Marc Faber: They Can Postpone the Endgame for Five or Ten Years

Economist, global trend analyst and well know Doctor of Doom, Marc Faber, suggests that with so many monetary, fiscal and political variables at play, the end game of this crisis can be delayed for months or years to come. Faber, who has warned since before the 2008 crisis that entire nations would fail due to high debt levels, that hyperinflation is an inevitable outcome of the Fed’s accounting games, and that war will be the ultimate result, shares his views on CNBC:

[Video Interview Below]

I don’t know what other people think, but what I think will happen eventually – and there are so many contradictory statements coming out that nobody really knows – but eventually the same will happen as in the United States. The ECB (European Central Bank) will print money one way or the other. And, the debts that essentially should be written down to realistic value will continue to be carried on the books of banks at unrealistic values. So, the end crisis will be postponed until the sovereigns go bankrupt.

…

Before they go bankrupt they’ll print money. They’ll print endless money. As long as we have Ben Bernanke and Janet Yellin at the Fed they’ll print money and so they can postpone the end game endlessly…Endlessly not, but say for another five to ten years.

Each money printing exercise brings about unintended consequences. These unintended consequences are partly higher inflation rates than had no money been printed.

When the banking system came unhinged in 2008 many assumed the system would simply collapse into a depression right then and there, reset, and then eventually restart the economic growth cycle. Instead, the US government and central bank decided to intervene. While this “saved” the system at the time, recapitalized banks, boosted stock markets, and pumped what some believe to be in excess of $20 Trillion into the global economy, it really did nothing but further prolong the inevitable. Furthermore, it made the eventual and unavoidable collapse of debt and leverage that much worse.

Now, with Europe very much on the brink, the ECB is really left with no other choice than to print trillions of Euros. The consequences of the money printing in the U.S. and Europe, according to Faber (and many others), will not be pretty:

I think I am very constructive and a I’m a great optimist in life, otherwise I would commit suicide in view of the kind of governments we have nowadays.

Because, for sure, they will take wealth away from well-to-do people one way or the other. And from the middle class they will take it away through inflating the economy and lowering the standards of living.

…So I think that we are in a very difficult situation…

…

If you print money the U.S. it doesn’t mean that it creates bubbles in the U.S. It can create bubbles in your neighboring regions – say Latin America, or Asia, or it can create bubbles in precious metals or in commodities, or in home prices somewhere else in the world. Or, say, for instance, in China. And if the Chinese bubble bursts one day, which inevitably will happen, maybe not tomorrow, but maybe in three months or maybe in three years. But when it happens it will have devastating consequences for the global economy.

As Dr. Faber points out, the system is complex and the butterfly effect, while clearly evident, is simply impossible to predict with any meaningful accuracy. For all we know the entire system can collapse in the next 30 days, or, the full fallout may not be witnessed for several years.

All we can do is draw on historical example and the facts as they become available to us.

What we know is that entire nations, including the United States, have bit off more debt than they can chew. There exists no way to pay this debt back. The only option is immediate default or monetary machinations. No politician is willing to pull the trigger on default, and the banks (who are controlling the strings of the political puppets) will not let it happen if they have any sayso in the matter. Thus, we are left with more printing.

As they print more and force prices to rise, they will also cut services that have become essential to millions. They’ll also move to increase taxes and fees across all Western nations. Total collapse of the system may be avoided for now, but the lives of tens of millions of people will be made more difficult with each new dollar they print and every new policy measure they implement. During the great depression there was a decade of strife before the world went to war. In Zimbabwe, the hyperinflation built up for many years before it went super nova – all the while the people suffered.

The eventual outcome of all this, as Doctor Faber has argued, is the end of the world as we have come to know it. This coming paradigm shift is unavoidable.

So what should you do? According to Faber, All Currencies are Doomed, Except for Gold so become your own central bank and trade your fiat paper for hard assets.

In November of 2009 Faber predicted that the coming meltdown in sovereign debt will eventually lead to the worst possible outcome for the people of the world:

The crisis has not solved anything. On the contrary there is less transparency today than there was before. The government’s balance sheet is expanding, and the abuses that have led to the one cause of the crisis have continued.

I think eventually there will be a big bust and then the whole credit expansion will come to an end.

