Author: Peter Schiff

Those blindsided by the recent financial meltdown are now loudly blaming the free market for its failure to police its own excesses, and are calling for greater regulation to prevent future disasters. But for those who clearly observed the problems developing (in high definition slow motion) the blame can be directed squarely at the policies of the Greenspan/Bernanke Federal Reserve. As has been the case countless times in history, the free market will now pay the price for government incompetence.

In Senate hearings this week, all parties involved completely ignored the Fed’s own culpability in igniting the speculative fever. It’s as if a senior prom had turned into a wild bacchanalia, and angry parents now question why the chaperones failed to notice the disrobing or why the DJ played provocative music, all the while ignoring the bearded gentleman pouring grain alcohol into the punch bowl.

A perfect illustration of the Fed’s failure to take responsibility can be found in Bernanke’s explanations regarding inflation, which he solely attributes to the effects of the rapid increase in global commodity prices. He failed to mention that commodity prices are rising as a direct consequence of his monetary policy, which is debasing not just the U.S. dollar, but currencies around the world. Rather than accepting the blame for creating inflation, Bernanke is shifting the blame to the free market. The Senators are happy to let him get away with it as it provides more evidence to support the “need “ for more government to save the economy from the disastrous effects of unbridled capitalism.

When asked how we got into this mess, Bernanke replied that our problems resulted from an excessive credit bubble characterized by aggressive leverage, reckless lending, and extreme risk taking. Absent from his explanation was the Fed’s role in irresponsibly setting interest rates below market levels, which mispriced risk, got the party started and kept it raging into the wee hours of the morning. The expressed goal of the Fed for much of this decade was, and is, to encourage and facilitate borrowing and lending.
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Author: Peter Schiff

Despite the fact that the Fed still believes that a recession is unlikely to occur, Bernanke & Co. followed up on last week’s emergency 75 basis point rate cut with a 50 basis point kicker on Wednesday. Not to be outdone by the Fed’s generosity, the House of Representatives and the Bush Administration slapped together a $150 billion “stimulus package”, which can only be delayed by the Senate’s desire to join in the bead throwing. On Wall Street these actions were cheered as heroic, with praise and accolades for all (what could be more politically courageous than handing out free money in an election year.) In a recent poll, fully 78% of economists thought these policies were appropriate…while 18% thought that they were not aggressive enough.

A common definition of insanity is the act of repeating the same activity while expecting a different result. Bernanke is now repeating the same mistakes made by Greenspan, yet he and almost everyone on Wall Street expect a different result. The stock market bubble of the 1990s resulted from interest rates being too low, which sent false signals to businesses, causing them to over-invest in information technology, telecom, and dot coms. When that bubble burst, rather than allowing the corrective recession to run its course, the Fed responded by slashing interest rates. The result was an even larger bubble in real estate; causing consumers too borrow far too much money to buy houses and other goodies.

Now that the housing bubble has burst, the Fed is once again slashing interest rates to postpone the pain. However, in order to correct for years of extravagant borrowing and spending, the country is in desperate need of a period of saving and economizing. But by rewarding debtors and punishing savers, lower interest rates actually encourage the opposite behavior. Given how much harm this strategy has already done in the past why should we assume it will work any better now?

Consider a real world example. Suppose your spendthrift neighbor, maxed out on credit card and home equity debt, no savings in the bank, struggling to make ends meet and one paycheck away from foreclosure and personal bankruptcy, comes to you for financial advice regarding what to do with the $1,200 he received in the Federal Stimulus Lottery? Would your advice be to “go out and buy yourself a brand new plasma T.V.”? My guess is that you would suggest he pay down his debts. If you were a good friend you might help him devise a budget to put his financial house back in order. Such a plan might include trading in his Mercedes SUV for a more fuel efficient Honda, brown bag lunches instead of expensive restaurants, tearing up department store charge cards, cancelling vacations, cutting back premium cable channels, etc. When you are neck deep in debt, the solution is to economize, ratchet down your lifestyle and repair your personal balance sheet. In other words, you go though your own personal recession.

Would your advice be any different if it was not just one neighbor asking but 300 million? If it’s wrong for an overly-indebted individual to blow a windfall, it’s just as wrong if millions of us do it collectively. If our economy is already suffering from too much debt, think of how much worse off we will be after we blow thought these rebate checks.

