Thursday, March 25, 2010

McAlvany Weekly Commentary, March 24, 2010

China: Tariffs, Trade Wars & Tragic Miscalculations

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CFTC must act fast on metals limits - Chilton

The Commodity Futures Trading Commission needs to move quickly to establish position limits for metals such as gold and silver, Bart Chilton, the strongest proponent for position limits at the commission, said on Tuesday.

The CFTC, the country's top futures regulator, already has proposed a plan to limit the number of speculative contracts a trader can hold in the energy sector. The agency will hold a hearing on Thursday on whether metals position limits are needed to avoid concentration and price manipulation.

"I think we should propose a rule on metals position limits now and move forward as swiftly as possible," Chilton, a Democratic commissioner at the CFTC, told metal investors. (more)

How the Middle Class Slowly Evaporated in the Last 40 Years – Loss of Manufacturing, Bank Deregulation, Hyper Consumption, and Short-term Profit Seeki

Some like to think that the middle class has always been a fixture of American society. In fact, the rise of a steady and strong middle class didn’t happen until after World War II. Clearly people can’t look at the economically painful Great Depression, which rampaged the nation from 1929 to 1939 as a good time for average Americans? In fact, even a few years after World War II the nation hit a few rough patches with price controls and millions of Americans rushing back into the workforce. But with many of the industrial economies in tatters in Europe and Asia, the U.S. had a well positioned spot for decades of strong growth. But make no mistake by looking at history that we were producing and manufacturing goods for the world. And things seemed to work out well for many Americans even with a robust manufacturing base. (more)

Faber: Dismal Stocks, Bonds Create New Gold Standard

Uncertainties surrounding asset classes such as stocks and bonds have created a new gold standard, says Marc Faber, editor of “The Gloom, Boom and Doom Report.”

Between 2001 and 2008, gold outperformed stocks and bonds, but beginning in 2009, stocks soared.

That, Faber says, sent some investors to gold for safety because normally, retail investors cannot move in and out of different assets like institutional investors.

“I think we already have now a gold standard … created by the market place,” Faber tells CNBC. (more)

Florida political leaders consider state bank: 2% mortgages, 6% credit cards, no state debt costs

Even though this idea is obviously cost-effective with just a few moments’ consideration of the facts, even though the idea of creating money and credit for the public good rather than for bank profit has a rich history of support from many of America’s brightest minds, and even though this is the “secret” to the state with the lowest unemployment in the nation along with a record budget surplus (it’s North Dakota, one of only two solvent states today), the idea of a state-owned bank creating its own credit is a new idea for many Americans.

Florida candidate for Governor, economist Farid Khavari, explains that a state-owned bank should replace for-profit banks to provide substantial public benefits while profiting the state. Two percent mortgages would reduce interest payments by 85%, saving $88,000 per every $100,000 borrowed. The bank would pay 5% interest on deposits, charge 6% interest on credit cards, and 3-4% on commercial and vehicle loans. (more)

Treasurys Sink After Poor Sale

Treasury prices fell hard after a poor five-year auction that escalated concerns about the government's ability to sell its massive amounts of debt.

Worries about supply picked up this week after the government's $44 billion two-year auction on Tuesday attracted less demand than anticipated. The five year sale was messier, sending Treasury prices tumbling. Demand at the auctions may have been impacted by less buying from Japan as its fiscal year-end approaches. Nonetheless, the poor results put investors on edge given the huge amounts of debt the government is likely to continue to issue to fund its budget deficit.

Investors were reminded of the huge amounts of debt the government will need to continue to sell after President Barack Obama signed into law a $940 billion health-care overhaul bill on Tuesday, which will necessitate even more borrowing by the government. (more)

U.S. Is Riskier Than Euro Zone; So Says CDS Market

Something troubling has occurred in the market for default protection on the debt of the world's biggest borrower.

As the folks at Standard Poor's Valuation and Risk Strategies division noted in a research note Monday, the difference between the spread on U.S. sovereign credit default swaps and an equivalent benchmark for AAA-rated euro-zone sovereigns flipped into positive territory March 12. As U.S. CDS spreads expanded to their widest levels in two years, that cross-region gap blew out to 5.7 basis points last Friday before narrowing to 4.7 Tuesday.

Wider CDS spreads indicate that sellers of insurance against a particular issuer's default are charging more for it. In effect, the positive U.S.-versus-euro zone spread means investors think the risk of a U.S. default--however remote--is greater than that on euro-denominated sovereign debt. (more)

Portugal’s Debt Rating Lowered by Fitch on Finances

Portugal’s credit grade was cut by Fitch Ratings, underscoring growing concern that Europe’s weakest economies will struggle to meet their debt commitments as finances deteriorate.

