Saturday, August 28, 2010

Time to Flee US Treasuries: Marc Faber and Peter Schiff

Declining Volumes In U.S. Stock Market - What Does It Mean?

It is clearly evident that since early May 2010 there has been a marked downward trend in volumes in both the S&P 500 and Dow stock indices. Oddly enough, year-to-date the statistic reached a peak of approximately 7.1 billion shares traded on both the S&P 500 and the Dow—albeit almost 2 weeks apart (4/27 for the S&P and 5/10 for the Dow). The fall appears to accelerate during the month of August. This is not at all a surprise, given the high number of traders/asset managers who take holidays during the month. Nevertheless, the stock market cannot take a sustained upward turn unless the aforementioned trend reverses. In other words, volume must increase for a genuine up-tick in the market to occur. However, it is worthwhile to note that volumes, in and of itself, cannot generate an upswing. It must be accompanied by an expectation that economic conditions will improve and hence corporate profits will also increase. This assumption appears quite tenuous at the moment.

That said, it is worthwhile to note that, as the data show, the stock market can increase along with declining volumes. This is because a higher value in stocks is generally expected by the market. Therefore, lower volumes theoretically represent scarcity, which buoys prices and perceived value. Of course, this is under the assumption there is such a thing as value, which at this time it is being artificially maintained.

Unfortunately, I am not able to upload the charts I created via Excel which demonstrate the evolution of stock market volumes. However the reader can independently perform my analysis. Simply go to and download the Dow’s and the S&P 500’s “historical prices” data in a spreadsheet, after which you can manipulate the data (by taking 10-day average volume) to obtain my figures.

There is no question that a severe stock market correction is coming. However, it is particularly difficult to predict the specific time it will come. However, we can be assured that as each day passes by we are getting closer to the day of financial reckoning.

Saturday, August 14, 2010

Monetary Gloom…Storms Ahead!

As can be noted from the graph below, in absolute terms the adjusted monetary base has stabilized. However, it is still hovering above the $2 trillion mark. From a historical perspective this is amount is almost 2.5 times higher than what was experienced before the 2008 financial crash.

In relative terms, that is, taking into account the year-over-year change in absolute amounts, it is hovering close to 20%. It appears to have initially hit bottom in early 2010.

As I previously noted, when the trough in this measure is reached, we are basically in the countdown phase before a major market correction occurs.

The FED edict this week that they will reinvest the proceeds from the coupon rate and other maturing MBS to purchase US Treasuries is nothing but a drop in the bucket. The move was concocted with the intention of managing market expectations. In other words, it gives the impression to market participants that the FED is willing and able to continue to manipulate capital allocation.

However, as a former central banker and neo-Keynesian supporter, Alan Beattie, currently writing for the Financial Times put it:

One of the peculiar challenges that confront central bankers – and I used to be one – is countering the perception that they are privy to large amounts of private information. True, central banks talk to a lot of practitioners in the financial markets and the real economy and have a good insight into the short-term money markets from their own operations. But beyond that, they are usually working off the same numbers as everyone else. Yet in times of great uncertainty, investors will cling on to anything they can to form a view about the economy, including assuming the Fed knows more than they do.

Of course, like most mainstream economists, Mr. Beattie insists in more spending to cure our economic malice. Conveniently however, like most mainstream economists, he fails to mention—let alone explain—the evidence refuting his opinion: Namely, since 2008 US GDP has increased about $100 billion; total debt, on the other hand, has increased $2.5 trillion (this is not even counting all the government guarantees). In other words, every $25 dollars of additional debt has generated $1 of additional GDP. All these folks with Ivy League and other elite school degrees fail to comprehend simple arithmetic. Their solutions are always more of the same. Therefore, it doesn’t require a high level of intelligence to recognize that, as Marc Faber says, the FED will print and print until the system finally collapses. This will be sooner that you think!