Or think about it this way — Imagine an obese individual showing up at a Weight Watchers meeting and his counselor handing him a box of Twinkies? How much weight do you think would be lost on the “Twinkie diet?” American consumers have basically stuffed themselves almost to the point of explosion. What is needed is salad; not more Twinkies.

Ironically of course, by blowing up both the stock market bubble in the 1990s and the real estate bubble that followed, Greenspan actually repeated the same mistakes that previous Fed chairmen Benjamin Strong and William McChensey Martin made in the 1920s and the 1960s respectively. It seems sanity is a major disqualification for central bankers.

Visit Peter Schiff’s website.

Emergency Action Required Immediately To Prevent Public From Joining The Panic Tomorrow.

Author: Jim Sinclair

Dear CIGAs,

This is it.

The DJII futures are down over 500 points.

If the Federal Reserve fails to take emergency action before the US opening tomorrow, you will see the DJII open down 1000 points as the public joins this professional panic.

Everything you see happening is contained in the Formula, which will be the catalyst that takes gold again above $887.50 and to $1650.

As long as you have followed my plea to have NO MARGIN on anything gold I see no problems.

If you have margin the rule is never meet a margin call, but sell whatever is needed to meet the call or more, never less.

It is a better wager that the Fed will immediately drop rates by 1 full percentage point.

It is a slam dunk that all Western central banks will cut loose and flood the world with more liquidity than ever seen before.

If central banks fail to cause a torrent of liquidity from their unending check books then $450 trillion of derivatives will take us to the world of Mad Max.

Monetary inflation ALWAYS causes PRICE inflation even without strong business conditions.

Prices of hard and transportable assets rise regardless of business conditions.

All currencies fall and the stronger currency is the laggard in the race to the bottom of the tank.

Visit Jim Sinclair’s website

Author: Jim Sinclair

Thursday the Chairman of the Federal Reserve expressed his support for a significant fiscal and monetary stimulus as a preemptive strike against a U.S. recession. The market answered by dropping over 300 points. Today the President of the U.S. broadly outlined a non-specific plan for economic stimulation. After the Administration’s plan for $150 billion of economic stimulation was made public, the DOW closed almost 60 points lower. The result of the Bernanke/Adminstration fiscal and monetary stimulus is a total Dow decline of 479 points, according to my calculations.

Nothing said by either luminary addresses the problem, including those that developed this afternoon by the downgrade of the debt of Ambac, one of the four major bond insurers, MBIA, MGIC and similar companies dealing in OTC Default Derivatives. Should S&P and Moody take similar action, which is expected, two trillion in debt should also be downgraded. The downgrade of the debt of the guarantor must impact the debt they have guaranteed. So the two trillion is debt that may well and should be downgraded now is another domino of titanic size.

This afternoon’s problems are new and their size says both Kings Are Wearing No Clothes” with respect to their presentations of Thursday and today.

The general equities market must be calmed. Should the Dow crater, another major domino falls. Let’s see how the PPT (Price Protection Team) brings the Dow in Tuesday morning in pre U.S. trading and then how Tuesday closes. The DOW better be higher each day than the indices are before U.S. trading or as the last two days demonstrated, the PPT has lost its tight control of the equities markets. Watch the pre-open indices and closing Dow very closely.

If the equity markets cannot be calmed then:
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Author: Jim Sinclair
Mr. Sinclair’s response to the market reaction to the Federal Resrve’s 1/4% cut in the Fed Funds rate and discount rate on December 11th, 2007.

Dear Extended Family:

Don’t be fooled by today’s market. The Fed is running a BLUFF as they are out of aces. There is simply no possibility, way or means of being HAWKISH in the face of a meltdown wherein major financial entities of all kinds are simply going too broke to be rescued. These losses are the largest in my life of 66 years. This is the worst financial crisis in modern history and the degree of liquidity that has to injected into the world monetary system is without precedent. Soon the US FEDERAL BUDGET DEFICIT WILL EXPLODE UPWARDS, THE TIC WILL GO NET NEGATIVE AND THE DOLLAR WILL DROP LIKE AN F-16 IN A FREEFALL WITH AFTERBURNERS FLAMING.

