Banks to allow local groups to buy foreclosures
CIGA Eric

Straight out of the New Deal playbook, public sector funds, better known as ‘free money’, will receive priority over private funds to provide liquidity and help stabilize troubled neighborhoods. Home Owners’ Loan Corporation (HOLC) of 1933 was also intended to provide liquidity and prevent foreclosures in troubled neighborhoods during the Great Depression. The HOLC ran out of money by 1935 and had little affect on the secular trends in place since 1929.

Major banks are agreeing to give local governments and nonprofit groups the ability to buy foreclosed homes before they are sold to private investors.

The Obama administration said Wednesday local officials could benefit from acquiring these properties and renovating them or using the land for redevelopment projects. Congress has provided $7 billion to buy the homes, but these groups are struggling to spend the federal money because they are often outbid by speculators who are snapping up foreclosures.

Source: finance.yahoo.com

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UN: Global food prices highest in 2 years
CIGA Eric

International food prices have risen to their highest level in two years, fueled in part by a drought in Russia that lifted the cost of wheat, a U.N. agency said Wednesday.

Rising global food prices are byproduct of currency devaluation across the globe. Yet, the headline discussion remains fixed on the message of deflation.

Spot Commodity Prices: CRB Spot Index (1947 – Present);
16-Raw Industrial Spot Price (1935-1947);
Great Britain Wholesale Price of All Commodities (1885-1935)

Foodstuffs, which have underperformed the spot index since 2009, has begun to outperform again. That last time this happened gold accelerated from 2007 to 2008.

Gold and CRBFood to CRBSpot Ratio:

The talk of deflation is nothing more than misdirection away from the message conveyed by the secular trends.

Source: hosted.ap.org

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Dear Eric,

China has a plan that goes out a century.

The West has no national economic plan even for tomorrow.

Regards,
Jim

China may probe BHP’s bid for Potash: report
CIGA Eric

The consequence of an economic battlefield, battle for resources and control, that not only knows no boundaries but also allegiances.

China may launch an antimonopoly probe into BHP Billiton’s $39 billion bid for Canada’s Potash Corp, the China Business News said on Wednesday, citing a source familiar with the matter.

China will also review the merger of two Russian potash firms — Uralkali and Silvinit — given the major impact the two deals would have on China, the paper cited the unnamed source as saying.

Source: finance.yahoo.com

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GLOBAL TRADE

THE RISE OF SMALLER EMERGING NATIONS AS TRADING POWERS

Recent research by UBS economist Jon Anderson illustrates how trade is being reshaped in the developing world.  It will probably not surprise you to learn that between 1998 and 2008 six developing nations recorded an increase in exports (as measured by manufacturing & GDP) of more than 25 percent.  What will surprise you are the names of these countries.

The emerging market countries that grew their exports by the largest percentage were not the big countries one might expect, such as China, Brazil or India.  Instead, they were smaller countries, with less celebrated economies.  They were Cambodia, Thailand and Vietnam in South East Asia and the Czech Republic, the Slovak Republic and Hungary in Eastern Europe.

Why did these countries record the highest increase in exports?

Consult a world map and the answer becomes clear.  To quote Dr. Anderson "… all of these countries sit in exactly two small locations in the world directly east of traditional developed Europe [the Czech Republic, the Slovak Republic and Hungary], or just around the shipping lanes from the original Asian Tigers [Hong Kong, Korea, Singapore and Taiwan]." As we can see, "…the largest beneficiaries of the great secular expansion in global trade were those situated next to it, either in terms of outright proximity to markets or proximity to the sea- based production chain."

TRADE ROUTES ARE CHANGING

In our opinion, it is significant that emerging nations are becoming less and less dependent upon the developed world for import and export trade.  According to estimates produced by the world trade organization, trade between emerging markets increased by 18 percent per annum from 2000- 2008.  This was a much larger increase than the trade between developed and emerging nations or the trade between developed nations.

Why?

1.)  For many years developing nations have been forming new trade relationships with each other.

