| Gold Market on U.S. Elections: So What? Posted: 14 Oct 2010 03:52 PM PDT Except on rare occasions I do not do guest posts on this blog. This is one of the exceptions. It is from my friend Charles Goyette, author of the The Dollar MeltdownFrom Charles Goyette... Gold Market on U.S. Elections: So What?
For those of us who recognize the complicity of both Republicans and Democrats in our economic calamity, it has been satisfying to see the party establishments of each pummeled this election season. But as far as averting the currency crisis I describe in The Dollar Meltdown, the gold market says it's too little, too late.
It's no surprise that politicians hear only what they want to hear, but the Democrats take a new world indoor record for tone-deafness into the election. As the year opened with real unemployment at double-digit levels, all the President and the Democrat establishment could think about was passing Obamacare. They may be proud that they stayed on message, never mind that for most people a health care plan starts with a job and some savings.
With polls suggesting Republicans are set to re-take the House, it looks like the Democrats have a glass jaw to go along with that tin ear. And while scattered tea party victories gave the Republican establishment the thrashing it so richly deserved, the bad news is that none of it matters to our financial prospects. At least that's the message from the gold market.
Who can disagree? Unless you think that Republicans will want to go into the next election cycle having taken on Social Security, Medicare, Medicaid and other entitlements, there is not much hope that they will do anything meaningful about fiscal policy. Announced on September 23, the Republican Pledge to America promised to save "at least $100 billion in the first year alone." $100 billion a year? They can't be serious. By the end of September, just a week later, the federal debt had already grown by another $100 billion. Of course Republicans will tinker with the hated Obamacare just enough to deliver up some form of Boehner-care. Sorry, but the chance to earn lobbyist affection and future campaign contributions trumps any thoughts about simply facing up to federal insolvency and getting government out of health care.
Some real money could be saved rolling back the American empire. Congressman Ron Paul and others calculate total war and foreign spending at about $1 trillion a year. In this context, a return of the Republicans reminds us of Talleyrand's comment on the Bourbon dynasty that returned to the throne of France after the abdication of Napoleon: They "had learned nothing and forgotten nothing." Republicans seemed to have learned nothing and forgotten everything. Betraying a hubris not seen since Bush set off to "rid the world of evil," the pledge from November's likely winners includes "bringing certainty to an uncertain world." Republicans do take their military Keynesianism seriously. Just months ago Republican congressmen came together to support President Obama's surge in Afghanistan with a $59 billion emergency spending bill. Now they are campaigning about a "robust defense," one category of spending that even the new members from the tea parties aren't inclined to resist.
On the monetary front, Federal Reserve officials, having forgotten at least the French Revolution and probably the 1970's as well, are counting on inflation to kick start economic growth. Money printing is the Fed's old time religion, but at least they are going to the trouble of bottling it under new names: liquidity operations, deficit accommodating, and quantitative easing. When chairman Bernanke said something euphemistic last week about "additional purchases," gold shot up again, joined by silver and oil. And the dollar moved decisively lower. It's now down 12 percent since June, resuming its long-term slide. Markets are said to be pretty good at discounting future events. Haven't they heard that the fiscal conservatives will re-take Washington?
It is clear that the rest of the world is similarly unimpressed by Fed euphemisms or the dollar's prospects, no matter who wins. Like the picnic ramada at the park where people take cover for a while when it begins to rain, investors take cover with the dollar briefly during a crisis. They did so in the 2008 mortgage meltdown and again during the Euro debt crisis. But like a ramada, nobody wants to live there. Or wait out a really bad storm.
Where does one weather a currency crisis? Take a look around. Reuters reported this week on a Swiss private banker who handles clients with at least $50 million to invest that they are buying gold, sometimes by the ton, and moving it out of the financial system. According to the Financial Times, JPMorgan, having recently built a vault in Singapore, has reopened an underground gold vault in New York, while Deutsche Bank and Barclays may be opening new vaults in London. India illustrates the trend: investment demand in India has grown to 92.5 tons in the first six months of this year, compared to 25.4 tons a year earlier; this time last year India's central bank lightened its dollar reserves substantially, taking down 200 tons of gold in one move. They aren't alone.
Central banks around the world, long net sellers of gold reserves, have become buyers, among them China and Russia. Gold keeps making new all-time highs. And it doesn't seem to care about the Republican's prospects this fall.
The above article was also a guest post on CNBC with a different title Goyette: Finding Shelter in a Currency CrisisIf you have not yet read The Dollar Meltdown, please do so. It is well worth a look. Here is a review I did shortly after it came out: The Dollar Meltdown: Book ReviewBoth Parties FlawedI agree with Charles that gold does not give a hoot about the elections. Moreover I can find numerous flaws with both parties, and commented on it earlier today in Geithner's Search for Scapegoats Avoids the Harsh Truth No One Wants to HearRepublicans Need to Admit US Cannot Afford to be World's Policeman
Regardless of what Republicans may think, we can no longer afford to be the world's policeman.
