Thursday, February 4, 2010

McAlvany Weekly Commentary, Feb 3, 2010

Economic Realities Supporting the Gold Market

February 3rd, 2010
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Real Deficit Numbers and Real Consequences

We just finished 2009 with a record federal deficit of $1.4 trillion. Let’s think about that for a minute. The U.S. government says it is $1,400 billion in the red at the end of 2009. But is that the “real” deficit number? The reason why I ask is the government uses accounting gimmicks to make just about every number it puts out look better than what it really is. For example, the most recent Consumer Price Index for inflation was officially 2.7%; but if you compute inflation the way Bureau of Labor Statistics did it in 1980, the inflation rate would be 9.7%. The same goes for unemployment. Officially, it stands at 10%; but if computed the way BLS did it prior to 1994, it would come out to 21.9%. (more)

El-Erian Says Retreat in Stocks Will Worsen as Economy Slumps

Mohamed A. El-Erian, whose firm runs the world’s biggest mutual fund, said the largest stock market decline in 11 months may worsen amid persistent U.S. joblessness and economic growth that trails analysts’ forecasts.

Investors have wrongly priced in an “orderly” withdrawal of stimulus measures, a rebound in bank lending and coordinated government policy to restore growth, the chief executive officer of Pacific Investment Management Co. wrote in a Bloomberg News column. That means Wall Street projections for gains in 2010 may prove incorrect and prices will slump, he said. (more)

The Crisis Is Not Over

Readers ask if the financial crisis is over, if the recovery is for real and, if not, what are Americans' prospects. The short answer is that the financial crisis is not over, the recovery is not real, and the U.S. faces a far worse crisis than the financial one. Here is the situation as I understand it:

The global crisis is understood as a banking crisis brought on by the mindless deregulation of the U.S. financial arena. Investment banks leveraged assets to highly irresponsible levels, issued questionable financial instruments with fraudulent investment grade ratings, and issued the instruments through direct sales to customers rather than through markets. (more)

No help in sight, more homeowners walk away

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing. (more)

Global Insolvency: How will the US Service its Debt?

The recent election in Massachusetts of Republican Scott Brown to the Senate was a seminal event. It ended the Democratic administration’s ability to ram through legislation. It changed the game. The locomotive hit the bunter.

China saw the error of its ways in overstimulating its economy and halted bank lending. The Senate majority refusing to seat the new Senator Brown passed a tremendous increase in short-term government debt. Goldman Sachs and others thumbed their noses at the rest of America and distributed giant bonuses as the country wallowed in depression and 22.5% unemployment. Finally we have Paul Volcker proclaiming the end of too big to fail and stopping banks from trading their own accounts. These announcements are just another diversion. If firms could not trade their own accounts they might as well close their doors. Then came the President’s “State of the Union” message, which was just more party line fantasy. If he’d been smart he would have waltzed down the middle and played populist. Imbued with their own power the Democrats have again destroyed themselves. Far more important than all this is something more salient and that is how is the US and other nations are going to service their debt and raise more funds in a depression? (more)

U.S. government close to debt ceiling

The U.S. Treasury Department said Wednesday it expects to hit the government's debt ceiling by the end of February, putting pressure on Congress to raise the limit from its current level of $12.4-trillion (U.S.).

Treasury said it is working closely with Congress to raise the ceiling. The Senate has approved legislation to increase it by $1.9-trillion to $14.3-trillion. A ceiling that high would equal about $45,000 for every American. The House is expected to vote on the increase Thursday.

Congress approved a smaller increase of $290-billion in late December, allowing the government to borrow for about two more months. (more)

There Is A "Growing Bubble In Commercial Real Estate" As S&P Observes Recognition Of CRE Losses Could Wipe Out Banking System

In a note released earlier, Congressmen Paul Kanjorski and Ken Calvert stated that they are launching an "Effort Urging Federal Regulators to Address Growing Commercial Real Estate Market Concerns" which will focus on the economic implications of the "deteriorating conditions in the commercial real estate." Luckily, Kanjorski bypasses the spin cycle and calls the repeat CRE bubble by its proper name:

"The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery," said Chairman Kanjorski. "In order to safeguard the businesses operating on Main Street and protect the millions of jobs depending on commercial real estate, the Treasury and the Federal Reserve now must take needed and urgent action to stave off a potentially devastating wave of commercial real estate foreclosures and bank losses." (more)

Higher Highs coming in Gold!

The recent peak in gold on December 2nd was interrupted by a pullback that most likely ended with a double bottom on Jan 28th. To help us determine if this pull-back is ready to give way to the next big rally we take a look at all of the pullbacks of 10% or more since the Gold Bull started its run in 2001. There have been 9 such pull-backs, including the one just ending.

But first we draw your attention to a very bullish chart. It is the chart that highlights the inverted head and shoulders formation that came to life when gold broke out above the important $1,000.00 level. This breakout portends a target of $1,350.00 minimum, and some would conclude at target at $1,500.00 (more)

Morgan Stanley Analyst: Short the Euro, Long the Dollar

Morgan Stanley analyst Sophia Drossos says shorting the euro and going long on the dollar is likely to make money across a wide range of economic scenarios in 2010.

Long U.S. dollar "is a trade that can work in environments of risk aversion as well as stronger global growth,” Drossos notes.

“Because we believe a revival in the global economy will be led by U.S. growth outperformance against G4 economies … one way to express this view is to short" the euro versus the U.S. dollar.

“Continued concerns regarding fiscal frictions in the Euro zone are an important headwind to the euro that would likely be magnified in a prolonged bout of risk reduction.” (more)