It is clearly no accident that President Lula of Brazil has visited over 60 developing nations during his tenure and is working hard to develop trade with many nations.  This policy of extending Brazil’s economic influence throughout the developing world is similar, albeit on a smaller scale, to China’s huge efforts in this area.  India is also working to develop and enhance its trade contacts among developing nations, as are smaller countries all over South America, Southeast Asia, and Eastern Europe.

2.)  Many developing countries have begun acquiring assets in other less developed nations to fill their need for raw materials.

Companies from China, India, Brazil and others are acquiring properties: mines, oil fields, production facilities, farms and other assets in a large number of countries.  These companies may be acting for their own benefit or as part of a national policy to secure raw materials and other elements of production.  Not only does it make the purchasing country more secure by guaranteeing that certain materials available for key growth industries, it also provides them with a potential economic advantage over competitors because they can source their materials at lower price or in greater quantities.

CHINA’S RARE EARTH INDUSTRY

Recently a wave of fear has been caused by China’s announcement that they would implement export controls on some of their rare earths.

This announcement has caused the world to awaken to an issue that we have been commenting on for years.

Rare earths are necessary to make many high tech instruments and products that we rely on in our modern technological society for consumer, industrial and military goods. A lack of availability of some rare earths will create economic and militarily difficulty for many nations until alternative sources of these rare earths are developed elsewhere.  It is likely that the alternative sources of these materials will be found and/or produced, however, a long time lag before sufficient production of these raw materials could damage the competitive position of those who do not have access to the required supplies.

THE AGE OF U.S. DOMINANCE DRAWS TO A CLOSE

It is not an accident that English has been the language of commerce, diplomacy, and military activity for the past several decades. The U.S. dollar is the world’s reserve currency and has also been used as the national currency by many nations around the globe.

The U.S. dollar’s position as the world’s reserve currency has been based on the U.S.’s leadership status on the world stage, not just on economic issues, but on political, martial and social issues as well.

In short the U.S. sends foreign aid and other programs to allies and potential allies, and even fights wars to strengthen the political and economic positions the U.S. and our allies.  Very few would argue that U.S. companies and industries are not among the beneficiaries of these efforts.

Today, as emerging economies rise in global economic prominence and an increased proportion of global trade is being conducted between developing nations, the U.S. is losing its central role in world trade.

THIS TREND WILL EVENTUALLY IMPACT THE U.S. DOLLAR’S POSITION AS THE WORLD RESERVE CURRENCY.

As the U.S. loses economic power, American citizens and most especially American investors should be prepared to have the U.S. excluded or at least not included in many multilateral trade, economic and political talks.  This will decrease the clout and the economic benefit for many large U.S. companies and industries.

STOCK VALUATIONS

Asian stocks in fast growing nations have begun to sell at prices equal to or at a premium to U.S. and European stocks. Why is this happening?

Asia has:

1.)  3 billion new consumers

2.)  Robust trade between Asian economies and other developing markets.

3.)  Strong banking systems, not the highly leveraged banking systems that we find in much of Europe and in the U.S.

4.)  Reasonable expectations of growth for companies and economies as a whole.

5.)  Populations with strong entrepreneurial spirit and the desire to rise up the economic ladder.

We have often discussed the problems facing the developed nations, so I will not go into detail again here.  Suffice it to say, that while Asia enjoys much of #s 1-5 the developed world is busy dealing with:

1.)  A badly damaged banking system.

2.)  Overwhelming debt (This debit is so high that if inflation develops, and we believe that inflation is inevitable, interest costs can overcome growth every rapidly.).

3.)  Low economic growth.

The emerging economies of Asia have 5 positives on their side and the developed world has 3 negatives.  If you are a global investment analyst, it’s not hard to choose where to invest.

If the Obama administration wants to gain favor with investors, may we suggest that they consider extending tax cuts and implement other programs to spur capital formation and new job creation in the U.S.   If the administration were to undertake such a program the U.S. economy and U.S. stock market would immediately benefit.

MEXICO AND U.S. IMMIGRATION

Many Americans are aware of a serious problem, which has been growing in Mexico for some time.  Mexico’s police, economic and political systems are collapsing.  Most serious is the fact that a large percentage of all of the police forces in Mexico may have been compromised or moved into the employ of drug traffickers.  The causes of this problem have been a long time in the making.  For generations police and political corruption has been an open secret in Mexico.  The effect of chronic corruption combined with the lack of growth of a middle class, the high profits in the drug business and a volatile social environment Mexico has been brought to a tipping point.

