Can anyone get rid of these pesky meddlers?

The reason we need a collapse on Wall Street is that it’s the only way for the economy to get back on its feet.

The Great Correction has to correct.

It has to clean up the mistakes. It has to sweep out the debris. It has to un-screw up the economy.

Who screwed it up? The fixers... the world improvers... the meddlers... the Democrats and Republicans... 

Now, stocks have to fall. Banks need to go out of business. Companies need to go broke... and households need to default...

Asset prices need to go down. Unemployment needs to go up.

The pieces have to fall... or you can never pick them up.

If the feds would just leave well enough alone Mr Market would have handled the whole thing. And we’d be out of this Great Correction by now. He would have knocked down almost all of Wall Street. He would have put dozens of our leading companies into Chapter 11... blown up trillions of dollars in derivatives... and forced thousands of bankers, brokers, businessmen and hedge fund managers into early retirement.

That problem of unequal distribution of wealth... the rich getting richer, and all? He would have taken care of it!

And he would have done it all in a few short weeks in late 2008. By now, we’d have full employment again. And people building real wealth.

In other words, if the feds had not poured trillions of dollars down so many rat-holes... good money after bad... the whole thing would be over by now. We’d have a growing economy. We have real businesses producing real stuff... and paying real wages to real workers.

But the feds are on the job. And the job they’re on is to protect their voters... and their campaign donors... from Mr Market.

Of course, all they can do is delay the fix. They can make the problem worse. They can make the losses bigger. But they can’t fix anything.

Fixing requires pain. And the feds try to avoid pain at all costs... especially when they are the ones who will feel it.

So, they borrow and spend... and then print and spend... until the whole thing blows up.


Bill Bonner

Why you’ll pay for the Greek exit

Well I’m sure you’ve had your fill of the 'Grexit' story. It was all over the news and papers at the weekend... everyone’s talking about it.

Of course the very real possibility of a Greek exit from the eurozone is hardly news to us here.

So let’s move on to the bigger question. And that is: Who pays if Greece exits?

You pay!

The Greeks are, how shall I put it, very upset.

They’re upset with the main political parties, who many feel have sold them out to the wicked Europeans. Youth unemployment is over 50%, while in Germany, it’s fallen. Greek banks are haemorrhaging cash, while it piles up in Germany. Greek bond yields are heading out of the ball-park, while the German government can borrow for practically nothing.

The words the public want to hear are uttered by an effervescent young-gun politician called Alexis Tsipras. And his calming words are something like: Let’s just dump our debt obligations.

And the obvious question we should be asking ourselves is...

Who loses?



If Greece exits the euro, then the question is, how much will lenders get back? Of course nobody knows, nor do they know which currency they may get back. But we do have an idea of who’s holding the debt.

As the graphic shows, Greek debt holders can be split into three distinct groups, all of them with about a third each. There’s the ECB/IMF, who have bought in to try to stabilise the Greek debt market. There’s the Greek and Cypriot banks, that bought in for regulatory reasons (a risk-free asset for bank reserves) and pension savings. And last, but not least, there’s everyone else, or the ‘market’ – and  that could include your pension fund.

But don’t worry too much, as it’s much more likely to be French pension funds or banks left holding the baby. The following graphic explains why...
Who does Greece owe?

Source: BBC

I can see 41 billion reasons why the French are keen to keep Greece within the eurozone!

But an exit will hurt the Greeks most

Though I have argued strongly that it’s in Greece’s interests to leave the eurozone, I’m not for one moment suggesting it’s going to be easy.

The rest of the world can probably cope with Grexit. It’s only if other countries follow her out the door that we’re in big trouble. But for Greek banks and pension funds, it’ll be shocking. They’re filled to the rafters with their own Greek debt.

Older (and wealthier) factions of Greek society will pay a very heavy price in the event of Grexit.

It’s little wonder that euros are heading out of Greek bank accounts. If you face losing a large chunk of your pension, then you’re not going to run the risk of your cash going up in smoke too.

Greek businesses will be next to suffer

I remember when Argentina faced a similar exit. I remember it well, because I was in the throes of an important business deal with an Argentinean. And it nearly bust my business...

Argentina faced an exit from its dollar peg. Argentina was in a similar situation to Greece today. Basically, her currency was ‘pegged’ to the US dollar, and had been for ten years. But given the distortions caused by an ill-fitting monetary union, it couldn’t hold on. Deficit spending and debt had become too onerous. So the Argentineans needed loans from the IMF to keep up the charade of monetary union.

Everyone could see what was happening. Bank accounts were being emptied as holders feared a currency devaluation.

I’d just started a food import business. And one of the first deals I did was the sale of two containers of organic honey to a large UK buyer.

I had signed a contract that promised to deliver. But suddenly our Argentinean supplier didn’t want to go through with the deal. He didn’t want our dollars – he was frightened that once received, the cash would be debased. He said he’d rather sit on his honey. For him it was literally liquid gold.

And he was right... upon exit, the value of the peso fell to about a quarter.

Thankfully I was able to wriggle out of the deal with the UK buyer. But they weren’t happy, and they could have made me go out and buy the honey elsewhere and deliver it to them at a massive loss.

The point is, when you start publicly debating the exit from monetary union, international business grinds to a halt. Nobody does anything for fear of converting their hard work into debased currency.

I say if Greece heads out the door, it should be done as quickly as possible. Greece can’t afford a drawn out withdrawal. Every day spent in limbo causes more and more economic heartache.

The pain is going to be shocking. But not as shocking as hanging on.

Somebody ought to tell the politicians.


Bengt Saelensminde

Cash is King, deflation begins

“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate...  it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

- Andrew Mellon       

Down, down, down...

Oil is at a five-month low. Russian stocks are 20% below their high. Commodities are back to 2010 levels.

Everything is going down. Even gold.

Wait a minute. Since we know from Einstein that all motion is relative, everything CAN’T be going down. If everything were going down, everything would be standing still. Something must be going up as a point of reference.

So what’s going up?

Cash!

Cash is going up against oil, houses, stocks, copper, commodities of all sorts...  and just about everything else.

Cash is king.

Why? Because we are in a Great Correction. And in a great correction, prices are corrected. In a bubble, prices tend to go up. This tends to push up animal spirits... encouraging investors and business people to do things that they will later regret. They build houses no one can afford... and shopping centres no one really needs. Then, these things – and the loans against them – appear as “assets” on the books of banks, pension funds, hedge funds, private equity outfits... you name it.

Later, as the correction continues, markets discover that these ‘assets’ are not worth quite as much as they thought. Prices go down. Some ‘assets’ become liabilities. They are underwater, with more debt than equity.

Labour rates fall too. There are fewer projects that “make sense”... and they need fewer workers. Business falls off. Unemployment goes up. Salaries go down.

As prices fall, they must fall against something. So they fall against cash. Cash becomes more valuable. You can buy more real assets with every unit. People who hold their cash through a correction usually do well. They are able to buy quality assets, at the bottom, at large discounts to their previous prices.

That’s why so many people are willing to lend money to the feds for such low interest rates. They figures it’s as good as cash.

All this is obvious and hardly worth mentioning. In a better world, we’d all know what was going on... and we could all predict what would happen next: the mistakes would be written off, defaulted on, foreclosed, and marked down...

... and then, the economy could get up, dust itself off, and get back to work.That’s what used to happen. The first American depression came in 1819. Cotton prices collapsed. Farms were foreclosed. Banks failed. It was over by 1821 – two years later.

Then, there was the Panic of 1837. New York brokerage houses failed. Farm prices collapsed. A bank president committed suicide. But it was over by 1843 – six years later.

