Currency

Canada added 11.9k jobs in September bringing our unemployment rate down to 6.9% The drop in the unemployment rate was not caused by a surge in jobs but instead the participation rate falling down to only 66.4%.

CAD Futures were up initially on the news however they are now trading back to unchanged on the day, showing the initial bullishness is erased by the poor secondary data and global conditions.

 

Drew Zimmerman

Investment & Commodities/Futures Advisor

604-664-2842 – Direct

604 664 2900 – Main

604 664 2666 – Fax

800 810 7022 – Toll Free

dzimmerman@pifinancial.com

Commodity Hedge Funds Are Collapsing

Posted by Martin Armstrong - Armstrong Economics

on Friday, 11 October 2013 10:33

Screen Shot 2013-10-11 at 3.24.18 AMThe commodity hedge funds are simply collapsing. This is one reason why you will also see the low in gold unfold. With all the ranting, screaming, claims of hyperinflation, threats of investigations, and prognostications that the dollar will end, not only has gold declined, but the appetite for investing in commodities in general.

Clive Capital, who was once the largest Commodity hedge fund, announced it was winding down and returning $1 billion to investors after two years of losses. Being bullish on commodities (including gold) has not paid off in the last two years. Numerous hedge funds are closing. This has included Arbalet, Bluegold, Centaurus, and Fortress. Clive Capital wrote in their announcement to clients:

“We perceive there to be limited suitable opportunities at this point in the economic-demand and the commodity-supply cycles to enable us to utilise our directional, long volatility approach to generate the strong returns of the past.”

This is reflecting the collapse in liquidity and the general deflationary side of this implosion within the world economy. As the G20 continues to hunt money now on a global scale, they will force more and more capital into hiding and the economic contraction to become far worse the more they tax and seek to make illegal anyone with money outside their own country. They are lawyers – not economists or market traders. They only see their own side – power. They do not comprehend what they are doing to the world economy and how they are destroying the future for the next generation reflected in the more than 60% unemployment among the youth.

More From Martin:

Deflation + Inflation = Stagflation

The Real Problem is Not the Shutdown

Posted by Mike "Mish" Shedlock: Global Economic Analysis

on Friday, 11 October 2013 10:15

robotbody builder

Robot Manufacturing – Ed Note: 30 Seconds of video below to get the idea.

“Here is a fascinating look at auto manufacturing at Tesla. Reflections on “Real Problems” follow. I will tie the two seemingly unrelated ideas together.”

Please take that video into consideration when considering a rant from Paul Craig Roberts called The Real Crisis Is Not The Government Shutdown

Roberts claims the “The real crisis is that jobs offshoring by US corporations has permanently lowered US tax revenues by shifting what would have been consumer income, US GDP, and tax base to China, India, and other countries where wages and the cost of living are relatively low. On the spending side, twelve years of wars have inflated annual expenditures. The consequence is a wide deficit gap between revenues and expenditures.”

I will grant him that war-mongering is a huge problem. As for the loss of manufacturing jobs, I would point out that even China is losing them – to automation.

More importantly Roberts fails to understand the relationship between Fed policy and Nixon closing the gold window for the initial outsourcing. Roberts also fails to understand that unions wrecked GM and that GM is on the rebound because of wage reductions made in GM’s bankruptcy.

Gold and the Trade Deficit

For an explanation as to how gold is related to the trade deficit, please see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited
 Roberts continues with his mostly-nonsensical rant: 

The real crisis is the absence of intelligence among economists and policymakers who told us for 20 years not to worry about the offshoring of US jobs, because we were going to have a “New Economy” with better jobs.

As I report each month, not a single one of these “New Economy” jobs has appeared in the payroll jobs statistics or in the Labor Department’s projections of future jobs. Economists and policymakers simply gave away a good chunk of the US economy in order to enhance corporate profits. One result has been to create in the US the worst distribution of income of all developed countries and of many undeveloped ones.

In the scheme of things, the enhanced profits are a short-run thing, because by halting the growth in consumer income, jobs offshoring has destroyed the US consumer market.

Disability Fraud and the Demand for Goods

The demand for consumer goods is surprisingly high. And I believe that’s a bad thing. People ought to be more concerned about retirement, and less concerned about the latest toy or gadget, than they are. 

Rampant fraud in collecting disability checks and welfare just may explain the lack of concern, or at least a healthy chunk of it.

I have been talking about disability fraud for five years, but mainstream media is just now investigating: Mainstream Media Finally Catches on to Disability Fraud: 60 Minutes Reports on “Disability USA”

The “real” problem is not offshoring, NAFTA, or declining real wages as Roberts suggests. Those are symptoms of problems not the “real problem”. However, I can easily name many real problems.