Before that happens, governments will continue printing money which in time will lead to a very high inflation rate, and the economy will not respond to stimulus.

The average family will be hurt by that, and then in order to distract the attention of the people, the governments will go to war.

People ask me against whom? Well, they will invent an enemy.

Chances are, we can’t stop the war that’s coming, just like we can’t stop the debt collapse. The system is just too big, too complex and out of our control. Thus, according to Faber, it’s time to focus on yourself and your family – with investments that will matter when it all falls apart:

With tongue apparently in cheek, he says buy a farm you can tend to yourself way out in the boondocks. And protect it with high voltage fences, barbed wire, booby traps, military weapons and Dobermans.

Forget time lines here and understand that the sheer size and volatility of the system makes it nearly impossible to identify exactly what, when and how. The only thing we need to know is that we are living in the middle of it all right now, and day-by-day, month-by-month, year-by-year it continues to deteriorate.

We’d be ecstatic If Dr. Faber is correct in his assessment that they could potentially postpone the worst-case endgame for five to ten years. That just means we’ve got much more time than we thought to get out of harm’s way.

Reprinted from SHTF Plan.

100% Chance of Crisis, Worse Than 2008: Jim Rogers

The world is definitely going to face another financial crisis stemming from problems in Europe, Jim Rogers said Wednesday.

"We're certainly going to have more crises coming out of Europe and America; the world is in trouble. The world has been spending staggering amounts of money that it doesn't have for a few decades now, and it's all coming home to roost," Rogers, CEO and chairman Rogers Holdings told CNBC.

He added that the crisis would be much worse than the one markets saw in 2008 because the debt is much higher now.

"Last time, America quadrupled its debt. The system is much more extended now, and America cannot quadruple its debt again. Greece cannot double its debt again. The next time around is going to be much worse," Rogers said.

"In 2002 it was bad, in 2008 it was worse and 2012 or 2013 is going to be worse still – be careful," he added.

Rogers said he was long the euro despite the euro zone facing deep crises, but said all paper money was now under duress.

"I own several paper currencies. My theory is that if things get better I will make money in commodities, and if they don't get better I'll make money in commodities because they'll print more money and stocks will be going down a lot," he said.

"I own the euro because everyone is beating it down so badly and the US dollar too," he added.

He said all the main currencies were in terrible shape but he still expected to make money from them.

Rogers told CNBC the only solution to the crisis was to let everyone go bankrupt.

"Get everyone in a room and decide you will go bankrupt. You will survive and we're going to ringfence you. We'll make sure your checks clear. Everyone's deposits are going to be ok, the system's going to survive.

"But we are going to have a lot of pain that way the system would survive because some countries including Germany have credibility," Rogers said.

He said if Greece left the euro it would be a disaster for the Greeks because they would go back to the "same old ways".

"They would start printing money. No one would lend them money. Inflation would go through the roof and the Greek economy would get worse and worse. That's not good for Greece. It's not good for the world," he said.

"It would be better off if we can hold the euro together and we reorganize. People are bankrupt and when people are bankrupt you might as well face reality. Reorganize the assets, competent people (will) come in and you start over from a sound base," Rogers said.

McAlvany Weekly Commentary

A Street View of the Current Gold Market: An Interview With Trader Roy

Posted on 09 November 2011.

A Look At This Week’s Show:
-Gold should see $1850 in the next 60 days and should be very bullish in 2012 as well.
-Two macroeconomic events that will drive gold over the next year are loose monetary policy and the potential collapse of an EU member nation.
-Gold should maintain steady double digit growth through at least 2015. Growth could be much more abrupt should something unexpected occur such as an Israeli strike on Iranian nuclear facilities or a surprise in the U.S. Presidential election.

Gold Insider Conversations: Roy’s experience as an institutional gold trader over a 32 year period brings insight into the present day gyrations in the precious metals markets. We discuss past present and future events as they relate to Gold, and the various issues which are immediately impacting the price of the metals. He can discuss his views freely as a long time friend, but in confidence. We have left his name and the remainder of his bio out so he can share his thoughts with candor.