The Panic of 1857 was triggered by the bankruptcy of Ohio Life Insurance and Trust Company. Railroad speculators were ruined. Stocks plunged. Nearly a thousand companies went broke. The resulting depression was hard... but short. Recovery began two years later.

The Panic of 1873 led to a five-year depression. And the Panic of 1893 hit even harder – with a crash on Wall Street, 16,000 business failures and a 15% unemployment rate. Four years later, the economy was running hot again.

The aftermath of WWI brought the Depression of 1921. By many measures it was as bad as the Great Depression. But it was quick – two years later it was over.

And then, came the Great Depression itself. What made it so great? The feds! Until the 1930s, the feds let the economy take care of itself. Interest rates? They were set by willing buyers and sellers, not by economists working for the government. Monetary policy? Fiscal policy? There were none.

When it was time for a correction, Mr Market took out a wrecking ball and knocked down the mistakes of the previous boom. The debris was quickly swept away... and it was off to the races again.

Even as late as the 1930s, Andrew Mellon, then Secretary of the US Treasury, advised president Hoover to “liquidate” everything. His idea was to give the correction a helping hand...  Rather than wait for the correction to do its work, he’d swing the wrecking ball himself.

That is just what he did in the 1920s. He was Treasury Secretary in 1921 too. And instead of trying to fight the slump of ’21-’23, he helped it on its way. Instead of “countercyclical stimulus” measures, he gave the nation “pro-cyclical” measures. That is, he didn’t increase government spending in order to provide the economy with fiscal stimulus. He cut government spending in order to leave more money in the hands of consumers, investors, and business people.

And it worked. Scarcely 24 months after the beginning of the depression it was over... with unemployment back to 5%.

But the world changed between ’21 and ’31. By the ‘30s, the feds had the bit between their teeth. In Germany, the Nazis were already consolidating power and gathering tinder for the Reichstag. In Italy, Mussolini and his gang were wearing funny outfits and plotting out an empire. Stalin was reorganizing Soviet agriculture – which would result in millions of deaths by starvation. And in the Western democracies, the meddlers were taking over too.

Instead of thanking Mellon for his input, the feds tried to impeach him! In a few months, Mellon was gone. And then US economic policy was firmly in the hands of people who thought they could do better.

The gist of the new policy was that corrections must be stopped – at all cost. Depressions must be fought. Bankruptcies must be prevented...  Markets must be controlled! By bureaucrats!

This new policy was what made the Great Depression great. Mr. Market may have wanted to correct his mistakes; but the feds wouldn’t let him. The depression continued, off and on, throughout the ‘30s... and the ‘40s too. It didn’t really end until the 1950s.

You might expect the feds would have learned from that experience. Compared to the laissez faire policies of Andrew Mellon their activism was a complete, miserable failure.

Learn? Are you kidding. We’re now in the 6th year of the crisis that began with the collapse of subprime in April ’07. Does it show any sign of letting up? Any sign of coming to an end?

Nope?

The feds have fought the correction every step of the way... with everything they’ve got. They’ve tried monetary stimulus – taking rates down to zero.

They’ve tried fiscal stimulus – with $1 trillion budget deficits for the last four years... and no end in sight. They’ve tried 'unconventional' measures too – such as QE 1, QE II and The Twist. Last year, the Fed funded more than 60% of the US deficit with printed money. And the Fed has increased its holdings of US debt some 3.5 times since 2008, from $479 billion in September, 2008 to $1.66 trillion in March, 2012.

So, put on your seat belts. Sit back. Relax.

Eventually, the correction will do its work. But it could take a long, long time.

Bill Bonner

What the European elections mean for you

As we’ve noted before, politics holds the key to the euro’s future.

The euro is a political construct, not an economic one. As it stands, the euro cannot function in the long term, from an economic point of view. The various countries involved are too different.

So the main thing holding the euro together so far is that European voters, by and large, still want it. Voters might be angry at Germany, or angry at their own leaders, or angry at eurocrats in general.

But they don’t yet blame the currency for their woes, this could be the year that all that changes

Forget growth versus austerity – it all comes down to defaulting

Sharing a currency and nothing else is a recipe for disaster for smaller countries. Scotland plans to keep the pound if it pursues independence. But it perfectly sums up the problems that the eurozone faces.

Forget all the stuff about austerity versus growth. It’s good column fodder for economists, but it doesn’t get us any closer to understanding what will happen on the ground.

The austerity mob argues that countries need to do what it takes to pay back their debts. Instinctively, this feels like the ‘right’ decision. Most of the time, if you’ve spent too much money, then yes, cutting back for a while and rebuilding your savings is the smart thing to do.

But there comes a point where the hole you’ve dug is simply too big. That’s when your creditors need to share the pain. People seem to forget that when a lender writes a cheque, they’re taking a risk. If they haven’t assessed that person’s credit risk correctly, then the rules of capitalism dictate that they should lose some or all of that money.

So austerity without explicit default cannot work.

The growth mob, on the other hand, seem to think that you can borrow and spend with impunity. This is wrong, and they know it. What the growth guys are really arguing is that Germany should take the leash off the European Central Bank (ECB).

If the ECB is allowed to print money, then Greece and all the other countries can service their debts the easy way – the Anglo-Saxon way, in fact. Over time, these economies will recover.

It does mean that you confiscate money from savers across the eurozone in the form of inflation. It also means that you are implicitly defaulting – you are repaying your debts with devalued currency.

And it creates moral hazard – neither countries nor lenders have any incentive to change their behaviour if they believe that there is always a bail-out at the end of the road.

So these are the choices: an implicit default or an explicit default. In an implicit default, German taxpayers agree to stand behind other nations’ debts (in the form of ECB money-printing, or a common eurozone bond issue – it all boils down to the same thing). That leads to a weaker euro.

In an explicit default, Greece tells its remaining creditors (the ones it hasn’t already defaulted on) that it can’t repay them.

Trouble is, any eurozone country that unilaterally decides not to pay its debts would be stiffing other eurozone countries too. In particular, a whole lot of Greek debt is held by other European banks, as well as the ECB. That’s why it would be hard to default, and also to stay in the euro.

So an explicit default by Greece (or any other country for that matter), involves leaving the euro and going back to the drachma.

So what’s the European endgame?

Which of these routes will be chosen all comes down to the voters. So what have they said?

The key country is Germany, of course. And they have no intention of budging. As Reuters reports, Volker Kauder, one of Angela Merkel’s “closest allies”, said: “Germany could end up paying for the Socialist victory in France with more guarantees, more money. And that is not acceptable. Germany is not here to finance French election promises”.

Merkel is only reflecting the desires of her population. So while Francois Hollande can talk about growth all he wants, the best he’s likely to get is some sort of fudged ‘growth pact’ that is all words and no action. That won’t please the French people. But they’re not at the stage where they are ready to jack in the whole euro project as yet.

The Greeks, on the other hand…

In essence, the outcome of the Greek election was a mass vote for “anything but this”. Greeks voted for Communists, Neo-Nazis, and all the colours of the political rainbow in between. Putting a coalition together from that lot is going to be tough. In fact, it seems likely that there’ll be another election in June. Although, chances are, that would result in an even more polarised result.

Citigroup reckons that there’s now a 75% chance of Greece leaving the euro by the end of 2013. That seems more than reasonable. The question is, how much damage could it do?

Private debt holders have already had their holdings written down substantially. So it’s hard to believe that losing the rest would deliver a knock-out blow to the global financial system.

However, it would still be incredibly messy, but it would also get the markets watching for the next candidate to leave – probably Portugal.