The rating was lowered one step to AA- with a “negative” outlook, Fitch said in a statement today. The euro extended its decline, weakening 1.1 percent to $1.3355 as of 10:32 a.m. in London. Portuguese bonds fell, with the yield on the 10-year note rising 5 basis points to 4.33 percent. Portugal’s PSI-20 Index of stocks dropped 2 percent.

Euro-region governments including Greece, Ireland, Italy and Spain are seeking to narrow growing budget deficits. Portugal’s deficit is 9.3 percent of gross domestic product, more than triple the European Union’s 3 percent limit. Its economic growth is “significantly below” what is typical for a AA country, reducing its ability to resist the global financial crisis, Fitch said. (more)

Explain why you sold Britain's gold, Gordon Brown told

The decision to sell the gold – taken by Mr Brown when he was Chancellor – is regarded as one of the Treasury's worst financial mistakes and has cost taxpayers almost £7 billion.
Mr Brown and the Treasury have repeatedly refused to disclose information about the gold sale amid allegations that warnings were ignored.
Following a series of freedom of information requests from The Daily Telegraph over the past four years, the Information Commissioner has ordered the Treasury to release some details. The Treasury must publish the information demanded within 35 calendar days – by the end of April. (more)

Hussman: Inflation Will Be Huge in the Years to Come

Economist and fund manager John Hussman says inflation will be huge.

"It should not escape investors that the rapid expansion of deficits during the 1970s and into the early 1980s was accompanied by a hostile inflation climate, while the fiscal discipline of the 1990s produced a very pleasant period of low inflation pressures," Hussman writes in a note to investors.

Hussman’s near-term concern continues to be the risk of fresh credit strains, the likely outcome of which he feels will be a flight-to-safety toward default-free Treasury securities and a tendency toward dollar strength and commodity weakness.

“The long-term implications of bailouts, tax shortfalls and lack of budget discipline is likely to be significant inflation pressure beginning about four years or so out, and continuing for the remainder of the decade,” Hussman says. (more)

Here's Why The Money Supply Has Exploded, But We Haven't Seen Rampant Inflation Yet

The U.S. money supply has been expanding at an absolutely unprecedented rate. So why are we not experiencing rampant inflation? Why is the U.S. dollar not falling through the floor? Well, the truth is that all of this new money has gotten into the U.S. financial system but it is not getting into the hands of U.S. businesses and consumers. In fact, even though the money supply is exploding, U.S. banks have dramatically decreased lending. This has brought us to a very bizarre financial situation as a nation.

What we have seen is the U.S. government shovel massive amounts of cash into the U.S. financial system and then watch as the big banks sit on that cash and refuse to lend it. The biggest banks in the U.S. reduced their collective small business lending balance by another 1 billion dollars in November 2009. That drop was the seventh monthly decline in a row. In fact, in 2009 as a whole U.S. banks posted their sharpest decline in lending since 1942. (more)

Sales of New U.S. Homes Dropped in February to Lowest on Record

Sales of new homes in the U.S. unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market.

Purchases decreased 2.2 percent to an annual pace of 308,000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years.

The new-home market is vying with foreclosure-induced declines in prices for existing homes in an economy where unemployment is forecast to average 9.6 percent this year, close to a 26-year high. Treasury Secretary Timothy F. Geithner yesterday said it would take a “long time” to repair the housing market as the administration takes steps to overhaul real-estate financing and regulation. (more)

This year, US public debt could reach end game

For at least four years, AsiaNews has sounded the alarm bells against the risks due to the huge size reached by speculative finance[1]. In 2008, we said that the attempt to save US banks could push the US debt beyond the point of solvency (see Maurizio d’Orlando, “US debt approaches insolvency . . .,” in AsiaNews 19 December 2008)[2]. Back them it could appear a bit overblown, but now even US Federal Reserve Chairman Ben S Bernanke is warning the US Congress about the danger. In a statement before the House Financial Services Committee,[3] he said that the US public debt might no longer be sustainable very soon. Financial jargon aside, the subtitle of an article by The Washington Times—Stage is set in U.S. for a Greek tragedy—says it all. Interviewed for the article, Bernanke says the United States is likely to face a debt crisis like the one in Greece sooner than later, “not something that is 10 years away”.

In 2008, the size of the debt was such that it was quite clear that it was not sustainable. Now we have a timeframe to measure the likelihood of insolvency for the US public debt, and it is this year. The reason for that is described in an article whose title needs no explanation: “The bankruptcy of the United States is now certain”. (more)