Daily Updates

With continued strong Chinese and Indian accumulation of physical gold, today King World News interviewed acclaimed money manager Stephen Leeb.  When asked about the massive physical buying out of Asia,Leeb replied, “People want a currency they can rely on and gold really is a currency.  If you are sitting there as the Chinese right now with $3.2 trillion, do you really want to have more dollars when we are likely to get the printing presses going full tilt.”

Stephen Leeb continues:
“Do you really want to buy the euro when you have Greece, which is spending like a drunken sailor, no.  You want something that is going to be around for as long as you’ve been around, and the only currency that has been around for as long as the Chinese have been around is gold and silver. – read more HERE

 

 

Perfect Storm Creates Tidal Wave of Gold Demand

 

“At this point, the stock market looks weak and it’s not thrilled by the latest Obama scheme. Gold has been hovering around 1800 and looks as though it wants to hold its ground. After all, the rise to 1800 was no easy move, and gold is entitled to rest like your editor.

Every one is wondering about real estate, and whether we’re near the bottom. For this I depend on my brilliant friend, Robert Campbell of the Campbell Real Estate Timing Letter (858 481 3235). Robert called the top for real estate right on the nose. Robert uses a technical method of calling real estate turns.

Following are Robert’s latest words — “In a balance sheet recession caused by too much private sector debt, US households much de-lever until their earned incomes can more easily service the debts they amassed during the bubble. As I showed you with the bottom chart on page 2, mortgage debt accounts for most of the debt overhanging the US.

“Because earned incomes adjusted for inflation have fallen for all but the top 5 to 10% of all Americans in the last ten years, I could see where US mortgage debt may have to fall by as much as 50% from today’s levels before the private sector has sufficiently repaired their balance sheets, and the deleveraging process is over.

“Bursting bubbles typically give back all or most of all their ‘easy come, easy go’ gains. This means mortgage debt would have to fall from today’s still lofty level of $10 trillion to around $5 trillion–which pre-bubble as where it was in 2001. With falling incomes, most Americans will eventually be forced to default on massive overhang of mortgage debt in order to de-lever — and this would result in a lengthy and steady stream of distressed sales that will be hitting the market and depressing housing prices for years, not months, into the future.”

Russell Comment — Like A.Gary Shilling, Campbell sees a LONG period of deleveraging ahead for Americans. This will not be kind to real estate — or, in the long run, for markets in general.

 

Ed Note: One of Richard Russell’s best pieces: The Perfect Business

Richard Russell has made his subscribers fortunes. One of the best values anywhere in the financial world at only a $300 subscription to get his DAILY report for a year. Click HERE to subscribe. The 87 year old Russell got his subscribers heavily invested in Gold below $300 and has urged his subscibers to stay long. He continues to urge his subscribers to stay long.

I believe the Eurozone will break apart. Eurobonds are dead, so are fiscal unions. The question is really what path the crisis takes.

Via email, Saxo Bank chief economist Steen Jakobsen outlines several scenarios in a series of three emails that I spliced together.

There are three major ways of dealing with this crisis:

  • Japanization – A Slow Death – Like Japan. Accept deflation, along with slow gradual restructuring, massive fiscal deficits, negative real-rates, housing prices lower than 30 years ago and a stock market valuation at less than 50 per cent of its peak
  • Crisis 2.0 – A Forest Fire of deleveraging, political and economic changes created by necessity and need for moving forward. This scenario features a deep one-to-three year recession followed by better debt to equity, more realistic future expectations, and a public sector under control.
  • Monetization – The extend-and-pretend forever solution, buying time – more of the same, patch work solutions, slowly forcing Europe towards fiscal consolidation not changing the Maastricht but the ECB charter to allow it to be lender-of-last-resort. This is the final phase of ‘Maximum Intervention’ – bigger and bigger direct support on liquidity(as seen today) and no impact on the solvency.

 

In the ‘Maximum Intervention’ macro theme the next policy response will be something new, yet more of the same – this has been the historic reaction function of the EU. The consensus right now is that the ECB wants EFSF enlarged from 440 billion EUR to 2.000 billion EUR size in order to get ahead of the EU debt crisis. This is opposed by the Germany.

Another solution is to start Quantative Easing, using the ECB to print money, similar to the US, Japan, UK and Switzerland – this is opposed, for now, by the ECB.

