Dear CIGAs,

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

Jim Sinclair’s Commentary

This is the 2nd state of (economic) Emergency in California.

California ‘fiscal emergency’ declared
29 July 2010 Last updated at 06:49 ET

California governor Arnold Schwarzenegger has declared a fiscal state of emergency, putting pressure on lawmakers to pass a state budget that is now more than a month overdue.

California’s economy, which is the eighth largest in the world, faces a budget deficit of $19bn (£12bn).

Mr Schwarzenegger said that without a budget in place the state’s government would run out of cash by October.

He also ordered most state employees to take three days unpaid leave a month.

Earlier this month, the governor ordered 200,000 state workers to be paid the minimum wage because no budget had been passed.

‘Fiscal meltdown’

The "furlough Friday", which will start in August, requires state workers to take three Fridays off a month until a new budget is enacted.

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Jim Sinclair’s Commentary

The US has much more threatening problems than the EU.

1.65 Million Properties Receive Foreclosure Filings in First Half of 2010
Bank Repos Hit Another Record High in Q2 While Defaults and Auctions Decrease; June Marks Third Straight Monthly Decrease in Overall Foreclosure Filings
By RealtyTrac Staff

IRVINE, Calif. – July 15, 2010 – RealtyTrac® (http://www.realtytrac.com/gateway_co.asp?accnt=137300), the leading online marketplace for foreclosure properties, today released its Midyear 2010 U.S. Foreclosure Market Report, which shows a total of 1,961,894 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 1,654,634 U.S. properties in the first six months of 2010, a 5 percent decrease in total properties from the previous six months but an 8 percent increase in total properties from the first six months of 2009. The report also shows that 1.28 percent of all U.S. housing units (one in 78) received at least one foreclosure filing in the first half of the year.

Foreclosure filings were reported on 313,841 U.S. properties in June, a decrease of nearly 3 percent from the previous month and a decrease of nearly 7 percent from June 2009. June was the sixteenth straight month where the total number of properties with foreclosure filings exceeded 300,000.

Foreclosure filings were reported on 895,521 U.S. properties during the second quarter, a decrease of nearly 4 percent from the previous quarter and an increase of less than 1 percent from the second quarter of 2009.Default and auction notices were down on a quarter-over-quarter and year-over-year basis in the second quarter, but bank repossessions (REOs) increased 5 percent from the previous quarter and 38 percent from Q2 2009 to 269,962 — a new quarterly high for the report.

“The second quarter was a tale of two trends,” said James J. Saccacio, chief executive officer of RealtyTrac. “The pace of properties entering foreclosure slowed as lenders pre-empted or delayed foreclosure proceedings on delinquent properties with more aggressive short sale and loan modification initiatives. Meanwhile the pace of properties completing the foreclosure process through bank repossession quickened as lenders cleared out a backlog of distressed inventory delayed by foreclosure prevention efforts in 2009.

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Jim Sinclair’s Commentary

And more and more as we head, without any doubt, into currency induced cost push inflation.

Bank of England chief says stimulus still needed
Bank of England governor says degree of continuing stimulus is key issue
Robert Barr, Associated Press Writer, On Wednesday July 28, 2010, 6:27 am EDT

LONDON (AP) — The governor of the Bank of England said Wednesday that the need to stimulate the economy still takes precedence over concerns about high inflation at a time when the outlook for the global economy remains uncertain.

Governor Mervyn King told Parliament’s Treasury Committee that Britain cannot be confident that a sustained recovery is under way despite last week’s report that the economy grew 1.1 percent in the second quarter — the third quarter of recovery from a deep recession.

"The debate is about the appropriate degree of stimulus, not about applying brakes," King said.

The Bank’s Monetary Policy Committee has kept its key interest rate at an all-time low of 0.5 percent, though one member — Andrew Sentance — is advocating a hike to 0.75 percent because of his concerns about inflation remaining above the official 2 percent target.

"We continue to face the challenge of rebalancing our economy away from consumption towards net exports, and raising our national savings rate. During the rebalancing, there is a risk that the level of money spending in the U.K. will remain weak, with the economy operating below capacity. That would push down on inflation potentially to a rate that is significantly below the 2 percent target," King said.

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Jim Sinclair’s Commentary

You heard it from the Brits today. Now hear it from the Fed.

Currency Induced Cost Push Inflation is on its way.