The one thing that a Greek exit might do, is shock the rest of the eurozone into deciding that defaulting via money-printing is the best way to go.

In the meantime, I’d keep your exposure to the eurozone to a minimum. But have some cash in your portfolio, ready to take advantage of any opportunities that arise. If the ECB does have its arm twisted into money-printing, a rally is almost guaranteed.

John Stepek

The true cause of Britain’s stagnant housing market

“Britain is back in recession!” screamed the newspapers last week.

“Tell us something we don’t know”, shrugged the markets.

Neither the FTSE 100 nor even the pound seemed particularly perturbed by the news that Britain’s economy had shrunk for a second quarter in a row.

Even if the figures are correct (they’re preliminary estimates after all), the reaction of some sections of the press and politicians was over the top.

You want to know why Britain is in recession?” We had a boom. Now we have a bust. That’s the way it works. It’s as simple as that. In 2008, we were in a serious mess. You can’t then expect, less than four years on from that cliff-edge, for everything to be booming again.

In the US, things seemed to have picked up much more quickly. But there is a reason for that. If the US is indeed recovering now, it’s because – despite the best efforts of the Federal Reserve – they had something closer to a proper crash.

The crucial difference was that, unlike the Bank of England, the Federal Reserve was unable to lower the cost of mortgages rapidly. As a result, house prices collapsed – and remain about a third lower than they were at the peak. Unemployment rocketed – and remains extremely high. About a sixth of the population is on food stamps.

Don’t be under any illusions – the Americans have gone through a much more painful crash than us. But it means that their banks have been forced to write off debt.

We chose the stagnation route out of the slump instead. Debts that should have been written off – from mortgages to business loans - have instead been allowed to stagger on, by lowering the cost of servicing them. Given this misuse of resources, it’s little wonder that we are still in a recession.


The real reason no-one is buying houses

The struggling economy is also having an impact on the housing market, says MoneyWeek editor-in-chief Merryn Somerset Webb on her blog. “There is much talk about the low level of volumes in the UK market – and about how that is the thing that is keeping prices up.

“People, convinced their house is still worth a bubble number, won’t sell at the new market price. So supply is crunched and prices have stayed higher than they should have. Soon, or so the story goes, sellers will blink and cut their prices properly, allowing volumes to rise and markets to clear.”

But Merryn has a different theory. She draws attention to the fact that mortgage providers are raising their rates or making “sneaky” changes to contracts. Perhaps the problem isn’t that people are greedily holding out for an unrealistic price for their home, after all.

Instead, perhaps it’s “all about the price they have to pay for a new mortgage on the next house they buy. The Financial Services Authority has pointed out that the UK is home to hundreds of thousands of mortgage prisoners – people who can’t move because they can’t get a new mortgage at all. They have too little equity or too low an income for our newly prudent mortgage lenders to touch with a bargepole”.

Even those people who aren’t officially ‘mortgage prisoners’ might still be stuck, says Merryn. Falling house prices will have pushed up borrowers’ (they owe more as a percentage of their house’s value than they used to).

Combined with stricter terms from lenders, this means that even people who think they have ‘portable mortgages’ – the type you can take with you when you move house – will have to apply for a new loan. And that, in the current climate, means they will end up paying more.

So “the lack of volume in the market might not be about sellers not being able to cope with the price of houses, but something that lies behind that – sellers not being able to cope with the price of new credit”.

The blog led to a debate in the comments section below. Regular commenter Boris Macdonut felt that the increases by mortgage providers are not significant enough to affect the housing market. “The real reason is not a modest cost increase but fear and distrust.”

But as Dr Ray pointed out, while the numbers may seem small, in percentage terms they are quite big. For example “an increase from 4.27 to 4.6 isn't a 0.33% increase. It is a 7.73% increase”.

Meanwhile, Agabus25 put it down to various factors. “It's not one single thing but the combination: higher rates, fees that you can no longer capitalise, withdrawal of interest-only, no extended maturities (ie no longer than 25 year loans), no excessive salary multiples, no sky-high loan-to-value, plus the squeeze on middle class earnings. Combine just a couple of these and the total effect is substantial enough to become a deal breaker.”


The game is completely rigged

Money printing by the Federal Reserve and other central banks, means that the idea of a ‘risk-free’ rate – essential to calculating the value of anything in modern finance - is now obsolete.

Indeed, says Tim Price: “There’s one thing I know about investing today - the game is completely rigged”.

Tim, who writes The Price Report newsletter, isn’t one to pull his punches. As far as he’s concerned: “The world’s governments and their central bank cronies are conspiring to distort almost every investment you can put your money in right now. But they can’t do it forever”.

He has a pretty bleak view of where things are heading. “The plain fact is that we are in the midst of a devastating sovereign crisis.” Yet Tim thinks that investors – if they’re prepared – can protect their money from the coming storm. And that’ll leave them in a good position to take advantage of the opportunities that will arise from that.

Is the gold bull market over? 

In the past few months the gold price has wobbled. Some have even said that the bull market for gold is over. Is it?

In the current bull market, gold has regularly had sharp run-ups, just as happened last year. And each time it’s happened, “a lengthy period of consolidation and digestion has followed before we have seen new highs. Often these periods last for more than a year. In some cases – if the preceding move has been large – the consolidation has lasted for over 18 months”.

So don’t worry. Gold is just having a breather. “I maintain we will eventually see new highs, just not any time soon.”

In fact, now could be a good time to stock up if you haven’t already. “If the patterns of previous moves continue to be our guide, we can expect gold to start creeping up from here – perhaps to about $1,800 before a pullback. I would like to see gold get above its 252-day moving average and stay above it.

“If it doesn’t and gold starts to creep down, I will be nervous. But continue to hold your gold. The fundamentals have not changed. And if you don’t own any, I would say the odds favour now as a decent opportunity to accumulate.”


James McKeigue

Is now a good time to buy gold?

‘If you are going to panic’, I’ve heard it said, ‘Panic first. You can investigate later.’

Gold had another one if its bad days yesterday. It fell some $30 or $40 an ounce, depending on when your day began. It fell another $13 overnight.

But now really is not the time to be panicking. If you start now, you’ll be very late to the panic party.

In fact, if you have been looking for an opportunity to increase your exposure to gold, now could be the chance you’ve been waiting for.


Gold is consolidating after its 2011 excesses

My longer-term prognosis for gold remains unchanged.

When gold has one of its big run ups, as it did in the periods to May 2006 and February 2008, afterwards, it goes though a lengthy period of consolidation. It’s trying , it’s frustrating, but that’s what it does.

Eventually it gathers impetus again, challenges the old high and, after several attempts, breaks out. The old high then becomes support. But it is many months – sometimes more than 12 – before we challenge that old high.

Gold is now in consolidation mode after its 2011 excesses. It will be many months yet before we break out to new highs. But we will. And two or three years after we do, gold will have another big run-up and sell-off and that $1,920 figure will be the line of support – just as both the $700 and $1,000 have been.

We still have colossal monetary stress, unpayable national debts, negative real interest rates and central banks that – despite yesterday’s jawboning by Federal Reserve chief Ben Bernanke – have gone beyond the point of no return on the money-printing path.

He is not printing at the moment because he doesn’t have to. US stock markets have been the stellar markets. They won’t be forever.

In the meantime, I’d like to introduce you to another moving average, one that’s worked particularly well for gold over the years. You may remember how well my 144-day moving average worked in the period from 2009 to late 2011. Well, now I’d like to tell you about the 252-day moving average.

When gold hits this line, it’s usually a good time to buy

I use the 252-day moving average because there are usually 252 trading days in year, so, in effect, it shows the average price over the last year.