For details please see Cost of War Since 2001; Federal outlays and revenues, 1940-2015.
Democrats Need to Admit Problem with Public Unions
States are bankrupt because of pension promises that cannot and will not be met. Public unions have destroyed states and municipalities.
State pension plans are $3 trillion in the hole. For more details, please see Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?
Thus, no matter what Democrats think, we cannot afford our love affair with public unions, union wages, and most importantly, union benefits.
Both parties need to rework the healthcare bill so that it contains provisions that will actually encourage lower costs and not damage small businesses. The bill as it sits made matters worse.
Search for Scapegoats Avoids the Truth
Somehow, some way, if you listen to Geithner and Krugman, all of these problems are supposed to go away if only China would float the Yuan.
Well Geithner's head is up his ass because none of this will go away as long as the US looks for scapegoats instead of admitting reality. That reality is we are on the road to bankruptcy and neither Keynesian nor Monetarist stimulus will help.
Our problems are structural in nature and everyone needs to admit there will be no quick solutions and we cannot spend our way out of this mess. The only thing that can put the US back on track is fiscal prudence and sound monetary policy. Unfortunately, no one wants to hear the truth.
Election RecapThat said, I believe this election will make a difference. Obama has proven to be every bit the warmaonger as Republicans. However, the Republicans can and will block cap-and-trade, and will not pander to public unions as much as Obama will. It is critical for Republicans to retake the House, no matter how flawed most of them are regarding military spending (damn flawed). The reasons should be obvious, Obama and the Democrats have continued the inept bailout policies started by Bush, pushed through a disastrous healthcare bill that needs to be scrapped and started over, the Democrats want to pass preposterous cap-and-trade legislation, and the Democrats are pushing legislation to mandate collective bargaining. That is on top of their war mongering. The county cannot afford that package. So yes, this election does matter, whether gold thinks so or not. In short, Obama and the Democrats have not done a single thing correct, in spite of a golden opportunity (a crisis) to do so. Please Support Ron Paul Type RepublicansBear in mind, I am not a Republican. I am a Ron Paul libertarian as is Charles Goyette. Both of us back candidates as close to that philosophy as we can find. Please give your support to Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Gallup Poll Shows Discretionary Spending at All Time Low; Trends Support Double-Dip Theory Posted: 14 Oct 2010 09:35 AM PDT In a trend that may be telling for the upcoming holiday shopping season Gallup reports Lower- and Middle-Income Spending Lowest Since January '08Lower- and middle-income Americans' self-reported average daily spending in stores, restaurants, gas stations, and online averaged $48 per day during September -- down $6 from August and $16 from July. Consumer discretionary spending by these Americans making less than $90,000 a year is now at its lowest level since Gallup began daily tracking in January 2008, as the recession was just getting underway.
Upper-Income Spending Remains Essentially Flat
Upper-income Americans reported spending an average of $118 per day in September -- up $9 from August but virtually the same as they spent in June and July. Spending among this group making $90,000 or more annually is not much different from the $114 they spent in September 2009. Only once -- in May -- has 2010 upper-income spending exceeded the 2009 "new normal" upper-income spending range of $107 to $121 per day.
Spending Trends Could Mean Double-Dip
Gallup modeling suggests that lower- and middle-income spending is significantly more sensitive to job market conditions than is upper-income spending. In this regard, the September decline in lower- and middle-income spending may reflect the sharp increase in unemployment over the same period and continued high underemployment levels. Further, the lagged effects of continuing high and increasing unemployment are probably yet to be fully felt.
On the other hand, upper-income spending tends to be more responsive to the "wealth effects" associated with higher stock and commodities prices. Although upper-income spending hasn't been increasing in response to the best September on Wall Street in 71 years -- at least to this point -- upper-income Americans have maintained their spending, while that of other Americans has declined.
Given this context, the recent Federal Reserve discussions about another round of quantitative easing seem to make a lot of sense. The Fed needs to do everything it can to keep the U.S. economy from experiencing another decline in economic activity -- a so-called double-dip. While it is not clear that this Fed effort will help the overall economy in the immediate term, anticipation of it has Wall Street surging and the dollar plummeting. In theory, the resulting wealth gains could have the beneficial effect of increasing upper-income spending.