• 
• 

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Financial Times Deutschland joins hunt for Germany's gold

Dear Friend of GATA and Gold:

The long clamor about the German gold reserves by GATA and particularly by our friends, the German journalist Lars Schall and the German market analyst Dimitri Speck, this week caught the attention of the German edition of the Financial Times, which published a story headlined "Speculation and Rumors: The Hunt for the Treasure of the Bundesbank."

The Financial Times Deutschland confirms, as GATA has reported, that most of the German gold is stored outside the country, partly for international security reasons but more so now for ease of trading and general subservience to the United States. The FTD story is notable mainly for extracting from the German central bank, the Bundesbank, a statement that no German gold is being leased at the moment.

Unfortunately the FTD's question, or at least the Bundesbank's answer, did not encompass gold swaps, particularly gold swaps with agencies of the U.S. government, also major mechanisms of gold price suppression, which were the focus of Schall's telling recent inquiries of the Bundesbank, inquiries the Bundesbank turned away without answering:

http://www.gata.org/node/9363

And the FTD's story errs completely in asserting: "In the 1960s former Bundesbank president Karl Blessing allegedly sent a letter to the American high commissioner in Germany in which he guaranteed that gold would not be converted into dollars. The letter is unpublished to this day; that's why it cannot be excluded that the commitments went even further."

... Dispatch continues below ...

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In fact the supposedly mysterious Blessing letter was sent, in 1967, not to the American high commissioner in Germany but to the chairman of the U.S. Federal Reserve, William McChesney Martin Jr.; it did not guarantee that Germany would not trade gold for dollars but quite the opposite, that Germany would not trade dollars for gold; and GATA published it in January this year, thanks to the efforts of Speck and University of Texas economics professor James K. Galbraith, who obtained a copy of the letter from the Lyndon B. Johnson presidential library at the university:

http://www.gata.org/node/9547

But the FTD story is a good start by a major news organization in getting interested in the details of gold price suppression. The FTD and other news organizations would perform even better service by pressing the Bundesbank, the Bank of England, and the Federal Reserve about gold swaps, the Fed in 2009 having admitted undertaking them --

http://www.gata.org/node/8192

-- and the Bank of England having refused last month to distinguish its gold loans and swaps from its general reporting of its claimed gold reserves:

http://www.gata.org/node/10635

The Financial Times Deutschland story is appended -- first an English translation provided by Schall and then the original in German.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Speculation and Rumors:

The Hunt for the Treasure of the Bundesbank

Germany is in possession of 3,400 tons of gold, the second-largest gold reserves in the world. But where is the billion-dollar treasure stored? There has been wild speculation about this for years. Financial Times Deutschland went in search of clues.

By Peter Vollmer
Financial Times Deutschland
Monday, November 7, 2011

http://www.ftd.de/finanzen/maerkte/rohstoffe/:spekulation-und-geruechte-...

Anyone who wants to lay his hands on the gold reserves of the Bundesbank -- which are currently approximately 3,401 tons with a current market value of $196 billion -- faces a problem: Where is the gold of the Bundesbank anyway?

This simple question has been the subject of wild speculation. Critical minds claim that the precious metal was largely in the United States, where it was deposited on the one hand during the Cold War as far away as possile from the "Iron Curtain," and on the other hand also as an ideological pledge of loyalty to the alliance of Germany to the United States.

Supercritical spirits even doubt that the Bundesbank has the gold at all.

Let's take one thing at a time.

The big gold reserves of the Federal Republic -- according to recent data from the the mining lobby World Gold Council the second largest in the world after the U.S., which holds with 8,133 tons, more than twice as much -- date from the 1950s. With the economic miracle, West German exports boomed and many nations paid in gold.

In 1968, Germany held 4,000 tons -- the culmination of the German gold holdings. A large portion of these reserves was, however, never transported, which is both logistically and actuarially difficult. The gold simply changed hands at the great trading centers in New York, London, or Paris without ever changing the local storage locations there.

During the Cold War, it seemed too uncertain to deposit the gold at the headquarters of the Bundesbank in the financial metropolis Frankfurt -- just 100 kilometers away from what in the Cold War was called the "Fulda Gap" -- a spot at the inner German border, which would have been ideal for an invasion by Warsaw Pact troops in wartime because of its topography.

