Hello Jim,

Again, appreciated seeing the 10-year charts from Dan, his contributions are always interesting, and these especially so.

However, I write this cold, cold winter’s morning to acknowledge further evidence of your accuracy: that of your warning several years back about money markets. The author of Jesse’s Cafe American cites the Zero Hedge article on the proposed changes effecting the fund manager’s power to cut off a member’s right to withdraw his money.

Based on your discussion about this possibility, which I thought remote at the time, I did liquidate two IRA’s in 2008, paid the penalty and bought additional bullion, which is now well up and on its way.

Reading your web site has been the best education. Throughout the years I always found great value in your lessons, but now as the hard and terrible Beast hunts for every last morsel, I am bowled over by the great good fortune of my path having crossed yours.

Thank you, sir,
CIGA Alex

Dear Alex,

Many thought my warning of money market funds was a tad over the top.

I wonder how many were as wise as you.

Regards,

Jim

Notes From Underground: Questioning the Taylor rule
Yra Harris | January 3, 2010 at 9:54 pm

The biggest story from the weekend is Federal Reserve Chairman Ben Bernanke’s speech at the American Economics Association in Atlanta. Bernanke calls for more regulation for the banking system, rather than using the hammer of interest rates to prevent the onset of bubbles, especially in the real estate market. Calling for greater "systemic regulation" is a way for the FED to claim that it was not Fed policy that led to the current crisis, but rather the lax oversight of regulators. The FED chairman utilizes the Taylor rule to disallow FED responsibility for the housing bubble.

Many FED critics point to the sustained low rates in the early part of the decade that made the housing bubble inflate to such detrimental levels that affected the entire financial system. Bernanke defends the prolonged low rates as based on the Taylor rule. It is interesting that the Fed chairman uses this veil of inflation policy in the low rates policy of 2002-2004 but then goes on to take credit for the FED overriding the strictness of the Taylor rule during the present credit crisis. In a Bloomberg.com article on the FED chairman’s speech, Bernanke goes out of his way to say that the Taylor rule would have recommended the FED raise rates to a range of 7-8% through the first three quarters of 2008. Mr. Bernanke says that this would have been “a policy decision that probably would not have garnered much support among monetary specialists.” He goes on to explain that the FED focused on anticipated rates of inflation and not actual rates. So here we have spelled out that the FED has an asymmetrical bias that lends itself to being a serial bubble blower. The FED utilizes the models we have when they fit our preconceived view, but override them when we need a different outcome.

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Jim Sinclair’s Commentary

Here is the real economy. The backbone of a nation as it filters.

This is where social contribution occurs via business, not paper shuffling that produces nothing whatsoever and has destroyed not only an economy but also a system and way of life.

Nobody will bail out CIGA Marc 77 if he should need it, yet those that killed the Golden Goose have been bailed out more than whole.

Dear Mr. Sinclair,

Much of my weekend has been spent going over the 2009 year end numbers for the hardware store as well as establishing new initiatives to hopefully boost sales in what I expect to be a relatively dismal environment.

Please note that these numbers are near final but will adjust mildly as I make final updates in the coming weeks.

Total Year over Year Annual Sales were down 13.9%

The quarterly breakdown is as follows:
1Q09 Sales were down 0.6%
2Q09 Sales were down 20.3%
3Q09 Sales were down 6.7%
4Q09 Sales were down 27.4%

3 out of 12 months showed sales increases (March 13.1%, August 1.0% and September 11.3%)

The 3 worst months were June (-33.0%), July (-27.6%) and December (-34.1%)

Business clearly decelerated going into the 4th quarter after picking up mildly toward late summer.

Generally speaking traffic until late in the 4th quarter was near 2008 levels. We have yet to reduce personnel due to this but the average transaction size is down dramatically. Inventory turns are also far more limited with a much smaller proportion of total inventory making up the majority of revenue. What we find is that a customer who normally may have purchased 6 cases of a particular item is now purchasing only 2.

Our overall cost of goods declined 11.4%, mildly less than revenue. To some extent the big box stores required us to lower prices on the most sensitive items which prevented us from expanding margins. Overall gross profit was off 17.8%. For the most part goods costs remained relatively constant through 2009 but certain categories (lumber, sheet rock) showed price declines and a few showed increases (mainly sealants and some paints and solvents). We found that manufacturers and distributors were very willing to discount prices at our request.

Categories leading the sales declines were lumber, general hardware and tools, and power tools.

Paint and paint sundries were the best performing core categories with some specialty categories such as winter products.

Our 3 largest vendors are two national hardware wholesalers both with sales over $1 billion per year and a major nationwide manufacturer of paint. Of the two national wholesalers, one with which I have a much closer relationship, they have informed me that same store sales have been weak and are very similar to my store’s experience. Their sales are expected to be roughly flat for the year but that is due primarily to the acquisition of new business, some of which was due to the failure of the 2nd largest independent distributor of hardware in the country earlier this year.

Our customers which represent a broad number of industries (handymen, contractors, hotels, hospitals, car rental services, property managers and assisted living), have nearly all been purchasing less in terms of volume of goods and gross sales. A number of large general contractors with whom we have close relationships have informed us that the competition in the bidding process for large projects is substantial in that there are more bidders and fewer projects to go around. A number of companies have unfortunately been forced to lay off workers.

In our discussions with customers we expect 2010 to remain challenging and in all probability become increasingly more difficult unless the stimulus efforts are targeted specifically at the construction and infrastructure sectors. Without this we feel that no meaningful business pick up can be expected.