Ten Real Problems

  1. Fractional Reserve Lending
  2. The Fed
  3. Lack of a gold standard
  4. Deficit Spending
  5. Public unions
  6. Davis Bacon and prevailing wage laws drive up costs
  7. Disability fraud
  8. Warmongering
  9. Politicians get into bed with corporations, unions, and crony constituents
  10. Lack of incentives to hold down costs on medicare, food stamps, and entitlements

If you fix the first four or five, most of the rest of the problems will be fixed automatically. 

Wage Inequality and Declining Real Wages

The primary reason for wage inequity is the Fed’s inflationary boom-bust practices. In addition, public unions and untenable pension obligations drive up costs (and taxes).

As I have stated dozens of times, inflation benefits those with first access to money (the banks and the already wealthy). 

Three Key Reads On Who Benefits From Inflation

Ironically, “onshoring” is now the buzzword. Thanks to robotics, some manufacturing has returned to the US (but the jobs didn’t, and won’t).

When it comes to “real” problems, Roberts really misses the boat. 

By Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Mike “Mish” Shedlock 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. Visithttp://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

INTO THE GLOBAL QE EXIT CRISIS

Posted by Frank R. Suess of Mountain Vision

on Friday, 11 October 2013 10:06

“The rate suppression that QE has imposed on developed countries since 2009 triggered a search for yield that flooded emerging economies with short-term ‘hot’ money.”

~ Stephen Roach, former chairman of Morgan Stanley Asia

Dear Mountaineers,

According to Moody’s, the consequences of a US “shutdown” would be negligible for growth in the U.S., and the debt ceiling “will be raised under certain conditions, but should not propel the U.S. into a bankruptcy situation”. As I write this letter, this no worries stance is shared by most analysts. And, financial markets largely reflect this view as well. So far, in financial markets, it’s been pretty much a non-event.

For instance, one might expect US interest rates to start rising in light of America slipping and sliding towards default. Reuters, on Monday, October 7th, reported that “The three main credit rating agencies have all warned, in varying degrees, the United States rating could be cut should it hit an expected October 17 deadline when Washington is set to run out of cash, endangering its ability to pay its debt.”

Yield on 10Y US government bond, Oct. 9th 2013

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Source: BFI Wealth Management, VWD Group data source

Yet, so far, with exception of some short-term rates, yields have not budged. As depicted in the chart above, the yield on 10-year Treasury paper has even come down over the past few weeks and, at this point, is moving sideways.

What’s interesting about the chart above is the fact that the 10Y yield shot up starkly starting in May, and has been dropping since early September. As we all know, this was the market’s prompt and loud response to the tapering comments made by Ben Bernanke. When the US Fed so much as whispers the possibility of tapering off, bond and stock markets react immediately, in worry of QE being removed. Equally, when Mr. Bernanke removes his threat of rehab, i.e. taking away the “cheap money drug”, financial markets go back into party mode, and the recovery story is back on track.

What sticks out here, really, is the fact that the Fed runs the show. Being the print manager of the world’s (currently still) number one reserve currency, apparently, entails all the power. What the US Treasury and politicians do in Washington appears largely irrelevant. As long as the Fed continues printing money to the tune of some USD 85 billion a month, the party may go one, irrespective of the Obama-Boehner showdown.

When trust is lost

So, as investors, can we all sit back, relax and watch the show in amusement and indifference? I’m not so sure. The credibility of the US dollar, its Treasury papers, and the US economy overall, to this day, are still very solid.

However, trust is a fickle thing. The concerns of investors around the world are growing. They are starting to put pressure on financial markets as we move closer toward October 17th. More and more analysts are concerned that, unless the U.S. government is able to show the rest of the world a desire to move forward and resolve its issues – at least until the next budget and debt ceiling will arrive with certainty – the trust and confidence in the US leadership, the US economy and its currency could take a severe hit. The potential consequences of a loss of trust in the world’s leading economy and number one currency should not be underestimated.

While I too am of the opinion that a last-minute resolution or back-door maneuver will most probably be found –we’ve been here before, several times over – one should not count out that OTHER possibility. In fact, warnings and official alerts abound. If this gets ugly, the “how could I have known?” excuse will not easily fly.

IMF world economic outlook and warnings

In its latest World Economic Outlook, the International Monetary Fund (IMF) warns that the world will “settle into a subdued medium-term growth trajectory” unless leading economies change course to improve prospects for recovery.