Over the years Germany's gold reserves decreased slightly, especially since the gold price dropped between 1980 and 2000, interrupted only by occasional convulsions. With the gold price increasing beginning in 2001 from below $300 per troy ounce to $700 in 2006 and finally above $1,000 in 2008, the perception of gold in the public mind changed, and more and more critical minds were interested in the whereabouts of the gold.

But the Bundesbank was tight-lipped: Its former chief executive, Hans-Helmut Kotz, told the magazine Stern in 2004: "The biggest part of our gold reserves is held at the U.S. Federal Reserve, the Bank of England, and the Banque de France, in that order." Never again has any representative of the Bundesbank expressed himself in such detail.

Via a written request to the Federal Government, Member of Parliament Peter Gauweiler received in November 2010 no further details of the storage locations but learned that the Bundesbank maintains its gold holdings in physical form -- not in the form of dodgy, windy delivery promises of banks that may be cash-strapped in time of crisis -- and that lending would be made in the current low-percentage range.

... Gold Lender Bundesbank

So anyone who does the treasure hunt has to patch up a map first: for example, from rumors -- 2.300 of the 3.400 tons are allegedly in the vaults of the Federal Reserve Bank in Manhattan. That would be more than two-thirds of the total gold reserves. The testimony of former Bundesbanker Kotz would not be contradicted by that. And because the Bundesbank is so tight-lipped, a lot of yarn is spun.

This also implies that the central bank would have lent the gold to collect interest on the loan -- and to give unspecified market forces such as banks the opportunity to suppress the gold price by selling the borrowed gold at the market. That would be a classic short sale, for which specualators are blamed in the stock and bond markets, and there would have been a lot of winners except for gold owners and producers. The central bank would receive interest for lending the gold that would otherwise uselessly lounge around.

Speculators could suppress the price with the sale of the borrowed gold and buy the gold back later more cheaply and pocket the difference as profit, more so as one pushes the gold price down. And both banks and central banks have an indirect interest in a low gold price, even if their gold reserves are worth less. The price of gold is ultimately a crisis indicator of system stability and future inflation rates; the higher the gold price, the higher the stress in the system, which neither banks nor central banks want.

But either the Bundesbank is lying or the conspiracy theory of "gold price suppression" via short selling with borrowed gold is wrong, because at the request of the Financial Times Germany, the Bundesbank announced that "at present no gold is lent."

Thorsten Schulte has neither a wooden leg nor an eye patch -- only his nickname fits the image of the treasure hunt. The "Silver Boy" is an expert in precious metals. He says: "Of course it is suspect that the Bundesbank reveals so little." There are several explanations. One is that the Bundesbank appeals to reasons of security and business policy.

... 'Diplomatic consideration for the U.S.'

In various Internet forums it is conjectured that the reserve was a dead pledge to the United States. But at the Bundesbank they do not want to hear of that: "We are guided by safety, cost efficiency, and liquidity," said a spokeswoman. Changes of storage locations were not excluded in general, but a transport to Germany's own vaults would be associated with high costs. Therefore, much of the gold is stored abroad.

Most experts consider it likely that Germany does not want to offend the wooden leg of the U.S.: "I suppose it's also about diplomatic consideration for the U.S.," says Schulte.

In the 1960s former Bundesbank president Karl Blessing allegedly sent a letter to the American High Commissioner in Germany in which he guaranteed that gold would not be converted into dollars. The letter is unpublished to this day; that's why it cannot be excluded that the commitments went even further. And even if not: "To carry the gold away from the U.S. would be a distrust signal first-class," says Schulte.

The situation is not as dramatic anyway. Parts of the German gold are simply in New York, Paris, or London because it can be traded or sold better this way. About 60 central banks store their bullion in Manhattan, thus saving the cost of transport. "In addition, there are reputable sources who say that the Bundesbank would bring small quantities to Germany time after time," says "Silver Boy" Schulte.

Therefore, the gold reserves that lie under the Bundesbank branches in Mainz and Frankfurt had not for long been at more than 4 percent of the total, as gold fans speculated over and over again. The Bundesbank told the FTD that "a large part of its gold reserves" are in Germany. However, more precise statements will not be given for the time being, and therefore conspiracy theorists will continue in dark nights at the fireplace spinning yarns about the German gold.

Ten Million Homes (19%) Face Foreclosure; 50% of Mortgages Underwater

Fifty to Seventy-Five Percent. That’s how much home prices will slide before this is all over.