Saturday, August 7, 2010

Incredible Threat

by Bill Bonner (via

Last week, Mr. James Bullard was being both cagey and clairvoyant. The president of the St. Louis Federal Reserve Bank noticed what everyone else has seen for months; the US economic recovery is a flop. GDP growth was last measured pottering along at a 2.4% rate in the second quarter, less than half the speed of the last quarter of ’09. At this stage in the typical post-war recovery, GDP growth should be over 5% with strong employment. Instead, the “Help Wanted” pages are largely empty. Homeowners are still underwater. And shoppers are still largely missing from the malls that once knew them. Whatever is going on, it is not the “V” shaped recovery that economists had expected. Many now worry that the recovery might have a “W” shape – a “double dip recession” form, with GDP growth dropping down below zero in this quarter or the next.

Mr. Bullard told a telephone press conference he worries that the US economy may become “enmeshed in a Japanese-style deflationary outcome within the next several years.” That is exactly what is likely to happen.

But it is a little early for the Fed economists to throw in the towel. They still have some fight left in them. If they were really on the ropes, for example, they could throw their “widow maker” punch – dropping dollar bills from helicopters. This would make sure that the money supply increases, even if the normal distribution channel – bank lending – is broken.

In a celebrated speech on Nov. 21, 202, Mr. Ben Bernanke, then a recent addition to the Federal Reserve Bank’s board of governors, explained why deflation was not a problem:

Like gold, US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost.

It was that technology to which Mr. Bullard referred when he ceased being prescient and began being cagey. He was not advocating dropping money from helicopters, not just yet. He was hoping he wouldn’t have to. Instead, he was raising the menace of inflation, in the hopes that that would be enough.

“By increasing the number of US dollars in circulation, or even by credibly threatening to do so,” Mr. Bernanke had continued, “the US government can also reduce the value of a US dollar in terms of goods and services, which is equivalent to raising prices in dollars of those goods and services… We conclude that under a paper money system, a determined government can always generate higher spending and hence positive inflation.”

There’s the problem right there. The threat must be credible. Ben Bernanke’s speech title left no doubt about his intentions: “Deflation: Making sure it doesn’t happen here.” Back then, the reported consumer price measure stood at 1.7% – slightly below the 2% target. Perhaps it was that 0.3% undershoot that set Ben Bernanke to thinking about it. If so, we wonder what he must think now. Today, the Fed is off-target by 75%, which is to say, the measured inflation rate is just 0.5%. It is beginning to look as though Ben Bernanke’s reputation as a deflation fighter is more boast than reality.

The Fed’s Open Market Committee meets on August 10th. On the agenda will be more direct purchases of US Treasury debt – bought with money that didn’t exist previously. This is what economists call “quantitative easing.” It is a way of increasing the money supply. But quantitative easing is not the same as dropping money from helicopters. If you drop money from helicopters there is no room for ambiguity, and no doubt about what happens next. In a matter of seconds, your currency will be sold off, your loans called, and your credibility ruined for at least a generation. Quantitative easing, on the other hand, is a much more subtle proposition. It allows the central banker to maintain his credibility, at least for a while, because it doesn’t necessarily or immediately work. When the private sector is hunkering down, the money doesn’t go far. Prices don’t rise. Japan has done plenty of quantitative easing, with no loss to the value of the yen or to the credibility of its central bank. Europe has done it too. And so has America. The US Fed bought $1.25 trillion worth of Wall Street’s castaway credits in the ’08-’09 rescue effort. But instead of losing faith in America’s central bank, investors bend their knees and bow their heads. Incredibly, the US now announces the heaviest borrowing in history while it enjoys some of the lowest interest rates in 55 years.

A threat to undermine the currency, we conclude, is only credible when it is made by someone who has already lost his credibility. That is, someone with nothing more to lose. Bernanke, Bullard, et al, are not there yet.

Thursday, August 5, 2010

The New Push for a Global Currency

by Llewellyn H. Rockwell, Jr. (Article published on 8/5/2010)

You surely didn't think that the governing elites would let this economic crisis pass without pushing some cockamamie scheme for control. Well, here is the cloud no bigger than a man's hand, a revival of a 60-year-old idea of a global paper currency to fix what ails us.

The IMF study that calls for this is by Reza Moghadam of the Strategy, Policy, and Review Department, "in collaboration with the Finance, Legal, Monetary and Capital Markets, Research and Statistics Departments, and consultation with the Area Departments." In other words, this paper shouldn't be ignored.

It's a long-term plan, but the plan has the unmistakable stamp of Keynes: "A global currency, bancor, issued by a global central bank would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy.... The global central bank could serve as a lender of last resort, providing needed systemic liquidity in the event of adverse shocks and more automatically than at present."