Launching its twice-yearly forecasts, the IMF trimmed its predictions of global expansion for 2013 and 2014, with the downgrade as a result of weaker prospects in emerging economies. The IMF still expects a “modest acceleration of activity” next year, led by advanced economies and particularly the United States with an expected 2.6% growth next year, “so long as US politicians manage to resolve the government shutdown and extend the debt ceiling.”

“Activity will move into higher gear as fiscal consolidation eases and monetary conditions stay supportive,” the IMF said. In other words, if the US doesn’t take away the drugs, we’ll be able to enjoy an extended party. But, the IMF did also very clearly warn of dire consequences if the drugs and punchbowl were removed, i.e. if the US government shutdown morphs into a failure to raise the debt ceiling next week.

Olivier Blanchard, the fund’s chief economist, said it would lead to “an extreme fiscal consolidation and [would] almost surely derail the US recovery” with wider global disruption. “If there was a problem lifting the debt ceiling, it could well be that what is now a recovery would turn into a recession or even worse,” he added.

Of course, the global economy has been on drugs – cheap and cheaper money – for over three decades now. Money creation and quantitative easing has turned into an addiction and getting off that addiction will not happen without pain. In fact, at this point, we are sailing into uncharted territory in terms of scope and scale of the monetary and fiscal imbalances we face. 

US fiscal and monetary profligacy unveiled by the Treasury

If you live under the assumption that the US government operates in a fiscally sustainable manner and that the US economy is growing strongly, you need to re-adjust your compass. If the latest shutdown spectacle hasn’t already changed your mind, possibly a recent report from the U.S. Treasury Department will help.

The report is nothing short of an official admission and confirmation of the decades’ long woeful mismanagement of U.S. economic, fiscal and monetary policy. The assumption widely held is that the political impasse will likely be resolved in the 11th hour just as it has been during prior showdowns. But, the report describes a broader background and its implications.

The U.S. Treasury Department warns that the economy could plunge into a downturn worse than the Great Recession if Congress fails to raise the federal borrowing limit and the country defaults on its debt obligations. A default could cause the nation’s credit markets to freeze, the value of the dollar to plummet and U.S. interest rates to skyrocket, according to the Treasury report released Thursday.

Keeping a cool head in this situation is probably the right decision. We’ve seen these kinds of shutdowns and showdowns before over and over again. Economically, and in financial markets, these episodes generally have had little impact. Raising the debt ceiling has become the thing to do regularly.

Yet, the intensity of quantitative easing has increased over the past few years. Keeping markets in party mode requires more and more intervention, more and more debt. There’s no turning back and no way out without a painful rehab.

What to expect? Can game theory give us some answers?

Can game theory be employed to explain, or even better “de-code”, the budget showdown in Washington? Game theory, as defined inWikipedia, is the study of strategic decision-making. More formally, it is “the study of mathematical models of conflict and cooperation between intelligent rational decision-makers”.

In an interesting interview with Professor Daniel Diermeier, a specialist in game theory in politics, whether game theory can be used is addressed. He compares the uncompromising positions in the current “budget game” with the situation found during the Cuba Crisis in 1962, when America and the Soviet Union almost unleashed a nuclear war.

The situation is also comparable to a game of chicken, where two cars are driving at each other and the first one to swerve away loses. Swerving is worse for you than not swerving, but if nobody swerves then you die. Similarly, John Boehner doesn’t want to “swerve” (pass a clean continuing resolution or debt ceiling increase) and Obama doesn’t want to “swerve” (sign a CR that defunds Obamacare, or sign a non-clean debt ceiling increase). But if neither swerves, then the shutdown continues and/or we default.

A rational strategy in any case would be to give in and make way because there is much more to lose than there is to win. But if one assumes that the other guy will do that for rational reasons, then you better keep your course. Therefore, to act or appear to act rational in this kind of showdown is a risk in itself, especially if you want to win.

All bets are off

Professor Diermeier’s interview is interesting indeed. However, unfortunately, we can’t say that game theory will give us any certainty or help recognize the “chicken” in this game, at least not in advance.

All bets are off. Beware!

Sincerely,

Frank Suess

About Frank Suess & Switzerland Based Mountain Vision

Frank R. Suess, CEO & Chairman of BFI Capital Group, is the chief editor of Mountain Vision. An advocate of free-market principles, Mr. Suess frequently speaks and writes on global economic, geo-political and financial matters, spanning from the US to China. Mr. Suess started his career in management consulting, having held senior positions with Andersen Consulting and PricewaterhouseCoopers, where he consulted a number of international corporations. He has an MBA, cum laude, from the Haas School of Business, UC Berkeley, CA, USA and a Bachelor´s degree in Finance, magna cum laude, from Saint Mary´s College, Moraga, CA, USA.