The European “TALF” scheme proposed by Geithner is a full blown move to QUANTATIVE EASING in Europe, the legal standing vis-à-vis Maastricht and the Constitutional Court in Karlsruhe is shaky at best.

I doubt the Germans will accept this – and even that the ECB will want their mandate changed directly. The Germans wants Crisis 2.0 – the ECB wants EFSF enlarged to + 2.000 billion EU.

Eurobonds Dead

Any solution ‘permanent’ in nature is in violation of German Constitutional Court – meaning pretty much Euro-bonds is out. (As Germany would have to be lender-of-last-resort when everyone else goes bankrupt)……Any solution temporary could fly vis-à-vis the Constitutional Court but ONLY if approved by full parliament.

Everything else coming to the table is talk, talk and more talk. American “experts” fail to understand the above and …. Most importantly as you have heard me say 1000x of times: ‘Never underestimate the political will of politicians to make this work/survive’ – Never!

The point of no return is here – Between now and the installment paid out in October we have major risk.

This week will tell if FOMC comes to rescue or we start the hard part of Crisis 2.0 – the deconstruction of capital needed to create the political will to do proper economic and political changes.

Geithner’s TALF Play Rejected by Germany

Portions of Steen’s comments were written last Friday. On Saturday, as Steen expected, Germany threw a money wrench into Geithner’s leveraged TALF play as noted by Bloomberg in Germany Rejects Using ECB to Lift EFSF Rescue-Fund Firepower


Germany’s top two finance officials rejected using the European Central Bank to boost the euro-area rescue fund’s firepower, rebuffing a suggestion by U.S. Treasury Secretary Timothy Geithner.

The German stance risks leaving the euro area without sufficient means to prevent the crisis from engulfing Spain and Italy.

“The EFSF’s sole purpose is the financing of states and that’s in order as long as it’s done via the capital market,” Bundesbank President Jens Weidmann told reporters today. “If it’s done via the central bank it constitutes monetary state financing,” which is forbidden under European Union rules.

Fed Uncertainty Principle in Play


Please note that corollaries 2, 3, and 4 of the Fed Uncertainty Principle are in play. Simply substitute ECB wherever you see Fed.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three: Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four:
The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.


Note that ECB president Jean-Claude Trichet purchased sovereign bonds of Greece, Italy, Portugal, Spain, and Ireland (over the heated objections of the German Central Bank) in what many think was a violation of the Maastricht Treaty.

Thus, while it may seem Maximum Intervention is out, “Never underestimate the political will of politicians to make this work/survive – Never!”

Ultimately Crisis 2.0 It Is

Neither Maximum Intervention nor Japanization are sustainable. There simply is no political will by anyone for prolonged Japanese-style debt-deflation, and maximum intervention will blow up eventually. Eventually Crisis 2.0 will take hold, and the sooner the better.

Crisis 2.0 (at least as I see things) can itself resolve in one of three ways, as noted in Eurozone Breakup Logistics (Never Believe Anything Until It’s Officially Denied)

I am not sure if Steen will agree with this, but I see Crisis 2.0 terminating in Plan B or Plan C.

  • Plan B: Greece, Spain, Portugal, Italy and the “Club-Med” states break away from the Euro.
  • Plan C: Germany, Austria, the Netherlands and Northern Europe break off the Euro. Alternatively Greece leaves via plan B, then Plan C takes over for everyone else.
  • Plan A: Defend the Euro at all Costs – is similar to Steen’s Maximum Intervention play and is therefore unworkable long-term.
Plan C is the least destructive for everyone, but politics may prevent it.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.

Even with the pullback, the Greek yield structure continues to imply default with certainty.

Click here to read more…

With the expanded two-day FOMC meeting (which until 45 days ago was supposed to be just one day) set to start shortly, here is chief policy maker Goldman Sachs reiterating again how much futile loosening to expect from the Fed. Nothing new here: Goldman repeats its call that Twist will hit tomorrow (and in a following report MS reiterates its call for Torque), sees IOER being cut from 0.25% to 0.1%, (sending the money and repo markets into a tailspin), but stops short of demanding another major round of LSAP. Basically, anything short of this will crash the market; anything long of this (as Rosenberg predicts) including several hundred billion in outright bond purchases, sends risk and gold soaring, and the dollar plunging.

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