Here we see gold from 2001, when the bull market began, to 2008. The red line underneath is the 252-day moving average.

You can see that throughout that seven-year period, gold repeatedly came back to it and found support there. In other words, it consistently marked an excellent entry point.



These things don’t work forever, however, and in 2008, as the world panicked (did you panic first?), gold got too far above the moving average, and then for a few sorry months in the latter part of the year, the price plunged through it.

From 2009 it hardly worked at all. Why? Because it didn’t have to.

From spring 2009 to late 2011 gold, such was its strength, never went back to its one-year average. Instead it consistently found support at the 144-day moving average – the green line on the chart below. The ‘irrelevant’ 252-day moving average is in red.



But in September last year, as we all know, gold went too far too fast.

One casualty of the subsequent wash-out has been the 144-day moving average (we are currently sitting below it). It is, for the time being, no longer an effective tool.

But, joy of joys, our friend the 252-day moving average has risen from the ashes. It now seems to be offering gold the support it so badly needs. Here’s a one-year chart of gold with the 252-day moving average underneath. We’ve just slipped through it overnight.



The 252-day moving average, I’ve found, is more of a ‘rough guide’. It doesn’t nail the exact lows in the way that the 144 did. You can see we slipped through for a few days in late December. But, over a longer time frame, it’s acted as a good point to be dripping money back in.

Will it continue to work? My bet is that it will.

I said a few weeks back that gold looks like it wants to go back to $1,600. I thought we had seen the low last week and that we were on our way back to $1,800. It looks like I got that wrong and that $1,600 has to be visited first.

I’m not sure, as some suggest, that Bernanke is out to deliberately suppress the price of gold. But he has said before that he has the gold price on his screen and watches it every day.

Does he want the gold price to soar? Of course not. But read his work, look at the measures of inflation he uses, look at what he actually does – he is a keen proponent of monetary stimulus. As Marc Faber would say: ‘he’s a money printer’.

Gold has gone back to its one-year moving average. Every time it’s done this bar a few months in late 2008, it’s not been a reason to panic. It’s been an opportunity.

So my message to you today, in case you haven’t already got it, is sit tight, stay long, stay strong, and be patient. The bull market isn’t over.


Dominic Frisby

South Carolina Acknowledges the Silver & Gold Manipulation

Silver price manipulation and gold manipulation has been alleged through out this bull market.  This premise has been one of many reasons why gold and silver advocates have urged the public to accumulate precious metals.  

The story begins on September 29, 2008 when the Wall St Journal reported that the CFTC would begin investigating allegations that 2 big banks had been controlling a large part of silver’s short positions-or bets that prices will decline-on the COMEX.

Since then the CFTC has issued press releases every now and then confirming that the investigation is ongoing.  The CFTC has been reluctant to give a final ruling.  This has only added fuel to the fire of speculation of some sort of conspiracy.

The silver manipulation story gets weirder.  A London based precious metals trader by the name of Andrew Maguire became a whistle blower who revealed via an interview with GATA in April 2010 that silver manipulation does exist, confirmed JP Morgan Chase and HSBC as the main culprits and went so far as providing the SEC the algorithm used to suppress the price of silver based on the movement of gold.  For three straight days his algorithm correctly and precisely tracked the price.  The SEC should have had all they needed.  That was the “smoking gun”. No charges were nor have been brought forth.

Andrew Maguire is quoted as saying, "JPMorgan acts as an agent for the Federal Reserve; they act to halt the rise of gold and silver against the US dollar. JPMorgan is insulated from potential losses (on their short positions) by the Fed and/or the U.S. taxpayer."

Maguire was even involved in a freak hit and run accident the day after his name was revealed at a CFTC hearing.  Maguire of course believed it was an attempt on his life.  It’s hard to argue especially when the authorities have refused to name the assailant and file charges against the assailant after having apprehended him and helicopter cameras watching the whole scene unfold from above!

But all this doesn’t matter anymore. Or at least it shouldn’t.  While investigating the specifics on the bill advancing gold and silver as legal tender in the State of South Carolina’s website, we came across a study that was conducted by South Carolina’s State treasurer.  The study was intended to provide state officials with advise on whether or not the State should invest State Pension funds in gold and silver.  But what the document revealed was much more than that.

The state document acknowledged collusion between the Federal Reserve, the London Bullion Market Association, JP Morgan Chase and HSBC have engaged in artificial price suppression of gold and silver prices through massive naked short positions. 

Mike Maloney

Why buy Silver?

• Currently there is less silver available for investors to buy than there is gold.
• Only enough silver on Earth for every person to have one fourth of an ounce.
• Considered a ‘miracle metal’. It is the world’s most used industrial metal and cannot be replaced by anything else.
• Silver is the most electrically conductive, thermally resistant, and reflective metal on the planet that has no known substitutes.
• Past 30 years the world has used up more silver than has been mined, and today silver inventories are near all time record low levels.
• Experts are retiring leaving a void in the mining of silver because college graduates are not getting degrees in mining and geology.

It is our opinion that investing in silver is one of the best investing opportunities in modern history. Silver is used in over 10,000 industrial applications and the fact that palladium is over $600 and ounce and silver as low as it is, is a revealing insight in how out of balance the metals are. The world could exist in its current form without palladium but it would stand still if silver disappeared. Silver without debate is the most valuable precious metal on the planet but also one of the cheapest. The reason it is so cheap is because the US Gov in bed with the big banks have suppressed the price of both gold and silver to have the appearance of a strong dollar. Why Buy Silver? Want to own something that the world desperately needs at every level and something the world is in very short supply of? Supply and demand pressures on the silver market are huge and the coming uptrend in the price of silver is still in the early stages. Get in before the herd. You’ll be happy you did.

A warning to all Gold investors

If we were to idealise the anatomy of a bull market, it would have three phases.

There’s the first (or ‘stealth’ phase) when the canny few get on board, but most are uninterested.

Then there’s the middle phase. This is when institutions and other sophisticated players wake up to it, but many continue to ignore it, because ‘prices have already gone up so much’. This is when you’re climbing your proverbial wall of worry.

Finally, there’s the euphoric mania, when the world and his wife simply can’t get enough.

So when it comes to gold, where are we now? 


One feature of the second phase of a bull market, is that the mainstream media, albeit guardedly, start mentioning said bull market.

There have been phases in this current gold bull market where radio and newspapers – I’d say less so television – have got interested in gold. This interest usually seems to come when gold has broken to new highs and is going on one of its mini-exponential runs. I’m thinking in particular about last August-September, but also about April to May 2006 and February 2008.

When those in the mainstream – who, ironically, are often on the outside – do get interested, one of the questions they keep coming back to is: ‘Is gold in a bubble?’ In other words, there is doubt. Prices have already gone up so much, that they’re sceptical and so stay out of the market.

This would suggest that – when it comes to gold – we are somewhere in phase two of our idealised bull market model. There is no guarantee of course that phase three will ever happen – I wonder if too many people are waiting for it – but wouldn’t it be nice if it did?

Don’t fall in love with gold

The fact is, gold is in a historic bull market. It has risen by an average of just under 20% per annum over the last 11 years, outperforming every other asset class. But there is much more to this bull market than meets the eye.

It’s not just about an asset class rising in price. It’s about the on-going breakdown of our financial and monetary systems. It’s about incompetence and perhaps even corruption in our bloated governments and central banks. It's about, believe it or not, freedom, and integrity.