To those who live in the Southwest of the U.S. and share a state border with Mexico this has become more obvious in just the past 6 months.  In our opinion, many more Mexicans will vote with their feet and leave Mexico for the U.S. if they can figure out how to get here.

We expect the U.S. to end up spending a large amount of money fighting narco terrorism in Mexico and, eventually, on U.S. soil.

SUMMARY

During the past few weeks; gold, silver, wheat, corn and some other metals have been accumulated by investors.  We believe that the current news background will continue to support higher prices for precious metals, grains, oil, and fast growing stocks in countries with high growth rates.

We believe that political instability in Mexico, Pakistan, Afghanistan and elsewhere will keep investors focused or risk rather that reward.

In such an environment it is our experience that one is wise to hold gold, oil, high yielding stocks and food commodities and to keep a large percentage of cash available to spend should opportunities arise.

If the Obama administration were to continue the tax rates currently in effect rather than raise them, and if they were to implement programs to stimulate capital formation and new business development and thus job creation in the U.S., the U.S. economy the stock market and the election prospects of Democrats would all be benefited.  It would be a change in their approach of tax and spend but perhaps they have been listening to the electorate.

We continue to warn all readers against long-term bonds of any issuer.

We see inflation developing in India, China, and elsewhere and believe that within a few quarters this inflation could be imported into the developed world.  In such an environment holding long duration bonds could lead to huge losses.

For those of you who hold Municipal Bonds, we will be happy to analyze the stability of the issuers of your bonds free of charge.  Contact our office at (310) 826-8600 if you would like to accept this free offer.

Thank you for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com

Dear CIGAs,

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini

July construction spending tumbles to 10-year low
Reuters

WASHINGTON (Reuters) – U.S. construction spending fell more than expected in July to its lowest rate in 10 years, according to a government report on Wednesday that added to fears economic growth was stagnating.

The Commerce Department said construction spending dropped 1.0 percent to an annual rate of $805.2 billion, the lowest since July 2000. June’s construction outlays were revised down to show a 0.8 percent fall, instead of the previously reported 0.1 percent gain.

Economists polled by Reuters forecast construction spending falling 0.5 percent in July.

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US private sector cuts 10,000 jobs in Aug – report
Wed Sep 1, 2010 8:21am EDT

NEW YORK (Reuters) – U.S. private employers unexpectedly cut 10,000 jobs in August compared to a revised gain of 37,000 in July, a report by a payrolls processor showed on Wednesday.

The July figure was originally reported as a gain of 42,000.

The median of estimates from 34 economists surveyed by Reuters for the ADP Employer Services report, jointly developed with Macroeconomic Advisers LLC, was for a rise of 19,000 private-sector jobs in August.

The ADP figures come ahead of the government’s much more comprehensive labor market report on Friday, which includes both public and private sector employment.

That report is expected to show a fall in overall nonfarm payrolls of 100,000 in August, based on a Reuters poll of analysts, but a rise in private payrolls of 41,000. [ECI/US]

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Jim Sinclair’s Commentary

What is the probability that the last quarter will be the best quarter for GM until 2015?

That is a good setup for an IPO.

GM Sales Fall 25% as Unemployment Wards Off ConsumersBy Keith Naughton and Tim Higgins – Sep 1, 2010 8:49 AM MT

General Motors Co.’s sales fell 25 percent last month and trailed analysts’ estimates as the U.S. auto industry headed for its worst August in 28 years.

GM said deliveries fell to 185,176 from 246,479 last August, when the U.S. government’s “cash for clunkers” incentive program boosted sales. The largest U.S. automaker was expected to report a 19 percent decrease, including an adjustment for the number of selling days in August, the average estimate of four analysts surveyed by Bloomberg. On that basis, sales fell 22 percent, Detroit-based GM said in a statement.

