The Dollar or Toilet Paper… Which is Shrinking Faster?

In the middle of last month, before Bernanke’s dream of QE2 became a reality, he described that “inflation is running at rates that are too low.” By “too low,” he meant of course that inflation is too low to keep artificially propping up asset prices, like the major market indices which in his opinion ought to give the US economy a shiny veneer of growth despite little underlying improvement in production.

Given this intended outcome, quantitative easing is at best a gimmicky strategy. What makes it far more pernicious though, is the weak premise that inflation is actually too low. When you consider the methods he’s relying upon for measuring it, you get the impression he wouldn’t note so much as a mild inflation uptick for a hot air balloon lifting off of the ground… but, we’ll explain more about measuring inflation below.

First, assuming Bernanke will in fact be successful in sparking inflation, how will a rising-prices environment impact the average wage-earner? Gonzalo Lira takes a closer look:

“Even in the best of economic times, wages and salaries do not rise in lockstep with an expanding economy. And we are currently not in an expanding economy. It is reasonable to assume that, during a period of steadily rising prices coupled with stagnant economic growth, wages and salaries will not rise for at least six months, if not longer… (more)

Fed's QE2 programme could grow to US$1.5 trillion, say analysts

Analysts expect the US Federal Reserve to pump more cash into the economy if its US$600 billion bond-buying plan fails to prevent deflation.

Some market watchers said the Fed's so-called quantitative easing (QE2) programme could eventually grow to as much as US$1.5 trillion.

High unemployment and fear of deflation have already prompted the US Federal Reserve to take action.

Some market watchers said the use of quantitative easing to stimulate growth may last for some time - despite the criticism levied at the US by other countries, including China.

Kevin Logan, Chief US Economist with HSBC, likened the Fed's move to a leaky bucket.

"It's almost as if the Federal Reserve is trying to put out a fire with a leaky bucket, but it's the only bucket it has. So they're going to try and continue to throw water on that fire, but meanwhile the liquidity leaks out.

"Is the Fed being reckless? I don't think so. As I said, the earlier programme was quite successful in stabilising the financial markets and the housing market." (more)

McAlvany Weekly Commentary

Under the Macro/Microscope with Gregory Weldon

Posted on 10 November 2010.

Gregory Weldon is the CEO of Weldon Financial. He publishes Weldon’s Money Monitor, The Metal Monitor and The ETF Playbook in addition to operating his Managed Futures Account Program as a CTA. He has a unique ability to define and forecast the market’s direction through his proprietary dissection of fundamental and technical market data. Be sure to read his book, Gold Trading Boot Camp at: www.mcalvanyica.com/resources/books If you would like to try a FREE trial to Mr. Weldon’s financial newsletters, visit: www.weldononline.com

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CHART OF THE DAY: An Update On The S&P 500 Priced In Gold

Irish bonds sink as Europe's debt fears grow

DUBLIN – Anxiety over heavy government debts in Europe flared up again Wednesday, as investors questioned whether countries like Ireland, Greece or Portugal can cut their budget deficits without choking off desperately needed economic growth.

Markets were increasingly betting that Ireland might be next in line for a massive financial bailout from its partners in the euro currency, after Greece's euro110 billion rescue from the brink of bankruptcy in May.

The interest rate, or yield, on Ireland's 10-year bonds jumped above 8 percent for the first time since the euro was introduced in 1999, reaching 8.64 percent in afternoon trading. Portugal managed to raise euro1.25 billion ($1.74 billion) in 6- and 10-year bonds, but at significantly higher interest costs than in September and August.

The fall in Irish bonds was accompanied by an announcement from London-based LCH.Clearnet Group, the world's second-largest bond clearing house, that it is significantly increasing the cash deposits it requires from traders dealing in those bonds. (more)

Dollar, Euro, Gold, Silver, and VIX Poised For Reversals

Numerous factors and markets are telling us the odds of short-to-intermediate-term reversals are elevated for numerous markets including silver (SLV), gold (GLD), the U.S. dollar (UUP), the euro (FXE), stocks (SPY), and the VIX (VXX). The objective of both fundamental and technical analysis of the financial markets is to help us better understand the risk-reward ratio and relative attractiveness of a wide variety of investments. Since no chart or annual report can help us predict the future, our study of markets deals in probable outcomes.

The possible drivers for market reversals in dollar, euro, gold, silver, and VIX include:

* Concerns about Irish debt

* Uncertainty related to the G20 summit

* High levels of optimism (bullish sentiment/contrarian indicator)

* Near vertical, and correction-less ascents in numerous markets

* Mania-like moves in gold and silver

* Stretched valuations (more)

Stocks edge higher amid caution over G20 summit

(AP) -- Stocks posted meager gains Wednesday as traders remained cautious ahead of a global economic summit where the U.S. is likely to face pushback from other nations over its economic stimulus plan.