Gold – to many – is so much more than just an asset that is rising in price. Look at the fervour it generates. Look how passionately people feel about it – myself included. Look, for example, at how angry and aggressive those who are long gold can become when someone dismisses it. I’m thinking, in particular, about the slagging off Nouriel Roubini receives on Twitter when he baits gold bugs. (I knocked him myself in one article). Certain pro-gold websites have become almost cultish.

I happen to think the world would be a better place if the free market were to choose which money we use – whether that be gold, pounds, dollars, or Bitcoins - rather than have a government money forced on it. Hayek outlines this idea of competing currencies in his essay The Denationalisation Of Money.

Competition would force better practice onto money issuers – and likely, though by no means certainly, most market participants would prefer to use gold or silver as money, at least until other forms of money pay sufficiently high interest to lure them away from the hard stuff.

Gold, as you can’t print it, is a great regulator. It forces discipline onto governments and banks. They have to rein in their spending. They can’t simply expand the supply of money and inflate their debts away.

But this is just an economic ideal. Gold may well prove to be the route to it, but it is still just an ideal. And it’s one that many have fallen in love with. Falling in love is fun.  Falling in love with an investment, however, or confusing an investment with an ideal, can be very dangerous. Your judgement is bound to get clouded.

So this is a kind of note to self, a warning. I have come to, I suppose, love gold – or at least the idea of it, and the glorious, free society it offers at the end of the rainbow.

But I shouldn’t. It’s just an investment. So be warned and take note. Should we ever see that exponential final euphoric bull market phase, then come back and read this, sober up and sell.

Having thrown a wet blanket over you all, I should say that my big picture view for gold is that the end of this bull market is still not within sight. All the main drivers – monetary stress, deficit spending, debt, currency debasement, ballooning money supply, negative real rates and so on – are still in place.

In the shorter term, I feel we are still in consolidation mode after the run up to $1,920 last August-September and remain of the mind that we won’t see new highs before next autumn at the earliest, though I’ll be glad to be wrong on that. And in the very short term, I think we put in a low last week around $1,625 and that we should see a nice run up to the $1,800 mark over the next few weeks.


Dominic Frisby

Keep a close eye on the fear gauge

The headline says it all. “Fear has vanished from the stock market”, says Steven Russolillo in the Wall Street Journal. “Don’t wake the sleeping giant: the stock market’s so-called ‘fear’ gauge is fast asleep”.

He’s talking about the VIX, or the CBOE Volatility index. It is quoted in percentage points and measures the expected movement in the S&P 500 index over the next 30-day period, which is then annualised.

The S&P 500 is the world’s most watched stock market index. A climbing VIX means that American, and also global, investors are becoming more fretful. Their selling drives the stock market down. The higher the VIX rises, the bigger the crescendo of concern.

The flipside is that the lower the VIX drops, the more the S&P 500 climbs. That’s when investors start to become complacent and the risk of a big sell-off rises as the supply of buyers runs out.

What the VIX is telling us now

Right now investors are becoming dangerously complacent. Analysts have been growing very bullish about official stats. Optimism has spread about the global economy. And all that despite Chinese growth slowing and the eurozone, which is still coping with major debt problems, facing a return to recession.

In fact, fund managers have been ploughing clients’ cash into shares faster than at any time since early-2011. And ‘short interest’ – where traders sell in the hope of buying back lower down – is at its lowest point for four years. All these are signs of fast-falling fear levels in stock markets.

But before we all buy into this bullish bonhomie, let's pause a moment. It's worth looking at what happens when the price of volatility becomes so cheap. And not just in the US. The overall performance of London–listed shares is closely linked to Wall Street. In other words, the VIX is a handy guide to the FTSE 100 too, as this chart shows.


Source: Bloomberg, FSL

You can see how the VIX (the red line) has plunged over the last six months. The FTSE 100 has been a near-mirror image of this. But since the financial crisis began in 2007, such low points in the fear gauge have always been followed by a sharp downswing in the equity market.

OK, this hasn’t always happened straightaway. And current investor complacency might yet take a few more weeks to shatter. There has to be a catalyst, and right now it’s unclear what that will be. But in summary, today’s overall market levels are looking increasingly dangerous.


David Stephenson

100 year Government bonds? You must be kidding!

Less than a week ahead of the Budget, chancellor George Osborne has been given a very clear warning by credit rating agency Fitch. “Keep up the cuts – or else”.

Fitch has put Britain on ‘negative outlook’. The group warned that the UK could lose its AAA-credit rating if the government fails to stick to its plan and debt ends up “peaking later and higher than currently forecast.”

Trouble is, if growth is weaker than hoped, or there’s a eurozone crisis, then we could lose the AAA too.

That leaves Osborne in a bit of a bind. How can he pull any vote-winning rabbits out of the hat if he hasn’t got any spare cash?

It’s small wonder he’s pondering desperate measures – such as issuing 100-year gilts.


A 100-year fixed-rate loan is a great deal – for the borrower

What rate would you charge to lend your money to the British government for the next 100 years?

George Osborne plans to find out. He’s looking at issuing a ‘century’ gilt, or maybe even a ‘perpetual’ (which has no maturity date at all). The benefits for the government are clear.

Britain would get to take advantage of current low lending rates. It would get to extend its average debt maturity even further. This stands at an already healthy 14 years, which is twice the figure of Italy and France. What this means is that we are less vulnerable to short-term spasms of panic in the debt markets, because we don’t need to roll over our debt as regularly.

It would also be a nice publicity stunt. “Look”, the chancellor could say. “Britain is so safe, so credit-worthy, so well-managed, that investors are throwing money at us.”

And at the back of his mind, he’s probably thinking, “Maybe the ratings agencies would cut us some slack if we had a longer debt maturity. That means I could spend a bit more money on winning the next election.”

So you can see why Osborne is tempted to explore this. What’s less clear is the upside for anyone who is confused enough to give the government this money.

Why would anyone lend to the government for 100 years?

The initial reaction certainly hasn’t been good. Investors might be dim enough to lend to the government over ten years for a sub-inflation return, but they’re not keen to do it for the next century.

Even those seen as the most natural customers for the product – pension funds, who have to match liabilities to life expectancies – aren’t keen.

The National Association of Pension Funds (NAPF) said “few of its members would find such gilts attractive,” says The Times. Joanne Segars of the NAPF told the paper: “Pension funds are looking for 30, 40 and 50-year index-linked debt, and would much rather the Government issue more of those.”

Well, of course they would. An asset that guarantees to beat inflation with very little risk over the course of 50 years is exactly what a pension fund needs.

But the point of issuing a 100-year bond at minuscule interest rates is to effectively write off the debt via inflation. Index-linking it would render the whole thing pointless.

The War Loan, issued in 1915 to pay for the First World War, was similar to what Osborne seems to be planning now. And it turned out to be a disastrous investment. In 1932, it was ‘restructured’. Indeed, some argue that Britain effectively defaulted. In practical terms, that was the impact on anyone holding the debt. £100 invested in the loan back then is worth less than £2 today, notes Ian King in The Times.

Keep avoiding gilts

What does all this mean for you? The fact that Osborne is seriously considering this, does make you wonder how much longer the gilt bubble has to last. If it wasn’t for the massively sceptical reaction from potential buyers, I’d say this was almost like ringing a bell for the top of the gilts market.

And it’ll be interesting to see the reception they receive if they actually get to market. Pension funds might be slagging them off now, but that’s the equivalent of kicking the tyres and tutting when you walk around a car showroom. They might lap up the 100-year debt when it’s issued.

Make no mistake, you’d have to be mad to buy it. Britain’s status as a ‘safe haven’ relies on two key things.

First, the crisis in Europe. As long as that continues, sterling and the UK are two nice, convenient destinations for wealthy Europeans seeking refuge for their cash. But that can only continue for so long.