Greg McCoach of Mining Speculator newsletter, is not ashamed to admit he has taken a big hit in juniors in the last couple of years. What he has done in response is what he advises all investors to do in this interview with The Gold Report: Get rid of the also-rans and keep and build positions in those companies that have what it takes to gain in multiples when the market recovers.

 The Gold Report: You wrote recently, “The 2008 crisis will pale in comparison to what is now on the horizon.” Given that the 2008 crisis nearly destroyed the world economy, how bad will the next crisis be?

Greg McCoach: The derivative issues were never fixed after the last crisis. In essence, the laws were changed so that the banks didn’t have to keep derivative liabilities on their books. That way, bank stocks could soar again. But the banks have acted even more recklessly since 2008 and are now in bigger trouble. The recent White House meeting with all the big financial players should be a warning to investors that something big is about to hit. The media touted this as a meeting to discuss the debt ceiling, but I would say it was about the crisis that is about to envelope the big banks again. Barack Obama didn’t run that meeting, JP Morgan Chase ran the meeting and told everyone what was coming. The banks don’t have the capital to cover their interest rate derivative problems that are as big as the Pacific Ocean. I would tell investors to expect ten times worse conditions from what we saw in 2008.

TGR: I’ve read that even if only 4% of the derivatives held by the banks are at risk, and only 10% of that goes south, it would completely wipe out the net worth of the top five banks.

GM: At this point, the acceleration of what I consider tyrannical measures on the part of the U.S. government has reached such a degree it’s obvious that something is coming. Why would it buy billions of rounds of hollow-point ammunition? Why is it buying millions of ready-to-eat meals? Why would it take all these extra security measures? Obviously, the U.S. government knows more than the general public does and it reveals something is wrong and the government is worried about it.

TGR: We had this situation after the scandal with HSBC where the U.S. Department of Justice admitted that criminal acts were probably committed, but prosecution would be unthinkable because the big banks cannot be allowed to fail.

GM: Well, that pretty much tells the story right there. The bureaucrats, Rebooblicans and Dumocrats, as Jim Willie says, don’t represent the people of America anymore. They represent themselves and their elitist banker puppeteers. They’re trying to control the message and all the outcomes. It’s a train wreck in process, but you have to tip your hat to them—they have been able to keep it together for so long. We could have experienced the end game at multiple occasions in the past 12 years, but it now seems to me that the limits of their good fortune are quickly coming to a close.

If you’re just watching CNN and FOX News, you’re oblivious to what’s really going on. But if you’re a thinking person, you should start getting together food storage and get your investments in line for the major problems ahead. I can’t tell you when it’s going to happen because I don’t have a crystal ball, but it’s not a matter of if this is going to happen; it’s just a matter of when.

TGR: What will be the warning signs of the next crisis?

GM: The warning signs are all around us right now and have been for the last six months. The big meeting at the White House with all the financial people I already mentioned was a huge sign. The erratic behavior lately of the U.S. government with the Middle East, particularly Syria, is also a sign. In recent weeks we have heard about a worldwide currency reset that is to take place in the very near future. This is telling those who have ears to listen that the Keynesian fraud of creating monies out of this air has reached a limit so they need to reset.

All of this means that we’ll wake up one morning and life will be very different. You’ll see markets performing erratically. You’ll see civil unrest. Most people think it will have something to do with another banking crisis, a derivatives situation. It could be a new war. I think things could happen quickly and take us down a very dark path. All we can do is prepare for ourselves and our families. You have got to own physical gold and silver that is in your possession.

TGR: The macroeconomic indicators suggest that the prices of gold and silver should be much higher than at present. Why do you think that 2013 looks to be the year that the bull markets in these metals ended?

GM: I don’t think the secular precious metals bull market has ended. I think we’re just taking a pause. I liken this to the move that happened in the 1970s when we made the U.S. dollar the official reserve currency of the world, and people could again own physical gold and silver. Gold went from $35/ounce ($35/oz) all the way up to $195/oz. Then it collapsed to $105/oz. A lot of people thought that was it for gold. But then it ran to $855/oz.

Since then, we’ve hit $1,950/oz, which was then corrected back to the $1,200–1,300/oz level. We’ve been bouncing around $1,200–1,400/oz, and I believe this is just setting us up for the foundation of the next big move in gold, which will take us to much, much higher levels. I’m thinking $3,500–5,000/oz. It will be associated with collapsing currencies, the devaluing dollar, problems in the banking sector, etc.

