaysian Airlines plane was shot down over eastern Ukraine, killing 298 people.

Tony Blinken, the US deputy national security adviser, said that the White House is likely to impose a fresh set of sanctions later this week.


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