Second, the Bank of England. Osborne doesn’t like to mention this, but gilt yields are low because our central bank keeps buying the things with freshly minted money. There’s a guaranteed, price-insensitive buyer in the market. Even the most useless contestant on that Alan Sugar programme,The Apprentice, could make a successful sale under those conditions.

If quantitative easing ends, gilt yields will have to rise. Indeed, that may be one good reason why the government is trying to make hay right now.

Incidentally, if you’re worried about inflation, I’d be comfortable holding on to index-linked gilts. Actively defaulting on these would be a huge step, and so I don’t see it happening, although they might fiddle with the official inflation figures. With headline inflation declining, you may get a better chance to buy later this year, but then again, the stubbornly high oil price may mean Mervyn King is disappointed sooner rather than later. That said, I’d keep hold of gold too as an all-round insurance.


John Stepek 

A look at what we were saying in 2006 before the crash

Gold investors who had been holding their breath for weeks had it knocked out of them this week. On Tuesday, the price fell $44 (to around $560), enough to put speculators in a tailspin. Even your editor – usually a rock of unproven opinions and a fountain of imperturbable prejudices – began to wonder.

What if we’re wrong? What if sophisticated, modern financial instruments have reduced gold’s role in modern finance? Wouldn’t gold act exactly as it has – that is, as a commodity? It went up with lead… and came down with it, too. But what kind of commodity has no industrial use? We wondered then why it had bothered to go up in the first place. After a while, we had wandered so deep into the forest of conflicting and ambiguous thoughts we needed a helicopter rescue.

Daily Reckoning readers might be wondering… and getting lost, too. Today’s reflection is meant to provide them with some breadcrumbs.

We begin with two questions:

• If we have a faith-based monetary system, what do we have faith in?
• When this, too, passes, what will take its place?

That second question is the mischievous one. So, we will answer it first: we don’t know. But it is the question itself that is most revealing. Were monetary systems permanent and immutable, there would be no need for them. The present financial system could sit there as unchanging as a harbour light – a sturdy guide to the prudent and a warning to the reckless.

Instead, monetary regimes come and go, like the lanterns of Cornish pirates, luring ships onto the rocks to be looted.

The financial history of Argentina is instructive as well as entertaining. There, hardly a single generation got through life without washing up – either on the rocks of inflation, the shoals of devaluation, or the soft mud of recession. One system brought inflation rates of 2,000% per year. When that sank, in came a peso as strong as the dollar. And then, when the new peso crashed, a new, new peso, with a new monetary regime behind it.

Just when people had learned how to get around the rocks, the rocks were moved. Along came another regime with another set of standards. Out on the pampas, people finally got used to financial change. They learned not merely from the record of the dead, but from their own living experience: don’t put your faith in any financial system; it won’t last.

But Americans can’t have learned much from their mistakes; they haven’t made enough of them. American paper currencies went bad in the Revolutionary War (“not worth a continental,” was the expression that recorded the mistake), and again in the War Between the States (when Lincoln spent more than he could honestly steal from the taxpayers).

The Great Depression, with its devaluation of the dollar against gold, might have taught them a thing or two as well. But there is hardly a single person still alive who learned from it directly. No, in matters of financial calamity, Americans might have been born yesterday. Soft and dewy, they are ready to believe anything – even that their financial system might last forever.

That brings us back to our other question: exactly what faith is it that undergirds our faith-based system?

It is faith, surely, in the dollar, is it not? The dollar is the unit in which Americans measure their wealth. If the dollar were called seriously into question, so would the system itself be. Everyone knows that the dollar is manmade, of course. Like all man’s creations, they accept that it is not without its flaws and is subject to improvement.

Man’s cars get better every year. And although a man may be happily married, still, walking around a dreary college campus or on a sunny beach… he can still imagine how things might be better with a newer model.

In the case of the greenback, it has lost 95% of its value since the Fed was established. It lost 80% of its value while the present financial system has been in effect. That is, since 1971, when the Bretton Woods system, with its limited connection to gold, was abolished by White House decree.

But while everyone knows the dollar gives ground, few believe it is unreliable. It is not the ruination of the dollar that disturbs people; it is ruination at an unforeseen rate. Like the Argentines, Americans have learned to live with a greasy dollar. What they’re not ready for is one that slips away from them too fast. Or even less – one that doesn’t budge.

Their faith is broad. How deep it is, we won’t know until it is tested. For the present, “You gotta believe” is the national anthem. Americans believe that their financial leaders have triumphed over sin and science, too. An Argentine recognizes that government will destroy its own currency in order to win votes and power. An American readily agrees that the Bank of Argentina would do such a thing, but of the Bank of Ben Bernanke, he can’t believe it. His faith stops at the metal detectors.

Yes, theoretically, government and its central bank may be tempted to try to create more liquidity than necessary, but no, they won’t give into it. Why not? Because the markets won’t let them, comes the unwavering reply. Ah yes, their faith stretches to cover free market speculators as well as government bureaucrats.

Should the feds create too much “money”, it is believed, investors will dump treasury bonds and force up interest rates, thereby reducing liquidity naturally. But for the last 10 years, a huge tide of cash, credit and credit derivatives has flooded the world without a word of complaint from the speculators.

Instead, they got rich and built gaudy houses in Greenwich, Connecticut. They figured out how to snooker the system… shuffling and reshuffling money, slipping an ace up their sleeves when no one was looking. Liquidity – money in all its forms – was lapping around them, but who was going to complain? House prices rose. Stocks rose. Bonds rose. What’s not to like?

And finally, the head of the most successful money shuffler of all time – Goldman Sachs – has just been invited to Washington to take charge of national finances. Could anything be clearer? The speculators are not watching over the feds; they’re watching out for them… and for themselves.

Meanwhile, in the popular imagination at least, great strides in the science of central banking have been made since the days of John Law. Asked what exactly those strides are, the modern economist shifts uneasily in his chair and mumbles something about improvements in data available to policy makers.

And this is where we begin to make faces. Our eyes roll toward the heavens.

We think of the improved “data” itself – of job numbers perverted by seasonal adjustments and changing definitions of employment that flatter the policymakers… of inflation figures shrunk by taking out inconvenient prices for food and energy and then hedonically act as a prestidigitator, so that they practically disappear from the stage of GDP calculations that have undergone so much cosmetic surgery that they no longer resemble anything familiar or even human. And we wonder what kind of jackass would take it seriously, let alone rely on such conniving rubbish to formulate public financial policy.

In the past, the detailed information wouldn’t have been of much use to bankers, even if they had had it. Their job was simpler. All they had to do was to make sure they could pay their debts – in gold. When they couldn’t, they went broke. If they were central banks, the whole nation went broke. As simple as the job was, many still couldn’t do it. Shady countries in sunny places routinely went belly up. Even in America, during the Great Depression, 10,000 banks went bust.

The Bank of the United States of America, run by the former chairman of the Princeton economics department, needs data because its mission has crept far beyond policing the value of the dollar. Expectations have inflated, too. Now, the Fed is expected to control the rate of decline of the dollar – a decline of about 2% per year is considered optimal.

And if that weren’t hard enough, the Fed is also asked to control the economy itself – regulating the availability of credit so as to avoid serious downturns. That is why the Fed lowered interest rates to 1% following the deflation scare of 2001. It had nothing to do with protecting the value of the dollar and everything to do with avoiding a deep recession.

Not only do central-bank scientists have more data at their fingertips, they have more theories, too. Liberalism. Keynesianism. Monetarism. There’s one for every purpose under heaven. It doesn’t matter that they are contradictory. The banker is merely expected to choose the one that suits the situation and use it like a socket wrench. Crank. Crank. Problem solved.