I feel compassion for those that did today fall for the Fed Bluff by throwing away gold, throwing away good gold shares and even worse, maybe buying the dollar or covering the short. Today’s Fed action in the great scheme of things is a scheme doomed to failure by the reality of the meltdown.

When business is scared to death that things might be falling off a cliff the failure to cut 1/2 to a full point is going to bite the Fed in the ass. As more and more poor business reports come in the dollar will swoon. Gold will rocket and the shares that participated well even to today’s morning will be the unquestioned leaders of the pack.

Don’t let Ben the poker player BLUFF you out of a pot of gold, your only insurance policy possible which will protect you from the problem that has NO PRACTICAL SOLUTION.

We are on an Express Train to Armageddon in the financial sense. Don’t let Ben the Great Fooler, make a fool out of you. Hang tight using fishing lines to buy and Rhino horns to sell if you must trade.

Gold is going to $1050 and onward to $1650.

Regards,
Jim

Visit Mr. Sinclair’s website.

Paulson, Banks in Talks to Stem Surge in Foreclosures

By Alison Vekshin and Craig Torres

Nov. 30 (Bloomberg) — U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday.

Paulson, who will address a housing conference on Dec. 3, presided over a one-hour gathering at the Treasury Department in Washington with federal regulators, bankers and lobbyists. Citigroup Inc., Wells Fargo & Co. and Washington Mutual Inc. executives attended, said a person present, who spoke on condition of anonymity.

The Bush administration cut its forecast for economic growth yesterday, reflecting a deepening housing recession that’s roiled financial markets since August. The Commerce Department reported the same day that the median price of a new house fell 13 percent in October from a year earlier, while fewer homes were sold than economists anticipated.

“One of the roles of Treasury is to say `come on, let’s get together and see what we can do,”’ said Wayne Abernathy, executive director of financial-institutions policy at the American Bankers Association in Washington and a former Treasury assistant secretary. “You’re likely to come up with something that will work both in the marketplace and honor the sanctity of the contracts involved.”

Stocks Advance

Stocks climbed today on speculation Paulson’s efforts may help slow credit losses. They also gained after Federal Reserve Chairman Ben S. Bernanke said “renewed turbulence” in financial markets may hurt growth, reinforcing investors’ expectations for an interest-rate cut next month. The Standard & Poor’s 500 stock index rose 0.8 percent to 1,481.14 at the close in New York.

Paulson was joined yesterday by Federal Deposit Insurance Corp. Chairman Sheila Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Reich.
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By John Rubino

Prudent Bear’s Doug Noland has for years been pointing out that one of the drivers of the credit bubble has been the ever-broadening definition of money. As the global economy expanded without a hic-up, more and more instruments came to be used as a store of value or medium of exchange or even a standard against which to value other things—in other words, as money. Thus mortgage-backed bonds and even more exotic things came to be seen as nearly risk-free and infinitely liquid. In Noland’s terms, credit gained “moneyness,” which sent the effective global money supply through the roof. This in turn allowed the U.S. and its trading partners to keep adding jobs and appearing to grow, despite debt levels that were rising into the stratosphere. For a while there, borrowing actually made the world richer, because both the cash received and the debt created functioned as money.

With a few months of hindsight, it’s now clear that debt-as-money was not one of humanity’s better ideas. When the U.S. housing market—the source of all that mortgage-backed pseudo money—began to tank, hedge funds found out that an asset-backed bond wasn’t exactly the same thing as a stack of hundred dollar bills. The global economy then started taking inventory of what it was using as money. And it began crossing things off the list. Subprime ABS? Nope, that’s not money. BBB corporate bonds? Nope. High-grade corporates? Alas, no. Credit default swaps? Are you kidding me?

No longer able to function as money, these instruments are being “repriced” (a slick little euphemism for “dumped for whatever anyone will pay”), which is causing a cascade failure of the many business models that depend on infinite liquidity. The effective global money supply is contracting at a double-digit rate, reversing out much of the past decade’s growth.

But here’s where it gets really interesting. The reaction of the world’s central banks to the freezing-up of the leveraged speculating community has, predictably, been to create massive amounts of new fiat currency and hand it to the banking system. They’re not dropping twenties out of helicopters yet, but functionally it’s the same thing. By swapping dollars, euros and yen for no-longer-money bonds that are plunging in price, creating some paper profits where there once were catastrophic losses, the Bankers hope to revive the animal spirits of the leveraged speculators. Specifically, they hope to stop the financial community from going further down the moneyness checklist and eliminating any more instruments.