Here’s the latest evidence that what we’re looking at is not just some short-term real estate cycle:

Of the 55-million families with mortgages, 10.4-million of them “are sliding toward failure and foreclosure”—a tragedy that will depress the U.S. housing market for years to come, a result of too many houses for sale and too few buyers.

That’s the blunt conclusion of distinguished economics journalist William Greider, to be published in an article in the November 14th issue of The Nation magazine.

America’s “Economic recovery will have to wait until that surplus (excess houses) is gone, because the housing sector has always led the way out of recession,” Greider says. “The more housing supply exceeds demand, the more prices fall. The more prices fall, the more families get sucked into the deep muddy. The vicious cycle is known in the industry as the death spiral. So far, there’s no end in sight.”

Source: Global Research via Before It’s News

The fact is, easy money from the Fed and no-income financing by banks took home prices to obscene levels during the real estate boom. The home values we saw at the peak in 2006-early 2007 were totally manufactured and without merit. That’s why over half of American households are now underwater in their mortgages:

According to a note by real estate expert Mark Hanson, referenced by CNBC’s Diana Olick, the truth of the matter is that, if one were to truly factor all implicit equity reductions, the number of underwater houses is…half. Expect this to proceed like a shockwave in the PrimeX space once the market comprehends what this means…

Source: Zero Hedge

The banks will never recover this money.

Nearly 20% of homeowners will, at some point during this crisis, fall into the delinquency/foreclosure process. That is a massive number. Out of 100 homes that may be in your neighborhood, on average, 20 of the homeowners will not be able to make their monthly mortgage payments. Of those 100 homes, fifty of them are underwater in their mortgage.

The numbers will likely get even worse, especially when you consider that interest rates will explode as US dollar risk becomes reality to investors around the world. Imagine what would happen if mortgage rates reached 1981 levels and were in excess of 10% (as high as 18% in some cases!). You think we have a glut of homes on the market now? At 10% interest or more, sales will almost completely lock up.

You can say good bye to the housing recovery for at least a decade. It’s just not going to happen.

The Gold Investor's Biggest Risk

While we're convinced that our gold and silver investments will pay off, they don't come without risk. What do you suppose is the biggest risk we face? Another 2008-style selloff? Gold stocks never breaking out of their funk? Maybe a depression that slams our standard of living?

Though those things are possible, we at Casey Research don't see that as your greatest threat:

"Your biggest risk is not that gold or silver may fall in price. Nor is it that gold stocks could take longer to catch fire than we think. Not even the prospect of the Greater Depression. No, your biggest risk is political. As bankrupt governments get increasingly desperate for revenue, any monetary asset held domestically could be a target. It is absolutely essential that every investor diversify themselves politically. In fact, at this point, it is the one action that should be taken before anything else." ~ Doug Casey, September 2011

I know many reading this are prudent investors. You own gold and silver as solid protection against currency debasement, inflation, and faltering economies. You set aside cash for emergencies. You have strong exposure to gold stocks, both producers and juniors, positioned ahead of what is likely the next-favored asset class. You feel protected and poised to profit.

Yet, despite all this preparation, you remain exposed to one of the biggest risks.

Similar to holding a diversified portfolio at a bank without checking the institution's solvency, many investors keep their entire stash of precious metals inside one political system without considering the potential trap they've set for themselves. While storing some of your gold outside your home country is not a panacea, it does offer one important thing: another layer of protection.

Consider the exposure of the typical US investor: 1) systemic risk, because both the bank and broker are US domiciled; 2) currency risk, as virtually every transaction is made in US dollars; 3) political risk, because they are left totally exposed to the whims of a single government; and, 4) economic risk, by being vulnerable to the breakdown of a single economy.

Viewed in this context, the average US investor has minimal diversification.

The remedy is to internationalize the storage of some of your precious metals. This act reduces four primary risks:

Confiscation: We don't know the likelihood of another gold confiscation. But we do know that things are working against us – particularly for US citizens. With $14.7 trillion of debt and $115 trillion of unfunded liabilities, the US government will likely pursue heavy-handed solutions. Under the 1933 FDR "gold confiscation" in the US (the executive order was actually a forced delivery of citizens' gold in exchange for cash), foreign-held gold was exempted.