And so, drawing on twisted data and convenient theories, the banker adjusts rates by quarter points. The prevailing theory in all the Western nations is that centralized planning is ineffective, troublesome, unethical and stupid. There’s hardly a serious economist over the age of 18 who will not point to the former Soviet Union and sneer.

“The market,” they will tell you with a superior tone, “does a better job of regulating supply, demand and price than bureaucrats.” And yet, the operating theory of every central bank is that a group of civil servants, working with government data, can fix the price of the key set of components in the entire economic system: credit.

The economists may have their theories, their insights, their models, we allow, but how do they know that what the world needs is a fed funds rate of 3.75% rather than one of 4.0%? And how do they know whether they should be tamping down on inflation… or goosing up a business downturn? They may have mountains of data, but they are still lost on the slopes. They cannot tell us what the price of oil will be tomorrow… or the price of sugar… or the price of gold. They take their guesses along with everyone else.

Because the numbers are corrupted, the theories are a hodge-podge of wishful thinking, myth and delusion. And the practice is that both officials and speculators collude to take advantage of the corruption and the delusion. Speak the truth to this kind of power? You might as well save your breath… and buy gold.



Bill Bonner

What the new lending crackdown means for house prices

The property sections are outraged.

Banks have decided that they’re going to be more careful about writing interest-only loans (where you only pay the interest on your loan, then pay the capital in one go at the end of the period).

In the good old days before the bust, you could get an interest-only loan with only the vaguest notion of how you’d repay the capital. You’d mutter something along the lines of, “house prices never fall – the government won’t let them”, and the computer would cheerfully say ‘yes’.

Now the answer is a resounding ‘no’. Santander for example, won’t lend interest-only on anything above a 50% loan-to-value. In other words, you need to own half the house already before the bank will even think about interest-only. Others have followed suit with similar restrictions.

Of course, unless you’re a mortgage broker, the only shocking thing about these rules is that they weren’t in place before the financial crash.

But the big question is: why the crackdown now? 




The horses bolted ages ago – why shut the stable doors now?

New, tighter rules on interest-only home loans are being blamed on the Mortgage Market Review (MMR). In short, this is the usual story of regulators tackling yesterday’s problem.

The rules on interest-only lending were clearly too lax before the crisis. Rather than change them when they needed to, and take the flak from the property lobbyists, regulators have left it until now, when all the damage has been done.

The review basically puts the onus on lenders to make sure their customers can repay their loans (you’d think that would be a basic function of sensible lending). Trade bodies argue that banks are now reining in interest-only lending for fear of being sued if people suffer a shortfall.

But I don’t think that’s the whole story. Banks are past masters at evading regulations they don’t like. I think the MMR is an excuse for the banks to tighten up. Here’s why.

Banks haven’t been snatching back brollies 

Throughout the aftermath of this financial crisis, everyone has been amazed at the leniency of the banks.

Usually a banker is defined as someone who tries to force an umbrella on you when it’s sunny, then wants it back when it starts to rain. In the current crisis, that’s not been the case.

Banks have been slower to repossess houses, and to shut down struggling businesses. That’s helped the economy to wobble along, albeit with a depressing, lurching, zombie-like gait.

Have they learned some lessons from previous crises?

Not at all. It’s just that in previous crises, banks haven’t been as fragile as they were this time around.

In the lead up to 2008, western banks overstretched themselves to the point where it would only have taken some very small losses to tip them into technical bankruptcy. In the event, we got huge losses that threatened to wipe out almost every major bank standing.

The central banks stepped in to keep the banks afloat and functioning. They dealt with the ’liquidity’ problem. And in the case of the very worst banks, they tackled the solvency problem by nationalising them.

But banks in general were still left with a lot of those dodgy loans on their books. They couldn’t dump them all at once – their balance sheets couldn’t take the stress.

Instead, what tends to happen with a banking crisis is that banks ‘deleverage’ in fits and starts.

When the crisis first happens, banks are bankrupt. So they pretend not to be, by avoiding writing down any of their bad loans. Instead, they start calling in any good loans they can, in order to ‘de-risk’ their portfolios.

What happens to the bad loans? It’s called ’extend and pretend’. Companies are given a longer time to repay loans – the debt is ’rolled over’. People struggling with their home loans negotiate lower payments – or are moved from repayment loans to interest-only ones. That’s called ’lender forbearance’.

As time wears on, the banks start to stabilise their balance sheets, aided and abetted by central banks making life easy for them. Meanwhile, regulators are pressing them to start behaving more responsibly (always after the event, of course).

So eventually, the banks get to the point where they feel they need to start addressing some of those dud loans. That’s when they decide they want their umbrellas back.

The end of forbearance 

Last week, Paul Diggle at Capital Economics tried to put a figure on how important a role forbearance has played in propping up the UK housing market. “The most common forms of forbearance are a switch to interest-only or a reduction in the interest rate charged.”

Lenders have also taken arrears and added them to the outstanding balance of the home loan. Interestingly, when this happens, “a borrower is no longer counted as being behind, removing them from the arrears statistics”.

The Bank of England estimates that 11.8% of borrowers have benefited from some form of forbearance. Of these, roughly a third thought they’d be in arrears if they hadn’t been given a break by their banks (and the other two-thirds were clearly chronic over-optimists).

In short, says Diggle, if banks had been less forgiving, then the proportion of home loans currently in arrears of three months or more would probably be around 5-6%. That’s “in line with the peak reached in the 1990s”.

In other words, if the banks decide it’s “no more Mr Nice Guy”, then the UK property market could run into some serious turbulence in the months ahead. And this crackdown on interest-only might be the signal that forbearance is at an end.

After all, who are likely to be your riskiest home loan customers? The ones on interest-only deals. If you can offload these people on to another lender while the going is good – or even repossess their home while the market is still defying gravity – then maybe that’s starting to look attractive to the banks.

Of course, if the banks kick off another downward turn in the housing market, pushing prices lower, it’ll hurt them too. But that’s how a banking crisis plays out – in fits and starts. The next dip in the rollercoaster could be right ahead of us.

John Stepek

Gold, the best is yet to come

Stock markets have enjoyed a cracking start to 2012. The riskier the share, the more likely it's been to surge. Commodities have joined in the fun too. And the ever-growing band of bulls will tell you there's plenty more to go for.

But I’m starting to get nervous about this advance in equity prices. Further, I’m not confident the commodity rally can be maintained.

What is making me fret about the rally?

In Europe, shares have risen on hopes that Greek debt woes have now been 'sorted'. But even after another €130bn mega-bailout, little has been done to deal with the Greek problem. Foreign bondholders will lose a massive amount of the value of their investment. That's just one of several ongoing worries for eurozone banks.

At the end of the day, Greece is still bust. And it's unlikely to become less broke. As Alen Mattich notes in the Wall Street Journal, the country is now “deeply competitive” while the government is “close to dysfunctional, certainly in terms of gathering taxes”.

Meanwhile the whole country is up in arms about austerity measures being imposed by the so-called 'Troika' of the IMF, European Commission and ECB.

In other words, regardless of what Greek politicians promise the Troika, the populace may not tolerate more state spending cutbacks. Greece leaving the euro in a 'disorderly default' would be the likely end result. And equity markets wouldn't like that one iota.

As ever, though, the global market upswing has been powered by Wall Street. But does this make sense? Let’s examine how much more money – or not - US firms are likely to make this year.