Regardless, Gallup's September spending and jobs data suggest that the possibility of a double-dip is no longer negligible. Congress needs to show the same sense of urgency as the Fed concerning what it can do for jobs and the economy when it convenes in its planned lame-duck session after the midterm elections. Quantitative Easing No SolutionThere is no merit in Quantitative Easing. The last thing we need is another stock market bubble just to keep upper income groups spending. Moreover, QE has given support to commodity prices even though it has done nothing, nor will it do anything for prices received by small businesses for their goods and services. Gallup, like the Fed, ignores the other side QE. Forcing interest rates low damages those on fixed income barely scraping by on 0% interest in there savings accounts and CDs. NFIB Gets it correctHere is an appropriate snip from NFIB Small Business Trends for October Continue to Show No Recovery, Inflation Not a Threat; Fed Governor Hoenig Blasts Bernanke's QE StrategyEvery month I report on NFIB small business trends and every month it looks like a broken record. October is no different. Please consider NFIB Small Business Trends for October.
Inflation Not A Threat
Inflation? Not a threat. Far more owners have cut prices than raised them for 21 months in a row. Deflation? It certainly feels that way to a quarter of the owners reporting price declines for the goods and services they produce and sell, and apparently a majority at the Federal Reserve are now worried. New "inflation targets" are being floated out there, like two percent (characterized as price stability?). This will be the justification for more "quantitative easing". Buying more Treasury securities may push rates even lower, but to what end? The impact on home sales will surely be minimal. With mortgage rates at record low levels already, even lower rates are unlikely to invite new entrants to the market. Of course, there may be other "agendas" such as a weakening of the dollar and support for asset prices. This is very dangerous as hundreds of billions of dollars are being "allocated" based on false prices (interest rates). The charade can't be maintained forever and weakening the dollar only invites others to join the party. And lost in all of this focus on credit is the loss of hundreds of billions in interest rate income for savers. Certainly their spending has been curtailed as a result. Every dollar a borrower saves from some sort of refinance deal is a dollar of interest income lost to savers. Even lenders will lose income as loans with interval rate re-sets will be set based on historically very low Treasury rates (lowering net interest margins). No wonder confidence is low and uncertainty is high, it is hard to make sense of this. Gallup's modeling of trends is highly likely to be correct, but its support for QE is misguided as the more detailed analysis by the NFIB shows. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Ceridian Pulse of Commerce Index (PCI) Declines Second Month, GDP Estimate Sinks to .7% to 1.7%; Recovery Grinds to a Halt Posted: 14 Oct 2010 08:09 AM PDT Ceridian reports PCI Declines for Second Consecutive Month in SeptemberThe Ceridian-UCLA Pulse of Commerce Index™ (PCI) by UCLA Anderson School of Management, adjusted for season and for monthly workdays, fell 0.5% in September after falling 1.0% in August.
The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers, and consumers, fell .5 percent in September after falling 1.0 percent in August, which is the first time the index has experienced a consecutive monthly decline since January 2009. Furthermore, August and September 2010 together produced the worst combined two-month decline since the recessionary months of January and February 2009.
The decline indicates four consecutive months of limited to no increases in over the road movement of produce, raw materials, goods-in-process and finished goods since the PCI peaked in May 2010. Moreover, the PCI forecasts GDP growth in the third quarter of 2010 at an anemic 0.7 percent to 1.7 percent, below the PCI's previous 1.5 to 2.5 percent estimate reported last month (which at the time approximated the consensus economic view). The PCI forecast of the Federal Reserve's monthly Industrial Production (IP) index (to be released later this month) also signals IP growth for September to be very close to zero with an even odds chance for a negative number.
"The PCI tells us that inventory is stalled on the nation's thoroughfares. The good months of growth are now seemingly in our rear view mirror," said Ed Leamer, chief PCI economist and director of the UCLA Anderson Forecast. "Our economy's loss in traction is alarming and for the 'Cassandras of the double-dip,' may foretell a coming decline in GDP and spike in unemployment. However, with residential investment, consumer durables, business spending, and other component indicators already at or near record lows relative to GDP, it remains unlikely that we will experience an outright decline into recession."
Pulse of Commerce (PCI) Chief Economist Ed Leamer and Ceridian's Craig Manson say economy has stalled citing second consecutive monthly drop in indexed activity; economy lacks momentum as PCI-based forecasts for Q3 GDP and Sept. IP near new lows. October PCI ReportThere are more charts and analysis in the Ceridian-UCLA Pulse of Commerce Index™ October PDFSeptember Decline Means Minimal Third Quarter GDP Growth.
The Ceridian-UCLA Pulse of Commerce Index™ (PCI) by UCLA Anderson School of Management, adjusted for season and for monthly workdays, fell 0.5% in September after falling 1.0% in August, which was the first time we have experienced a consecutive monthly decline since January 2009. August and September together this year have produced the worst combined two-month decline since the recessionary months of December 2009 and January 2010.
The PCI began 2010 strongly with growth of the first quarter compared with the fourth quarter of 2009 equal to 9.7% at an annualized rate. But the second quarter growth compared with the first was 6.2% annualized, and now the third quarter is only 2.1% above the second. In other words throughout the year, growth of the PCI has moved inexorably less and less, edging toward zero.