U.S. auto sales last month probably were the slowest for August in 28 years as model-year closeout deals failed to entice consumers concerned about the economy and their jobs. Deliveries industrywide may have reached an annualized rate of 11.6 million vehicles last month, the average of eight analysts’ estimates compiled by Bloomberg. That would be 18 percent below last year’s 14.2 million pace and above July’s 11.5 million rate.

“The car market and the overall economy is pretty weak,” Joe Phillippi, principal of consulting firm AutoTrends in Short Hills, New Jersey, said today by telephone. “Showroom traffic is down. We still have issues on the margin with some people not being able to get credit and people are nervous.”

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Jim Sinclair’s Commentary

Maybe they are going to price average it with their 2008 purchase on Bear Stearns common shares.

Fed lets China firm buy Morgan Stanley shares
WASHINGTON | Tue Aug 31, 2010 3:26pm EDT

WASHINGTON (Reuters) – The Federal Reserve on Tuesday approved a proposal by Chinese sovereign wealth fund China Investment Corp. to buy up to 10 percent of the voting shares of Morgan Stanley.

CIC has said that it does not intend to seek controlling interest of Morgan Stanley and the Fed said it did not see any adverse impact on competition or on the concentration of banking resources from allowing the deal to go ahead.

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Jim Sinclair’s Commentary

The Soros bubble is comical when you look at all the circumstances over which it occurred.

$1500 seems a convenient number to the quoted parties but the real number is $1650 and higher.

Gold Rallying to $1,500 as Soros’s Bubble Inflates
By Nicholas Larkin – Aug 31, 2010 9:28 AM ET

Investors are accumulating enough bullion to fill Switzerland’s vaults twice over as gold’s most- accurate forecasters say the longest rally in at least nine decades has further to go no matter what the economy holds.

Analysts raised their 2011 forecasts more than for any other precious metal the past two months, predicting a 10th annual advance, data compiled by Bloomberg show. The most widely held option on gold futures traded in New York is for $1,500 an ounce by December, or 18 percent more than the record $1,266.50 reached June 21. Holdings through bullion-backed exchange-traded products are already at more than 2,075 metric tons, within 0.1 percent of the all-time high.

“Either a swift economic recovery or further dismal economic performance should bring new buyers into the market,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt who was the most accurate forecaster in the first quarter and expects the metal to rise as high as $1,400 next year. “A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven.”

Investors added to their gold holdings through ETPs for three consecutive weeks, reflecting demand for assets typically favored in times of financial stress. Two-year Treasury yields fell to a record low of 0.4542 percent on Aug. 24 and the yen reached a 15-year high against the dollar the same day. Pacific Investment Management Co., Deutsche Bank AG and Citigroup Inc. have announced or are offering funds or traded instruments designed to guard against sudden market declines.

Swiss Reserves

Buyers accumulated almost 278 tons of gold in 2010 across 10 ETPs tracked by Bloomberg, worth $10.4 billion at this year’s average price. Total holdings are almost twice Switzerland’s official reserves of 1,040 tons, data compiled by the World Gold Council show. ETP holdings reached a record 2,078 tons July 19, data compiled by Bloomberg show.

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Jim Sinclair’s Commentary

This is a serious and revealing article, full of fact, that should be reviewed by all interested in gold.

Gold & Silver Market Suppression Failures Flash Buy Signal, Part 2
August 31, 2010
Robert Kientz

In Part 1 of this 5-part series, we discussed two agreements that Central Banks used to suppress the price of gold in the marketplace. Please read Part I before proceeding with this article.

So do the Central Banks still have gold?

A nice quote from the GATA article regarding availability of Canadian central bank gold:

When I published my essay “When Irish Eyes are Smiling: the story of Brian Mulroney and Canada’s gold,” the good folks at the Bank of Canada told me that there had been no physical gold in the bank vaults for years. To quote my essay directly:

“They advised me (early in 2002) that Canada does not really own this gold at all (at the time we were supposed to have about 40 tonnes). What was left of it had been leased out to various bullion banks years ago …and yes, it (was) being accounted for as requested by International Monetary Fund accounting rules regarding leased gold. Canada’s gold cupboard is bare … not a 400-oz. good-delivery bar in sight.”