The S&P 500 is the world's most closely-watched stock market barometer. That's why I keep a close eye on analysts' quarterly earnings estimates for it.

But most company analysts get too close to the firms they follow. They don't see earnings downturns until too late. So their 'bottom-up' expectations are more of a lagging than a leading indicator.

That's why I prefer to monitor 'top-down' estimates, i.e. those compiled by the big picture brigade. And I focus on forecast 'reported' earnings. These are the actual hard numbers that companies are expected to produce, rather than 'operating' earnings which ignore nasty bits like write-offs, etc.

Again, most strategists tend to be bulls – it's better for business. Yet the S&P stats are useful for gauging trends in analysts’ thinking. 


And an interesting trend is developing. Top-down reported estimates are some way lower than bottom-up. Further, despite the overall US economic picture looking slightly brighter, top-down analysts are now forecasting a 4% dip in American company earnings between April and December 2012.

On those reported estimates, the S&P 500 isn't particularly cheap on a prospective p/e of 13.7. And an overall reported profits drop over the rest of 2012 doesn't sit well with the index climbing higher in the near future. In fact, the potential earnings trend makes a near-term Wall Street pullback more likely. 

And when I see headlines appearing on Bloomberg proclaiming “Global Equities set for Bull Market”, and when I see former perma-bears like Prof. Nouriel Roubini – the 'Dr Doom' who forecast the US subprime mortgage meltdown - turning bullish, I get even more concerned.

Here’s the antidote

There is one investment that every investor needs to own right now. And that’s gold. 

This is simply a 'must have' holding in your portfolio – despite the recent fall. 

Because authorities will do everything they can to worm their way out of this crisis. And the traditional means of doing this is to print money (though they won’t stop there. I’ve been writing a lot recently about three other very devious plans that the UK government are launching on unsuspecting taxpayers.).

In Europe, the Long Term Refinancing Operation (LTRO) has handed out cheap cash to eurozone banks to cover their borrowing needs. In turn, a fair chunk of this money has been used to buy sovereign bonds around the single currency region.

The ECB denies it's descending into quantitative easing (QE). But ten-year sovereign bond yields on the eurozone’s periphery have tumbled since the LTRO kicked in. In effect, the LTRO is the ECB doing QE through the back door. 

Why does this matter for gold? When you strip away all the jargon, QE means printing more money by pressing a computer key.To begin with, that extra cash doesn't show up in the wider monetary aggregates or the real economy. It sits around in bank vaults. But at some stage in the future, it could leak out and drive up prices – as with commodities in 2009.

Fear of inflation is the ultimate driver for gold buyers. They want a currency that will keep its value. That’s why they watch central bank balance sheets. If these start growing fast, it means QE is underway. And it's the first sign of potential inflation trouble.

Here's the growth in the ECB balance sheet since 2006. The blue line show the first major injection of liquidity into the system as the financial crisis hit in 2008. And over the last six months, the ECB’s balance sheet has surged in size again.

No wonder gold priced in euros is on a strong upward march. If the ECB officially sanctions QE – which may well be needed for bailing out the eurozone – gold in euros will climb much higher still.

Source: Bloomberg, FSL

In Britain of course, QE is official Bank of England policy. £275bn has already been created. By the time you read this, at least £50bn more could be joining it. It’s no surprise the UK chart looks similar.


Source: Bloomberg, FSL

Gold may have dipped in sterling terms from last year’s peak. And plenty of sceptics will tell you it’ll never get back there.

But the fact is that sentiment is so poor with gold at these levels just indicates that people don’t realise what’s really unfolding.

I think this is going be the finest year we’ve ever had in this bull market.The best up year so far in this gold bull was 36%. I would be surprised if that number were not obliterated this year.

In any case, as I’ve been telling our readers at The Fleet Street Letter, the authorities won’t stop at money printing to save their hides. The reality is that the UK is carrying a massive debt burden. And, the government is going to have to do a hell of a lot more to deal with this problem in the coming months.

Basically the bill for the financial crisis is about to come due. And it’ll be the taxpayer paying out.

David Stevenson

Sooner or later a day of reckoning must come for the dollar

Everything that lives also dies. It is just an observation, but it seems to apply to everything – trees, governments, financial systems, bubbles, empires, and people themselves. There is a life cycle to all things – institutions, insects, and insurrections. They begin small... they grow... they mature... they get taken over by parasites... and they die. Tout casse... et tout passe, as the French say. Everything breaks up... and everything goes away.

In the stock market there is a life cycle of from 30-40 years from one peak to the next. 


These cycles of up and down... bull and bear... are well known. What you can never know for sure is where you are in the cycle. “Markets always do what they’re supposed to do,” say the old timers, “but never when they’re supposed to do it.

While the Dow, U.S. bonds, and U.S. housing are probably going down, some things are probably going up. Japan has been in a slump for 16 years; it now looks like a good bet to change direction.

And gold suffered a bear market that lasted for the last two decades of the 20th century. Since George W. Bush entered the Oval Office, gold has more than doubled. It seems to be in a long-term bull market.

But there’s nothing like a 20-year bear market in his favourite metal to give a man a sense of modesty. As your author’s gold coins fell in value; his stock of modesty increased. Now, at least, he knows what he doesn’t know.

That still leaves the things about which he knows nothing at all.

Here we are in terra incognita. Since 1971, for example, the world financial system has looked to dollars to store and measure its wealth. But to what does the dollar look? Nothing at all. It merely floats on its full faith in empty promises and the credit of the biggest debtor in the world – the U.S.A. We’ve never seen anything like it. People work all their lives to lay in a store of a pure-paper money that lost half its value in the last 20 years... and could lose the other half any time. Foreign governments, pension plans, insurance companies, hedge funds too stake their financial futures on this same paper money, whose value is uncertain and whose future is unknown.

Never before have so many people had so much wealth tied up in so many dubious propositions. During the 20 years from 1980 to 2000, the capital value of America’s stocks rose more than 1000%... and the value of America’s residential housing approximately doubled. Meanwhile, so has the American government’s ‘financing gap’ gotten so large it will likely never be bridged. Between the financial obligations of the U.S. federal government and its anticipated revenues is a canyon of $65 trillion, in present U.S. dollars. No nation ever faced such a huge economic challenge.

Nor have the western economies – including Japan – ever been threatened by the competition they’re now getting from three billion Asians. Nor has any country ever run a trade deficit on the scale of the current U.S. shortfall of $800 billion. Nor has any country had anything like the dollar reserves now in the hands of the Chinese – more than $1 trillion of them.

Also unprecedented is the derivatives market. As recently as ten years ago it barely existed. Now, the latest news tells us it has swollen to more than $300 trillion. What kind of shock would it take to bring it down? Even if it only shivers and shakes, what will happen to the financial system when it does?

Against all this kudzu of dollar-based wealth, debt and delusions is a solid, slow-growing oak of gold – man’s traditional way of keeping score in financial affairs – getting larger at the almost invisible rate of 1.7% per year.

How will it all turn out? We don’t know. All we do know is that every previous monetary system has washed up. And every paper currency every previous experiment with paper money has ended in regret and recrimination. All bubbles end. All of them. And when a bubble in paper money comes to end, typically people abandon the paper and rush back to gold.

Sooner or later a day of reckoning must come for the dollar, America’s trade deficit, and the world’s faith-based monetary system. We don’t know how. We don’t know when. But it is a pretty good bet that it will happen.

Of course, if you knew how it would turn out... if you could look into the future... you could take just the right action at just the right moment to take advantage of it. But we are profoundly ignorant. All we know is that, however it ends, it would probably be a good idea to have a few gold coins in your pocket when it does.


Bill Bonner