Last month, with two of the three months of the quarter recorded, we reported that "the PCI is currently consistent with a GDP growth number for the current quarter in the disappointing range of 1.5-2.5%, which approximates well the current consensus view of the economy." Now that the full quarter of PCI data is available, our PCI-based GDP forecast for growth in the 3rd quarter of 2010 has sunk to an anemic range 0.7% to 1.7%.
The declines in the PCI in the last two months suggest that the industrial production growth for September will be very close to zero, with even odds of a negative number.
Year-over-year growth in the PCI has continued to fall since May's exceptional number of 9.0% — 8.6% in June, 8.0% in July, 6.0% in August and now 5.8% in September. With the three-to-one relationship between the PCI and GDP growth in recessions and recoveries, that 6% figure translates into 2% GDP growth, far below what is needed for a healthy job market.
...
But most importantly there is an ominous bending of the PCI at the end of the series with the third quarter returns now fully in.
The graph includes a trend line labeled "Full Employment GDP". We seem to be slipping farther from that trend as the recovery grinds to a halt. There are many additional charts and data analysis in the report. Inquiring minds will want to give it a closer look.
Recovery Grinds to a HaltThis recovery is on its last legs, assuming you believe there was a recovery and not a mirage caused by unsustainable stimulus. Even if there is no double-dip, GDP of 2% is the stall rate, consistent with no job growth. As weak as the 3rd quarter looks, indications are that the 4th quarter will be worse. I still expect new highs in the unemployment rate. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Geithner's Search for Scapegoats Avoids the Harsh Truth No One Wants to Hear Posted: 14 Oct 2010 05:58 AM PDT Instead of admitting the United States' role in the global economic mess, Geithner Signals China Causing Global Currency InterventionsU.S. Treasury Secretary Timothy F. Geithner blamed China's policy of limiting gains in the yuan for contributing to a round of capital controls and currency-market interventions by emerging economies.
"What's happening is, as China holds its currency down, their currencies are moving up and they're having to work very hard to make sure they're not at an unfair disadvantage with China," Geithner said in an interview with "Charlie Rose" scheduled to air on PBS yesterday and Bloomberg Television today.
Countries from Brazil to South Korea and Thailand have sold their currencies in recent weeks to curb gains that threaten to impede export growth and slow their economies. South Korea, Taiwan, Brazil, Colombia and Russia are tightening rules on capital flows to limit swings in their currencies.
"This issue, which people like to frame as uniquely an American preoccupation, is really much more important to the rest of the world and is really a global problem as a whole," the Treasury chief said.
As talks among officials from the Group of 20 nations began in Washington last week, Geithner warned of a "damaging dynamic" of competitive currency weakening that could limit global growth and said "more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies." US Problems are Largely of US MakingCan someone, anyone, tell me why it is OK for the US to openly attempt to trash the US dollar, but it is not OK for other countries to do the same? Yes, China is clearly part of the problem, but so is the US, Japan, the UK, and every other country that actively pursues a weaker currency hoping beyond hope to stimulate exports at the expense of everyone else. Yesterday I spoke about capital controls in Emerging Market Economies Turn to Capital Controls; Forex Market in State of Disarray; Gold's Message; Life Imitates Art. After 18 holes of golf, I return to find Geither blaming China for emerging market capital controls and the currency interventions of Japan. Does anyone believe that if China floated the Yuan it would solve the world's problems? Hells bells, would it solve any of them? The critical problem in the US is government spending is out of control at the same time consumers are overleveraged in debt. There is no painless solution! Anyone who promises one is an idiot or a charlatan. Republicans Need to Admit US Cannot Afford to be World's PolicemanRegardless of what Republicans may think, we can no longer afford to be the world's policeman. For details please see Cost of War Since 2001; Federal outlays and revenues, 1940-2015. Democrats Need to Admit Problem with Public UnionsStates are bankrupt because of pension promises that cannot and will not be met. Public unions have destroyed states and municipalities. State pension plans are $3 trillion in the hole. For more details, please see Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?Thus, no matter what Democrats think, we cannot afford our love affair with public unions, union wages, and most importantly, union benefits. Both parties need to rework the healthcare bill so that it contains provisions that will actually encourage lower costs and not damage small businesses. The bill as it sits made matters worse. Search for Scapegoats Avoids the TruthSomehow, some way, if you listen to Geithner and Krugman, all of these problems are supposed to go away if only China would float the Yuan. Well Geithner's head is up his ass because none of this will go away as long as the US looks for scapegoats instead of admitting reality. That reality is we are on the road to bankruptcy and neither Keynesian nor Monetarist stimulus will help. Our problems are structural in nature and everyone needs to admit there will be no quick solutions and we cannot spend our way out of this mess. The only thing that can put the US back on track is fiscal prudence and sound monetary policy. Unfortunately, no one wants to hear the truth. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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