The term bancor comes from Keynes directly. He proposed this idea following World War II, but it was rejected mostly for nationalistic reasons. Instead we got a monetary system based on the dollar, which was in turn tied to gold. In other words, we got a phony gold standard that was destined to collapse as gold reserve imbalances became unsustainable, as they did by the late 1960s. What replaced it is our global paper money system of floating exchange rates.

But the elites never give in, never give up. The proposal for a global currency and global central bank is again making the rounds. What problem is being addressed? What is so desperately wrong with the world that the IMF is floating the idea of a world currency? In a word, the problem is hoarding. The IMF is really annoyed that "in recent years, international reserve accumulation has accelerated rapidly, reaching 13 percent of global GDP in 2009 – a threefold increase over ten years."

You see, monetary policy isn't supposed to work this way. In their ideal world, the central bank releases reserves and these reserves are lent out, leading to a boom in consumption and investment and thereby global happiness forever (never mind the hyperinflation that goes along with it). But there is a problem. The current system is nationally based and so the economic conditions of one country turn out to have an influence on the borrowing and lending markets. Without borrowers and lenders, the money gets stuck in the system.

This is a short history of the last two years. By now, if the Fed had its way, we would be awash in money. Instead the reserves are stuck in the banking system. It's like the whole of the population of the United States has suddenly been consumed by the moral advice: neither a borrower nor a lender be.

And why? Well, there are two reasons. Borrowers are just a bit nervous right now about the long term. They are watching balance sheets day by day, consumed with a weird sense of reality that had gone out the window during the boom times. Meanwhile, the bankers are just a bit risk averse, happier to keep the reserves in the vault than toss them to the winds of fate. They have the bank examiners breathing down their necks right now, and lending doesn't pay well, not with interest rates being suppressed down to the zero level.

Under these conditions, yes, hoarding seems like a pretty good idea. What's more, we should be very grateful indeed for this retrenchment. The idea of plunging back into another bubble seems rather shortsighted.

The IMF has a problem with this practice, though it doesn't dwell on it. The problem is that this practice of maintaining high reserves is putting a damper on consumption and investment, prolonging the recession. The simple-minded solution coming from the high-minded eggheads at the IMF is to find some system, any system, that would push the money from the vaults into the hands of the spending public.

The rationale for the global currency and global central bank is that the reserves could always find a market in a globalized system, and would not therefore be so tied to the exigencies of a nationally based banking and monetary system.

An academic paper can wax eloquent for hundreds of pages about the advantages of a global system. It will lead to more stability, efficiency, and less politicization of money and credit. And truly, there is a point here: a real gold standard is always tending towards a global currency system. Different national currencies are merely different names for the same thing.

But there is a key difference. Under a gold standard, the physical metal is the limit and the market is the master. Under a global paper system, the paper provides no limit whatsoever and the politicians are the masters. So there is no sense of talking about the glories of globalization in the current context. A world paper currency and world central bank would heighten the moral hazard and lead to a global inflationary regime such as we've never seen. There would be no escape from political control at that point.

Every proposal of a drastic solution such as this always comes with a warning of some equally drastic consequence of failing to adopt the proposal. In this case, the IMF actually raises questions about the survivability of the dollar itself. "There has been a long-running debate speculating on whether the dollar could collapse," says the paper. It raises the worry that if a run on the dollar materializes, central banks could attempt to race each other to dump it permanently.

But, the paper points out, many people wonder whether "good alternatives to the dollar exist." And for this reason, it might be a good idea to cobble together such an alternative sooner rather than later.

There is probably more truth in that statement than most people want to grant. But the right alternative is not yet another and more global experiment in paper money inflation. God forbid. If we want an alternative to the dollar, there is one that could appear before our eyes if only we would let it happen. Private currencies traders the world over could, on their own, give rise to a new currency rooted in gold and traded by means of digital media. On many occasions over the last 20 years, such a system nearly came to be. But guess what? The government cracked down and stopped it. The governing elites have decided that there will be no currency reform unless it comes from the marble palaces of the monetary elites.

Marc Faber: The Government Will Print Money Until the Final Collapse