What about the US gold stocks?

In a book written by Chris Weber and summarized on Lew Rockwell’s site, we noted that in the one audit of Fort Knox:

The shocking admission Ft Knox holds very little good delivery gold was made to Mr. Durell by the chief official of the General Accounting Office (GAO).

By February 1975 Saxbe was Ambassador to India, so Durell communicated his displeasure through his local Virginia congressman.

As a result of this, the GAO sent four men to Durell’s Virginia farm to try to convince him of the validity of their accounting practices. In charge was Hyman Krieger, the GAO’s Washington regional manager.

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Jim Sinclair’s Commentary

Looks like a deal, but for what?

I’ll give you one guess only.

No Charges for Moody’s in Ratings Violation
By EDWARD WYATT
Published: August 31, 2010

WASHINGTON — The Securities and Exchange Commission said Tuesday that it had declined to charge Moody’s Investors Service for violating securities laws by failing to comply with its own procedures for rating complex derivative securities in 2007.

The decision followed an S.E.C. investigation, and the commission used the opportunity to warn all of the national credit rating agencies that it would use new powers under the Dodd-Frank banking law to take action against similar conduct, even if it occurred outside the United States, as the Moody’s case did.

The S.E.C. said it had declined to pursue a fraud enforcement action in the case because of jurisdictional issues. The securities in question originated in and were rated and sold in Europe, the S.E.C. said.

The action by the commission comes two years after the beginning of a financial crisis caused in part by widespread losses on mortgage-related derivative securities that had been rated highly by national credit ratings agencies, including Moody’s.

Though the credit rating agencies have come under criticism over their role in the financial crisis, they have not been the subject of major enforcement actions by securities regulators.

Moody’s disclosed the inquiry in May, saying that the S.E.C. had warned that it might sue the firm for making “false and misleading” statements as part of its application as a nationally recognized statistical rating organization, known in S.E.C. parlance by the initials N.R.S.R.O.

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Jim Sinclair’s Commentary

The final Pillar of Gold at $1650 is US Government Long Bonds.

Titan Capital Joins Black Swan’s Taleb in Raising Bets on Crash
By Netty Ismail – Aug 30, 2010 4:29 PM PT

Titan Capital Group LLC, whose flagship volatility fund rose 21.6 percent as stocks tumbled in May, has raised bets on extreme market moves because investors’ views on the economic outlook have polarized.

The New York-based hedge fund, which manages about $400 million, has added “a lot more” cheap, out-of-the-money options, betting the market is underestimating the likelihood of a crash, founder Russell Abrams said in a phone interview. Treasuries, German government bonds and Japan’s yen are pricing in economic outcomes that are bleaker than the stock market expects, said the former co-head of U.S. equity derivative trading and convertible arbitrage at Merrill Lynch & Co.

“They are pointing to a much more dangerous environment than what equity investors believe,” he said in an interview Aug. 27. “Either you’re going to see the bond market make the the big move or the equity market make the big move; the current situation is not in equilibrium.”

Nassim Nicholas Taleb, whose book “The Black Swan” is about how unforeseen events can roil markets, said Aug. 11 he is “betting on the collapse of government bonds” and that investors should avoid stocks. Government bonds around the world have rallied on growing signs the global economic recovery is faltering, driving yields on two-year Treasury notes as well as German 30-year and 10-year bonds to record lows last week.

The yen reached a 15-year high of 83.60 per dollar Aug. 24. The Standard & Poor’s 500 Index gained 9.4 percent from July 1 until Aug. 10, when the Federal Reserve said that growth probably will be “more modest.”

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Titan Capital Joins Black Swan’s Taleb in Raising Bets on Crash
CIGA Eric

The Final Pillar of the Gold price at $1650 is US government long bonds

Jim

Jim,

In US dollar terms, yes, the US government long bond market is the final pillar to fall.

Five Golden Pillars:

All charts have been updated through August 2010.

Long-Term U.S. Government Bonds Total Return Index (LTGBTRI):

In a multi-dimensional world, where capital flows recognize the effects of currency devaluation, the US long bond market has already generated a recognizable top in constant currency terms – gold. The long-term U.S. Government Bond Total Return Index to Gold ratio recognized a top in 2002.