Fed Board Member’s Deflation Warning Hints at Policy Shift
By SEWELL CHAN
Published: July 29, 2010

WASHINGTON — A subtle but significant shift appears to be occurring within the Federal Reserve over the course of monetary policy, amid increasing signs that the economic recovery is weakening.

On Thursday, James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed’s current policies were putting the American economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.”

The warning by Mr. Bullard, who is a voting member of the Fed committee that determines interest rates, comes days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so.

Mr. Bullard had been viewed as a centrist, and associated with the camp that sees inflation, the Fed’s historic enemy, as a greater threat than deflation.

But with inflation now very low, about half of the Fed’s unofficial target of 2 percent, and with the European debt crisis having roiled the markets, even self-described inflation “hawks” like Mr. Bullard have gotten worried that growth has slowed so much that the economy is at risk of a dangerous cycle of falling prices and wages.

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Jim Sinclair’s Commentary

If Moody wishes to self destruct, downgrading US debt is the express lane method.

Moody’s: U.S. needs debt plan.
The U.S. government needs to lay out a credible plan to address its rising debt if it wants to maintain its triple-A credit rating, said Steve Hess, Moody’s top sovereign analyst for the U.S., East Asia and Australasia. At present, the U.S. appears to have "no plan" to deal with its fiscal outlook. The U.S. rating remains on a stable outlook at Moody’s.

Jim Sinclair’s Commentary

The fear "D" word is finding its way into the Halls of Ivy. You can anticipate QE to infinity which is the means of producing currency induced cost push inflation.

Beige Book shows economic fragility.
U.S. economic activity continued to be "weak" in June and into July, the Federal Reserve said in its Beige Book report, in the latest sign that the recovery may be running out of steam. Though most districts reported continued improvements in economic conditions, the improvements were modest; gains were limited for retail sales, housing and construction remained weak, and banking lending remained tight.

The Dual Face of the Structural Trade Deficit
CIGA Eric

Eric,

A big ship I would hate to try to avoid on the high seas while she was doing 30 knots. There will be three of the zapping back and forth across the Pacific 5 days each way! Wow! let’s hear it for Walmart!

Jack

Both pictures define the reality of structural deficits in which issuance debt at the expense of tomorrow’s production, consumption, and investment.

Made in China:

Made in China also manifests itself in the Formula depicted below.

US Federal Budget (Surplus or Deficit As A % of GDP, 12 Month Moving Average) and Gold London P.M. Fixed:

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Though For The Day:

Wouldn’t you say it is interesting that $1156 is one of the Gold Angels?

My Dear Friends,

The following note preceding the excellent article written by Ambrose Evans-Pritchard is from the man who I consider the "Dean of Gold," Harry Schultz.

This is what the Goldmans of the world are in the process of positioning themselves for at your expense.

At the same time many in the gold community are in the bathtub with their razor blade kit. Please, no cutting yet.

Regards,
Jim

Dear CIGAs,

Hyperinflation will come overnight as Jim predicts. Forget gradual.

How do you protect assets and food? Hide stuff. Avoid medium profile. The following article describes how bad it got in German hyperinflation and how dangerous it was to even own a painting. Read it all, then plan appropriately.

Harry Schultz

The Death of Paper Money
As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.
By Ambrose Evans-Pritchard
Published: 7:05PM BST 25 Jul 2010

Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation — whether the early 1920s in Germany, or the Korean and Vietnam wars in the US — starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.

Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.

As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus — though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.

As it happens, another book from the 1970s entitled "When Money Dies: the Nightmare of The Weimar Hyper-Inflation" has just been reprinted. Written by former Tory MEP Adam Fergusson — endorsed by Warren Buffett as a must-read — it is a vivid account drawn from the diaries of those who lived through the turmoil in Germany, Austria, and Hungary as the empires were broken up.

Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding. The diary of one young woman described the scene at her cousin’s farm.

"In the cart I saw three slaughtered pigs. The cowshed was drenched in blood. One cow had been slaughtered where it stood and the meat torn from its bones. The monsters had slit the udder of the finest milch cow, so that she had to be put out of her misery immediately. In the granary, a rag soaked with petrol was still smouldering to show what these beasts had intended," she wrote.

Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to undertand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments.

Foreigners with dollars, pounds, Swiss francs, or Czech crowns lived in opulence. They were hated. "Times made us cynical. Everybody saw an enemy in everybody else," said Erna von Pustau, daughter of a Hamburg fish merchant.

Great numbers of people failed to see it coming. "My relations and friends were stupid. They didn’t understand what inflation meant. Our solicitors were no better. My mother’s bank manager gave her appalling advice," said one well-connected woman.