TGR: What will be China’s role in this?

GM: China is the world’s biggest producer of gold, and now it is becoming the biggest holder of gold. It is dumping U.S. Treasury bills and buying anything it can get its hands on.

TGR: Is there no question in your mind that gold and silver are bargains now?

GM: Absolutely. People should be lining up to buy on this dip. This is a great opportunity. Nothing has fundamentally changed. Has the government started to become fiscally responsible? I laughed out loud when I heard about this “taper” of quantitative easing. What a complete joke. This should show thinking people the gig is up for the financial fraud being perpetrated at the Federal Reserve.

TGR: Many people argue that interest rates can’t go up because then the U.S. won’t be able to pay its debt, and the whole derivatives market will be threatened.

GM: If interest rates go up they are damned. If interest rates go down they are damned. Either way the Fed is screwed because of the derivative situation with their largest banks. I would expect interest rates to move in the direction that allows their banks and the U.S. government to survive the longest, but there is no way out of this that I can see.

TGR: What do you think of the argument made by the Gold Anti-Trust Action Committee that the big banks and the central bankers are suppressing the prices of gold and silver?

GM: The government doesn’t like rising gold and silver prices because it tells the public that something is wrong. Now, does the government come into our market and play games? Absolutely, but I don’t really pay too much attention because, ultimately, I believe free markets will dictate the course of the metals prices. It’s yet another sign on just how out of control the powers that be are when they seek to control the outcome of everything. They think they are God, but they’re about to find out otherwise.

TGR: You wrote on Sept. 20, 2013 that you’ve lost confidence in “a recovery this fall in our overall junior mining stock market.” If you are right, doesn’t this mean that many juniors won’t survive? And if this occurs, will it make the survivors stronger?

GM: Absolutely. This is an unfortunate chain of events, but in many regards it needed to happen. There were just too many junior mining companies. There are only so many talented teams of professionals in the industry that know how to make the discoveries that can be developed into producing mines. When you look at the monies that have been raised in this sector in the last 5–10 years, we have very little to show for it. All the low hanging fruit has already been discovered.

So this “wipeout,” as I’m referring to it, has been very difficult on investors, people employed by mining companies and newsletter writers like myself. I was hoping we would have a recovery this fall. The early signs in July and August seemed to indicate one because the strongest companies started to move and in many cases doubled from their lows in late June, early July. That is usually a sign that things are going to float again, but it all fell apart in September.

TGR: You have recommended that investors reduce their portfolios “to just a few of the highest quality stocks as we await the recovery.” What are the criteria that determine the highest quality stocks?

GM: Companies with plenty of cash on hand that don’t need to raise money right now. It is almost impossible to raise money in this sector at this juncture. Look for companies that are producing from high-grade projects with low costs, companies that will make money even if gold and silver go down further from current levels.

Even with companies like these, there is always something making things more difficult. There are a lot of great companies I like in Mexico, where the politicians are trying to change the laws to charge more taxes. Politicians have an insatiable appetite for other people’s money. It will affect companies in Mexico with low-grade projects to the point it may force them out of business.

TGR: When do you think the market will turn around?

GM: Things are not going to get better at least until 2014, and in the meantime a lot of juniors hanging by their fingernails are going to go out of business. That will solidify the market for the survivors. Maybe that is as it should be. I do believe that monies we’ve lost in this sector in the last two years can quickly be made up if investors maintain a position, or build positions, during these low times in the highest quality companies. Because when the market does recover, it is going to be a screamer.

TGR: Many long-time investors in the junior space have been so battered over the last couple of years that they’ve given up. What is the best reason for people to stay invested in juniors?

GM: I can’t blame people for getting so frustrated. They’ve taken horrendous losses; we all have. Some of the sharpest people I know in this business have been hammered. And when you suffer a lot, you tend to say, “Hey, I don’t want to do this anymore.” Those who can gut it out, however, those who have the fortitude and the understanding have to dump the garbage. Just take the pain, and get it over with. Realign portfolios to the highest quality and build positions in companies that can make up for a lot of lost ground when the market recovers.

TGR: Greg, thank you for your time and your insights.

Greg McCoach is an entrepreneur who has successfully started and run several businesses in the past 30 years. For the last 14 years, he has been involved with the precious metals industry as a bullion dealer, investor and newsletter writer (Mining Speculator and The Insider Alert). McCoach is also the president of AmeriGold, a gold bullion dealer. He writes a weekly column for Gold World.

 

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1) Kevin Michael Grace conducted this interview for The Gold Report and provides services to The Gold Report as an employee.
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