Major indexes were down for much of the day but managed to edge higher by late afternoon. A report showing a sharp decline in first-time claims for unemployment benefits helped support stock prices. A jump in oil prices lifted shares of energy companies including Chevron Corp. and ConocoPhillips.

An announcement from the Federal Reserve Bank of New York detailing the Fed's plans for its upcoming bond-purchasing program helped bring stock indexes somewhat higher in the mid-afternoon. The Fed's program, announced last week, is aimed at encouraging borrowing and spending by keeping interest rates low.

The Dow Jones industrial average rose 10.29, or 0.1 percent, to close at 11,357.04. The Dow had been down as many as 92 points earlier in the day.

The Standard & Poor's 500 index added 5.31, or 0.4 percent, to 1,218.71, and the Nasdaq composite rose 15.80, or 0.6 percent, to 2,578.78. (more)

U.S. Debt Proposal Would Cut Social Security, Taxes, Medicare

A presidential commission’s leaders proposed a $3.8 trillion deficit-cutting plan that would trim Social Security and Medicare, reduce income-tax rates and eliminate tax breaks including the mortgage-interest deduction.

The plan would throw out hundreds of tax breaks for items such as capital gains and child care. It would raise the gas tax, slash defense spending and bring down health-care costs by clamping down on medical malpractice suits. The Social Security retirement age would rise to 68 in about 2050 and 69 in about 2075.

“This country’s out of money and we better start thinking,” said Erskine Bowles, co-chairman of the panel created by President Barack Obama. Without “tough choices,” Bowles said, “we’re on the most predictable path toward an economic crisis that I can imagine.”

Bowles, former President Bill Clinton’s chief of staff, and former Senator Alan Simpson, a Wyoming Republican, announced the proposal in Washington today, stressing that it was intended as a starting point for discussion. (more)

Is the Fed's Debt-Buying Unconstitutional?

Is the Federal Reserve violating the U.S. Constitution’s separation of powers with its new purchases of $600 billion worth of U.S. Treasuries? Is the Fed engaging in an unconstitutional monetization of the U.S. Congress' out of control spending spree that is really a bridge loan to fiscal insanity?

At minimum, should the Fed be avoiding these purchases until the fiscally debauched U.S. Congress, packed to the ceiling with fiscal dipsomaniacs, follows Great Britain’s lead in its fiscal abstinence that may "out Thatcher" even Margaret Thatcher, as a top Dallas Fed official says?

Isn’t the problem fiscal incontinence and regulatory misfeasance, and business uncertainty about all of that, which is creating joblessness? Not a lack of liquidity and not deflation, which is not a clear and present danger, as instead inflation is still with us?

And isn’t the Fed dangerously habituating the stock, bond and commodities markets to a “new normal” of constant quantitative easing? (more)

Rare earth prices to rise again?

John Embry: Die Was Cast Before Elections

The Gold Report: The last time we spoke, you said you'd gone long on precious metals and short on housing, banking etc., as you'd become more certain of your viewpoint. You said, "Everybody is being told things are fine and that the economy will return to normal and growth will continue"—an underlying assumption you called "dead wrong." If that assumption is dead wrong, why are equities markets generally increasing and what should we expect from equities and gold markets going forward?

John Embry: I think the equity markets are reflecting the enormous amount of liquidity being injected into the market, particularly in the U.S. There's no question that POMO (permanent open market operations) are going on continuously—to the extent that Goldman Sachs has identified the days they're happening and recommending people buy equities those days—and they're having an outsized impact on the market. This does not reflect the underlying economics whatsoever.

We're very concerned about what might happen to equities because we continue to believe our view on the economy is playing out and that the U.S. economy has no real forward thrust. I don't think equities are all that interesting now, particularly at the level to which they've been elevated due to these various market interventions.

The authorities wanted to make things look better going into the November elections. Maybe now, there will be less pressure to inflate things to such an extent and they will focus more on reality than elections. Now that we're through the elections, it's almost like the roadrunner off the cliff. The feet are going fast, but look out below. (more)

Morgan Stanley: Equities Are Now 'Crazy Cheap'

Global stocks are in the middle of a multi-year bull market that began in March 2009 and will last for at least two more years, Morgan Stanley Smith Barney's investment strategists said on Wednesday.

"One of the great investment decisions someone could make today is to be invested in the equity markets, especially in the emerging markets," said Charles Reinhard, Morgan Stanley Smith Barney's global investment strategist at a press briefing on the firm's 2011 outlook.

The S&P 500 Index of large U.S. stocks has gained 79 percent since bottoming in March 2009, but Reinhard said there are still plenty of opportunities for investors. Company profits have grown by about 30 percent this year, and stock prices are "crazy cheap" relative to bonds and cash, he said.

Investors in the wake of the 2008 financial crisis have poured into the safety of bonds and cash, driving yields to paper thin levels. (more)