"You used to see the appearance of their flats gradually changing. One remembered where there used to be a picture or a carpet, or a secretaire. Eventually their rooms would be almost empty. Some of them begged — not in the streets — but by making casual visits. One knew too well what they had come for."

Corruption became rampant. People were stripped of their coat and shoes at knife-point on the street. The winners were those who — by luck or design — had borrowed heavily from banks to buy hard assets, or industrial conglomerates that had issued debentures. There was a great transfer of wealth from saver to debtor, though the Reichstag later passed a law linking old contracts to the gold price. Creditors clawed back something.

A conspiracy theory took root that the inflation was a Jewish plot to ruin Germany. The currency became known as "Judefetzen" (Jew- confetti), hinting at the chain of events that would lead to Kristallnacht a decade later.

While the Weimar tale is a timeless study of social disintegration, it cannot shed much light on events today. The final trigger for the 1923 collapse was the French occupation of the Ruhr, which ripped a great chunk out of German industry and set off mass resistance.

Lloyd George suspected that the French were trying to precipitate the disintegration of Germany by sponsoring a break-away Rhineland state (as indeed they were). For a brief moment rebels set up a separatist government in Dusseldorf. With poetic justice, the crisis recoiled against Paris and destroyed the franc.

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Jim Sinclair’s Commentary

The Fat Cats are big golfers.

If the FIDC would consider a 105% loss sharing arrangement, I am sure they would have a buyer.

Las Vegas golf course taken over by FDIC to go on auction block
Stallion Mountain Golf Club to be auctioned Aug. 16
By Buck Wargo
Tuesday, July 27, 2010 | 4:39 p.m.

A Las Vegas golf course taken over last summer by the Federal Deposit Insurance Corp. when it seized Community Bank of Nevada will be auctioned off to the highest bidder.

The Stallion Mountain Golf Club, located 6.9 miles east of the Strip on East Flamingo Road, was closed in July 2008 when a group of investors who bought it in 2006 from developer Billy Walters for $24.5 million gave it back to the bank when they could no longer afford their debt service payments.

The FDIC took over the bank in August 2009 and has maintained the course to prepare it for public auction.

The course, originally known as the former Sunrise Country Club, was built by former PGA player Jim Colbert and was the site where PGA Tour pro Chip Beck shot a record-tying 59 in the 1991 Las Vegas Invitational.

The auction is set for Aug. 16 and will be done through sealed bids, said Keith Cubba, a broker with the Land & Investment Group at Colliers International Las Vegas. Once the bids are received, it will be whittled down to a group of finalists who will be asked to make their final offer, he said.

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Jim Sinclair’s Commentary

The Age of Miracles is not over. Oil is biodegradable in the Gulf according to the media.

I swear I just heard the following on F-TV: "Government says a large amount of the Gulf spill oil is under the water and that is good because you cannot see it."

Jim Sinclair’s Commentary

Be prepared, as Eric says, to get the heartwarming news that whales are now adapted to eating the oil under the water that you fortuitously cannot see.

The whales are advised to eat fast because the oil is miraculously biodegradable. The whale bodies that have floated up on shore have all died of old age. The dead farmed oysters were planted dead.

Now think about the media reporting on economics.

Gulf of Mexico Oil Slick Appears to Vanish Quickly

The oil slick in the Gulf of Mexico appears to be dissolving far more rapidly than anyone expected, a piece of good news that raises tricky new questions about how fast the government should scale back its response to the Deepwater Horizon disaster.

The immense patches of surface oil that covered thousands of square miles of the gulf after the April 20 oil rig explosion are largely gone, though there continue to be sightings of tar balls and emulsified oil here and there.

Reporters flying over the area Sunday spotted only a few patches of sheen and an occasional streak of thicker oil, and radar images taken since then suggest that these few remaining patches are quickly breaking down in the warm surface waters of the gulf.

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Jim Sinclair’s Commentary

The key word today was used by the MOPErs. The Durable Goods Orders decline was UNEXPECTED.

That means it was an anomaly, a mistake and not a trend because the "Board of Economic Wizards" did not anticipate it in their deed deliberations.

Jim Sinclair’s Commentary

There is nothing dollar positive here.

- Restated Downturn Should Be More Severe
- Nonsense Home-Sales Reporting
- Roughly 144,000 Census Jobs Lost in July

"No. 312: Durable Goods, Home Sales, Upcoming GDP Revisions"
http://www.shadowstats.com/

Jim Sinclair’s Commentary

Greg Hunter is so right about the result of MOPEd details of the present time major banking crisis.