Capital Controls: Many Casey editors think some form of capital controls lie ahead, limiting or eliminating a citizen's ability to carry or send money abroad. If enacted, all your capital would be trapped inside the US and at the mercy of whatever taxing and regulating schemes the government might concoct. Although you might be able to leave the country, your assets could not travel with you.

Administrative Action: There are plenty of horror stories of asset seizure by a government agency without any notice or due process, possibly leaving the victim without the means to mount a legal defense. Having some gold or silver stored elsewhere provides what could be your only available source of funds in such a scenario.

Lack of Personal Control: Having gold and silver stored elsewhere adds to your options. You will have a source of funds available for business, entrepreneurial pursuits, investment, or pleasure.

Notice above we said these risks can be reduced, not eliminated. There is no perfect solution; US persons could, for example, be compelled to pay a "wealth tax" on assets held worldwide, or even repatriate them in a worst-case scenario. Absent a crystal ball, the political diversity of asset location is an essential strategy against an uncertain future.

Foreign-held assets also require greater awareness and planning:

1. Access to your metal or sale proceeds may not be quick. Therefore, this option is for those with some gold and silver stored at or near home. We do not recommend storing all your precious metals overseas; that defeats one of its purposes, to have it handy for an emergency.
2. While we think the US poses the greatest threat, a foreign government could move to control certain assets as well. The risk varies by country and is generally greater within the banking system than with private vaulting facilities.
3. Understanding and complying with reporting requirements is essential.

The bottom line, though, is that foreign-held precious metals can mitigate risk and give you more options. And as your metal holdings grows, diversification becomes more crucial.

Given our current rapacious climate, it's likely that simply buying gold won't be enough. We strongly suggest every investor diversify one's bullion storage outside their current political regime. The option may not be available someday, leaving you vulnerable without a secondary source of bullion.

We advise taking advantage of the opportunity before it is gone.

Arrivederci La Dolce Vita

For a moment there, it seemed that Silvio Berlusconi, the Italian Prime Minister, was one lucky man.

Just as it seemed as if an end had finally been scripted for the ongoing Greek sovereign debt tragedy, allowing the European Union to focus on Italy and its debt problem, Georgios Papandreou, the Greek Prime Minister, added a new act to the drama. By calling for a referendum on the austerity package his government negotiated, Papandreou's move shifted the spotlight briefly from Italy back onto Greece.

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Click for a large version

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Of course, there is consternation in Brussels, Berlin and Paris concerning the sudden need to provide the average Athenian with a say in the matter. Now, Berlusconi is no stranger to consternation: he is a past master at turning it to his advantage. But this time he may not be able to perform a sleight of hand. Chancellor Merkel and President Sarkozy are in no mood for the further antics of politicians from the Mediterranean. He must forge a deal to keep Merkel and Sarkozy from adding to the chorus of criticism of his government.

The problem is not the magnitude of Italy's debt or the size of its deficit. The problem is the Italian parliament's inability to reach a consensus on fiscal reform — in particular, on pruning Italy's expensive welfare state. Adding to the urgency is the degree to which Italy's economy and financial markets have become integrated within the EU. While a Greek exit from the Euro can be contemplated, Italy's departure cannot.

At the end of 2010, Italy's central government debt to gross domestic product (GDP) was 127 percent (compared to 147 percent for Greece). The central government's budget deficit is projected at a modest 3.9 percent (of GDP) for 2011 and 2.6 percent for 2012. Nor is the country's net international investment position (IIP) alarming. Italians at the end of the 1st quarter had more foreign liabilities to assets, totaling 26 percent of GDP. In comparison, Greece has a negative IIP of 101 percent (of GDP).

Here is where the differences end. Italy, like Greece, is dependent on foreign sources to finance its budget deficit. Using Banca d'Italia data, we estimate foreigners financed €798 Billion of €1.5 Trillion in government debt as of 2009. In part, this reflects a domestic imbalance. But, it is also a reflection of the benefits currency integration has brought to Italy and other Euro nations. A common currency enabled portfolio shifts difficult to effect with 17 different currencies. Risk-adverse northerners can now buy comparatively safer government debt, while Italians can earn more on their savings by lending for productive uses such as business investment. All benefit from the expanded opportunity set.