It is also my personal opinion that we may start to see more consolidation in the industry specifically at the manufacturer and wholesaler level. There are simply too many suppliers when hardware stores are purchasing less and in some cases closing their doors altogether. Unfortunately consolidation generally leads to additional layoffs as cost saving synergies are generally at the root of consolidation efforts. I would also expect some companies who cannot find suitors to potentially have to close down.

I truly wish I had a more upbeat assessment to share with you but unfortunately this is what our little microcosm of "Main Street" is experiencing.

All the best,
CIGAMarc

 

Jim Sinclair’s Commentary

CIGA Buz brought this to our attention. For the somnolent Sheeple there is a surprise in the offing.

Only gold saved wealth in Argentina. Only gold will secure your financial position.

You can be sure OTC derivative will not.

Cry for Me, Argentina

In the early 20th century,  Argentina was one of the richest countries in the world. While Great Britain ’s maritime power and its far-flung empire had propelled it to a dominant position among the world’s industrialized nations, only the United States challenged Argentina for the position of the world’s second-most powerful economy. It was blessed with abundant agriculture, vast swaths of rich farmland laced with navigable rivers and an accessible port system. Its level of industrialization was higher than many European countries: railroads, automobiles and telephones were commonplace.

In 1916, a new president was elected. Hipólito Irigoyen had formed a party called The Radicals under the banner of "fundamental change" with an appeal to the middle class. Among Irigoyen’s changes: mandatory pension insurance, mandatory health insurance, and support for low-income housing construction to stimulate the economy. Put simply, the state assumed economic control of a vast swath of the country’s operations and began assessing new payroll taxes to fund its efforts.

With an increasing flow of funds into these entitlement programs, the government’s payouts soon became overly generous. Before long its outlays surpassed the value of the taxpayers’ contributions. Put simply, it quickly became under-funded, much like the  United States ‘ Social Security and Medicare programs.

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Will latest jobs bill really produce jobs?
CIGA Eric

When the Senate takes up a jobs bill later this month or early in February, the debate will center on whether it really will create jobs and be worth plunging the government tens of billions of dollars further into debt.

Dubbed the "Son of the Stimulus," if passed, will be thrown onto ever-growing debt pile. A debt pile that only days ago was attracting bipartisan support to stabilize. Government spending does little to spur investment, which is the critical component to future sustainable growth. More important, this New Deal style spending will not support the U.S. dollar.

Source: finance.yahoo.com

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Breakdown of Total Bank Credit
CIGA Eric

"Why don’t we just put everyone in the United States on the federal government payroll and call it a day?" counters Rep. Jerry Lewis, R-Calif.

A breakdown of total bank credit for U.S. commercial banks illustrates the reluctance to lend and propensity to hoard cash. Government spending/programs cannot support the economy without the participation from the private sector.

The deterioration in consumer loan and credit card and other revolving plans is most concerning. Personal consumption expenditures account for more than 70% of GDP.

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Dear Jim,

Thanks, but the Fed passes the baton to the Treasury with the caps being lifted on Fanny and Freddie. Like George Washington (the Chairman) crossing the Delaware on Christmas Eve, this was the second greatest stealth in US history.

Yra Harris

Jim Sinclair’s Commentary

This article says it all.

If you read this extremely well written and easily understood piece you will see the inherent message. Form will not overcome substance. MOPE will fall to economic law in 2010.

The means do not justify the ends especially when the ends are an illusion in the first place.

I see my mission as one to protect you from the increasing weak economic structure insured by the rescue of financial firms (privileged paper shufflers) temporarily at the cost of real business that creates something tangible for society.

This is the reason that I label the 2009 dollar rally as a pimple on the ass of an elephant, a sucker’s rally created by luncheon agreements on the carry trade (unknowable as to volume) concluded by hedge fund managers.

Prepare for a Keynesian Hangover
Our government’s spending orgy will haunt us in 2010.
DECEMBER 28, 2009, 8:49 P.M. ET
By BENN STEIL

In 2008, as the U.S. economy teetered under the weight of years of reckless credit expansion, the Bush administration decided against proposals to sweep out the bad debts from the banking system and then fix the regulatory structure—an approach based on tried and tested models from the S&L crisis and other financial crises.

We will pay the price for this decision in 2010. That’s because the Obama administration and the Federal Reserve are plowing forward with Plan B: Nationalize credit creation and "stimulate" the private sector by spending in its stead.

Richard Nixon’s famous line, "We’re all Keynesians now" never seemed more apropos. With the budget deficit at an eye-popping $1.4 trillion, and on track to stay above $1 trillion indefinitely, Berkeley economist Brad DeLong writes breezily in his Nov. 30 blog that "anything that boosts the government’s deficit over the next two years passes the benefit-cost test—anything at all."

On the monetary side, the fireworks have been even more spectacular. Since the financial crisis of late 2008, the Fed has flooded the globe with newly conjured dollars in an unprecedented no-holds-barred effort to prod private credit expansion. Watching the booms in the markets for distressed debt, junk-rated corporate bonds and poor-country sovereign bonds since the summer, one might be forgiven for concluding that the Fed had succeeded well beyond its expectations, and that the market’s flight to safety had given way to a flight to Vegas. Yet "the truth is that policy should be piling on," Princeton economist and New York Times columnist Paul Krugman writes in his Nov. 25 blog, "not looking for the exit."

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TA Spotlight – Royal Gold
CIGA Eric

The swing high was broken on increasing volume and cumulative volume (REV) has surged to new highs. This confirms the recent breakout. Technical measurements suggests a minimum of $70 and a good probability that the upper trading band will be tested.

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Eric,

You might recall before this entity went above $20, I felt $80 was where it was going.

You also might recall a major job was done on this by a popular financial publication that sent it from $11 to $6 after which it went quite nicely into the $40s.

Respectfully yours,
Jim