If FASB did not capitulate there would be few solvent US banks. This includes major money center banks. This means that the earning statement and balance sheets of the financial community are as much a cartoon as the value put on bankrupt and near bankrupt OTC derivative so-called assets.

Dear CIGAs,

Last week, bank failures quietly passed the 100 milestone for the year.  I say “quietly” because the bank failure story has gone largely unreported or, at least, under-reported by the mainstream media.  Just to give you an idea of how fast the bank insolvency problem is accelerating, last year, at this time, 64 banks had been taken over by the Federal Deposit Insurance Corporation.  So far, this year, 103 banks have already been taken over by the FDIC.  There is no question the bank failures the FDIC will have to deal with will be greater than the 140 insolvent banks closed last year.  At this point, we just don’t know how many more, but dozens more than last year for sure. 

One big bank negative I see is the loss of business in the Gulf because of the oil spill catastrophe.  I don’t think it is a stretch to say that the loss of revenue from fishing, deep-water oil drilling, tourism and spoiled coastal property will probably have a negative effect on the balance sheet of Gulf Coast banks.  Just 2 weeks ago, a Wall Street Journal story documented tail spinning Florida banks asking for a break from federal regulators.  It said, “Florida banks—already weakened by the real-estate bust and hit again by customers suffering from the BP PLC oil spill—are asking federal regulators for a reprieve from government-ordered capital raising as they struggle to stay alive.” (Click here for the more on the WSJ story.) There are currently 775 “problem” banks on the FDIC’s list, and I don’t think that list will be shrinking anytime soon.

In order for the FDIC to close the banks, it has to spend cash to make depositors whole.  It is also entering into what are called “loss share” agreements.  It is a way to keep problem loans and foreclosed property in a banking environment and not become the full responsibility of the government.  It also caps the loss for the buying institution.  Here’s how the “loss share” basically works.  The FDIC writes down the assets to an estimated value.  Then, the FDIC covers any potential losses in an 80/20 split, with the FDIC covering 80% of any potential loss.  These loss share agreements were used in the S&L crisis in the early 90’s.  Since this crisis began, there have been $173.5 billion of loss share agreements through May of 2010.  (The total now stands at more than $178 billion.)  According to FDIC spokesman David Barr, if loss share agreements were not used, the failed bank assets might sell for “pennies on the dollar.”  The idea is to wait and sell the assets in the future when they might be worth more.  Barr told me just last week, “As the FDIC turns those losses into real losses when we sell those, then the loss at the failed bank is adjusted accordingly, some go up and some go down.”

If the economy continues to tank, make no mistake, there will be some liability to the FDIC.  We just will not know how much until the assets are sold.  There might be no future liability at all, but I don’t think that’s likely given the serious and prolonged problems facing the economy.  This is probably a multi-billion dollar future write down, but who knows?

The bank closings are also taking a toll on the FDIC’s Deposit Insurance Fund, or DIF.  In May, it was reported to be $20.7 billion in the red.  Back then, I wrote a post called, “FDIC Insurance Fund Still $20 Billion in the Hole.”    I said, “I talked with FDIC spokesman David Barr yesterday about the shortfall in the DIF.  He said, “The FDIC is not broke.”  It has an additional “$63 billion in cash.”  He told me there is about $46 billion in three years of prepaid deposit insurance premiums and an additional $17 billion in cash for a grand total of $63 billion in “liquid resources” to close insolvent banks.” 

If you subtract the $20.7 billion deficit of the DIF from the roughly $63 billion in “liquid resources,” you end up with a little more than $42 billion.  FDIC Chairman Sheila Bair was quoted, around the same time, saying the FDIC expects to spend “$40 billion” closing banks in the next year.  (Remember, this was before anyone knew how big the Gulf oil spill calamity was going to be.)  My math says that would leave a little more than $2 billion in “liquid resources.”  According to an email from David Barr yesterday, after that $2 billion is used, there is a “. . . 100 billion line of credit (from the Treasury).  The FDIC also has some $35 billion in assets from failed banks that we must sell.”  

That means in about a year, the FDIC will be closing banks with borrowed money and what it can get from selling the assets of failed banks.  If that doesn’t paint a dire picture of bank insolvency in this country, I don’t know what does.  It is amazing to me how little time the mainstream media is spending on this unfolding financial disaster and how much time it is devoting to things like Mel Gibson’s rants.

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