The cost: integration reduces the room for maneuver in a crisis. Sorting out the spaghetti of capital flows is well nigh impossible. Perhaps it is time for Berlusconi to say Arrivederci to La Dolce Vita.

Euro has one of worst drops this year Italian 10-year yield tops 7% after margin boost; sterling weakens

The euro took one of its biggest hits this year against the U.S. dollar Wednesday after Italian government bond yields surged, raising fears the euro zone’s third-largest economy could need a bailout.

Risk-averse investors moved to the perceived safety of the U.S. currency.

The euro EURUSD -2.02% fell to $1.3553, down from $1.3836 in North American trading late Tuesday. It’s only the fourth time this year the shared currency has fallen 2% or more.

The dollar index DXY +1.57% , which tracks the U.S. unit against a basket of six major currencies, rose to 77.885 from 76.620 on Tuesday.

The yield on Italy’s benchmark 10-year government bond IT:10YR_ITA -0.66% rose as high as 7.44%, according to FactSet Research data, then eased off to 7.25% in afternoon trading. The spike followed a decision by LCH.Clearnet to raise margin requirements on Italian debt. See story on Italy’s bonds, margin hike.

“Italian 10-year yields moved above 7% and excessive market volatility triggered circuit breakers in the futures market as increased uncertainty over the political situation in Italy led to widespread risk aversion,” said Chris Walker, strategist at UBS.

On Tuesday, the euro received a lift after Silvio Berlusconi promised to step down as Italy’s prime minister pending parliamentary approval of new austerity measures and structural reforms. Read about euro, Berlusconi resigning.

Now the question is what kind of government fills his place, and whether it tackles the politically-sensitive pension and labor rules in a way that restores confidence in Italy, said strategists at Brown Brothers Harriman.

“The most likely scenario, in the coming weeks, is that the current coalition rally around another prime minister candidate that it feels can gain domestic and international confidence,” said Marc Chandler, global head of currency strategist at the firm.

The second most likely scenario is the formation of a “technocratic” government, which may be more effective at implementing economic reforms quickly, he said.

“This is likely the most market-friendly outcome,” Chandler said.

The alternative would involve early elections and “be the worst outcome for sentiment as it would increase uncertainty and of course stall progress on economic reform,” he said.

European equities tumbled and U.S. stocks dropped, with the Standard & Poor’s 500 index SPX -3.68% down 3.6%. Still, some investors said the reaction was likely overdone.

“With a new Italian government to come in [once austerity measures are in place] and a unity government on the way in Greece, forward-looking names will probably be buying [euros] on the $1.36 handle, maintaining a range-trading environment for the euro-dollar,” said Sebastien Galy, strategist at Societe Generale. “The wave of fear should travel through in the U.S., before some sense comes back to the market and we see some relative normality.”

Also Wednesday, the British pound GBPUSD -1.03% changed hands at $1.5926, down from $1.6115 Tuesday. The Bank of England is expected to leave monetary policy unchanged Thursday, but may further boost its bond-buying program as soon as next month, analysts said. Read story about Bank of England meeting.

Bob Chapman: International Forecaster 9-Nov-2011

US MARKETS

We have been in or associated with gold and silver related assets and commodities for well over 50 years and we find we are not convinced that the failure of MF Global was just that, a failure.

John Corzine’s background makes us wonder if something else may have been afoot. He had been a former CO-chief operating officer of Goldman Sachs, a high-level, political operator and a Senator and governor from New Jersey. From our viewpoint this is cause for questioning.

In 2005 Man acquired Refco, which had failed. That became MF Global. The forced takeover worked out well.

This time it worked out differently. There was liquidation only and all MF Global employees were dismissed and prohibited from functioning. This meant clients were frozen in their accounts, something that heretofore had never happened previously.