Long-Term U.S. Government Bonds Total Return Index (LTGBTRI) to Gold Ratio:

Capital (flows), unlike headline analysis, is neither blind nor stupid. The higher order deceleration in the bond market’s secular trend is mirrored by higher order acceleration in the gold market’s secular trend. This is market by the red and blue parabolic curves above and below.

Gold, London P.M. Fixed:

The breakout in the gold stocks suggests that it is happening here and now.

S&P Gold (Formerly Precious Metals Mining)*
*S&P Gold from 1945, Barron’s Gold Stock Index from 1939-1945, 1922-1939 Homestake Mining:

Stick your head in the sand if you like. I only suggest that if you do, you might not like what you see when you pull it out.

Regards,
Eric

Nassim Nicholas Taleb, whose book “The Black Swan” is about how unforeseen events can roil markets, said Aug. 11 he is “betting on the collapse of government bonds” and that investors should avoid stocks. Government bonds around the world have rallied on growing signs the global economic recovery is faltering, driving yields on two-year Treasury notes as well as German 30-year and 10-year bonds to record lows last week.

Source: bloomberg.com

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Dear CIGAs,

Second quarter GDP growth numbers were revised down last week to a paltry 1.6% from 2.4%.  Wall Street celebrated because some were expecting “growth” to be revised even lower.  The stock market shot up on this news, but should everyone feel relieved because the U.S. got at least some growth?  Consider this–we paid dearly for that 1.6% growth.  If you add up what was spent on TARP, the stimulus bill, nearly $2 trillion spent by the Fed buying mortgage backed securities and Treasuries and all commitments to Fannie, Freddie, FHA and the FDIC, you come up with a total of about $3.7 trillion.  This is what it cost to support the U.S. financial system according to Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program. (Click here for more on this story.) 

To me, spending or committing $3.7 trillion to the American economy and getting just 1.6% growth is frightening.  Expert trader Dan Norcini had a very sarcastic take on this subject in a recent post at JSMineset.com.  He said, “The fact that it has taken gazillions of conjured-into-existence-out-of-no-where dollars (some call that stimulus) to produce this pitiful growth rate number for the quarter, seems to have escaped the attention of the equity perma bulls who have yet to come to grips with the consequences of all of this. My own view is that it should be a relatively easy matter to get that growth rate up to double the figure given us. All we would need to do to get to 3.2% growth rate is to print twice the number of Dollars and double the rate of government indebtedness.”  (Click here to read Norcini’s entire article.)

To John Williams of shadowstats.com, anemic growth was not a surprise.  In an interview yesterday, Williams told me, “The money that was spent just went to support the banking system to help prevent a systemic collapse.  They have prevented a collapse, that’s a big plus. . . . It was not designed to stimulate the economy.  It was designed to prevent a systemic collapse.”  We did get some stimulus from the home buyers tax credit and cash for clunkers.  That’s now gone, and it probably robbed sales of cars and houses from the future.  

So where does that leave us?  We just had dismal numbers reported on jobs, housing and GDP.  Does that mean we are at a bottom?  Not a chance.  If we really were in this so called recovery, wouldn’t we have much stronger growth?  Sure we would, and the Fed also knows there is something very wrong.  It recently announced it would spend at least $10 billion a month buying Treasuries.  The Fed also suggested it would act to keep the economy from sliding further.  That doesn’t sound like a recovery to me.  It sounds like further money printing is in the cards as the economy continues to falter.   

Williams predicts the banks are going to need another “bailout.”  He also told me, next year holds a “particularly high risk for a major systemic disorder, a heavy sell off of the U.S. dollar and early stages of hyperinflation.” He also thinks the stock market is “irrational, unstable and terribly dangerous.”   

In my interview, I asked Williams where people should invest money for safety.  He would not give specific asset categories, but he did say, “You want to be in hard assets that will retain their value against inflation.”  

That sounds to me like a warning to lighten up on the stock market and buy things such as silver and gold coins.  If nothing else, be conservative and protect yourself from the downside risk.  It appears the economy is set for another slide.

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