Within this tragic event Mr. Corzine was to receive $12.1 million in severance, which we are told he is going to forego. We find that unusual. That is a lot of money. Could it be that Jon Corzine is a slippery sociopath? Corzine was a professional and a former top person at Goldman Sachs. Was he capable of making such a monstrous error? We do not know for sure, but we don’t think so. He was wired into all the right people in government and within brokerage businesses, particularly at Goldman. Could Corzine have deliberately taken MP down, so Goldman could move in and pick up the pieces for a pittance? Could the buyer be a connection to Goldman? Could it be that Corzine’s mission was to destroy MF Global? This is a connected professional; why would be load up on the junk bonds of Greece, Ireland, Portugal, Italy and Spain? He had a lot more intelligence than we had and we would not have done that. We believe the possibility exists that MF’s failure could have been a giant fraud. We will get a better idea when we see who the buyer is. (more)

Buy This "Forever" Stock Now -- Before it's Too Late: KO

Despite the ongoing debt crisis in Europe, and the insane market volatility that comes with it, I'm going to go out on a limb and say the economy has turned a corner. In the long run, I think equities markets will follow a generally upward, though very rocky, path. At this time next year, my best guess for the Dow Jones Industrial Average is to be around 13,050, and for the S&P 500, roughly 1,365 -- about 10% higher than today in both cases.

While such gains would be great, the possibility raises a pressing issue -- getting certain high-quality, dividend-paying blue chip stocks before prices become prohibitive. [It's exactly times like these -- just before the stock market is likely to go on a major run -- that makes it ideal to scoop up these "forever stocks," which StreetAuthority Co-founder Paul Tracy talks about in this special presentation.]

Since relatively safe stocks like these are very popular right now, some are already on the verge of becoming overpriced. So retirees and others seeking safe havens should consider grabbing shares soon. To wait much longer would be to risk buying too high, muting future appreciation potential and increasing the chance of painful losses.

I could be talking about any number of "forever stocks," but the one I have in mind is The Coca-Cola Co. (NYSE: KO). Because of its huge size, global presence and enduring business, the stock's a great safe haven. It's much less volatile than the market, so it lets you sleep better, and it's yielding a solid 2.8%. But at around $68 per share, Coca-Cola has pretty much hit fair value.

There are numerous signs of this, including the stock's price-to-earnings (P/E) ratio of 12.5, which isn't far below the average P/E ratio for the soft drinks industry, which is 13.7. The stock's price-to-sales (P/S) ratio of 3.4 is already noticeably higher than the industry average of 2. So is Coca-Cola's price-to-cash flow (P/CF) ratio -- currently 17.4, compared with an industry average of 13.

Even so, shares are worth current prices because Coca-Cola is likely to keep thriving. Sales have risen 9% annually for the past five years, and analysts project 10.5% growth for the next five years. Earnings, which posted 9% annual growth during the prior five years, are expected to advance 10% annually. Analysts foresee solid dividend growth of 9.5% a year, only slightly off the 10.5% pace of the previous five years.

Although mature North American markets will certainly continue to be a crucial revenue source, they may not contribute all that much to future growth. Sales in the region have been unimpressive, rising by only 1% in the third quarter, for instance. As is the case for most top companies these days, by far the best results are to be found in emerging markets like China, where sales volume rose 11%, India (19%) and Mexico (8%) in the third quarter. Emerging markets should provide the best growth opportunities in the long-term, too, as people in those regions become progressively wealthier and demand more bottled beverages.

Because of this, Coca-Cola plans to invest $20 billion in emerging markets by 2020, focusing mainly on Africa, Mexico, Russia and China. One of the latest investments, announced April 12 of this year, was a three-year, $62-million spending program to upgrade existing facilities in Kenya, which include seven bottling plants and 22 production lines. Of the $20 billion Coca-Cola plans to invest in emerging markets during the next nine years, $12 billion is earmarked for Kenya because management is especially bullish on the African region.

Risks to consider: Rising commodity prices have been a major obstacle for many companies, including Coca-Cola. Greater-than-expected price increases in the future, particularly for sugar, could significantly reduce earnings.

Action to Take --> Analysts see Coca-Cola's stock rising to between $105 and $130 a share by the end of 2016, a projected gain of about 55-90% from current prices. Considering the potential headwind of rising commodity costs, and the fact that the Federal Reserve is now forecasting much slower economic growth than it originally predicted, I think the lower end of those ranges is probably more realistic.

Still, even if the stock were only to rise 55%, you'd still be looking at an annual return of 11.6% for the next four years -- not bad at all, and likely better than what the overall market will deliver during that time. So I disagree with those who say now isn't the time to invest in Coca-Cola. Now's an excellent time -- just don't wait too long.