But you don’t forget a brush with death that easily. The process of debt reclassification has a momentum that a few hundred billion new dollars won’t stop. And once corporate bonds and agency bonds and emerging market bonds have been crossed off the list, the system will start eyeing the dollar. Is it really a store of value after falling by half against oil and gold in the past five years? Didn’t the Fed just create a tidal wave of new dollars and promise to create infinitely more if needed? Isn’t the U.S. economy hobbled by the implosion of housing and mortgage finance and hedge funds and (soon) derivatives? Don’t Americans owe more per capita than any people in human history? And a realization will begin to dawn: Maybe the paper currency of an over-indebted country isn’t money either…

Visit Mr Rubino’s website at DollarCollapse

Gold and Dollar Market Summary, July 18th, 2007

Author: Jim Sinclair

Dear CIGAs,

You simply must have gold.

As you can see from the mast head of JSMineset, gold is the standard because there simply isn’t much of it. Alchemy in real terms is nothing more than an entertaining joke distributed for a laugh from the people at www.GATA.org. As a realistic possibility alchemy has to be at the bottom of the barrel of disinformation.

The US dollar is in miserable condition even though the Exchange Stabilization Fund did show within that five minute window of opportunity we pointed out earlier this morning. Is that a coincidence? Probably.

All the King’s horses and all the King’s men cannot put the Humpty Dumpy Dollar back together again, but they sure are trying. The dollar is trading now at .8025 as the Exchange Stabilization Fund funded by the US Treasury who is in turn funded by the Fed is doing everything possible to get the buck back to .8031. The problem with the heroic attempt is you have to keep it there. Keeping it there means you have to clean out the offerings in the cash market not only now but repeatedly, which is simply not possible.

The only way to support the dollar is to sell the hell out of it then use OPM for support. The other means is to spread it in a huge way to operate the spread just as is done in the equity indices to support that. The rub in this tactic for the US dollar is that you would have to cream it to help it and that is contra-productive. So far no real effort has been made to play the market to support the dollar. That is what makes it quite hard to start now. For this reason I do not see the present effort to hold that line (.8030) as a successful strategy.

We live in a world without restraints, almost without ethics, hateful people almost everywhere and no standards at all. This is enough of a reason to own gold. It is limited in quantity and becomes a currency when the previous reserve currency fails. The demand for gold will without any doubt rise. The supply cannot rise in any meaningful way. Therefore the price of gold must rise. It is that simple.

US paper is in trouble as senior paper is US and worldwide bonds, not necessarily equities. The sub prime debt level is following economic law we spoke of before. That is any level of debt, be it the lowest, will impact all levels of debt, even the best.

This then begins to fill in the final pillar that sustains the generational bull market in gold.

This Pillar is taking form as the awful number $666 is breached. Maybe the number has something to do with the COT boys.

Bernanke Confirms the Formula:
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Today we saw the O.N.S. (Office of National Statistics) release the C.P.I. and the R.P.I. for the month of June. The C.P.I. or the consumer price index came out at a 2.4% year on year rate and actually dropped from 2.5% in May but the financial markets were expecting a drop to 2.3%, while the R.P.I. or the retail price index came out at 4.4% year on year which was on the back of an expected decrease from 4.3% to 4.2%. Short sterling futures, which reflect expectations of three month deposits, dropped across the board. A one basis point decrease in the futures price represents a one basis point increase in expectation of three month sterling deposits. The September 2008 futures dropped from 93.68 to 93.61 and is therefore discounting a rate of 6.39% for September of next year.

Tonight’s Evening Standard’s front page story says: “Soaring prices in shops mean rates are certain to hit 6% soon” and it goes on to say that economists now think another rate hike by the Bank of England is almost certain and that it could come in August. We have noticed that most economist have been underestimating how far the Bank of England will need to raise rates. In an article in March this year Victoria Marklew, an economist at The Northern Trust Co., said the following: ” So, where does all this lead interest rates? The prospect of one more rate hike in April or May has dimmed a little but not disappeared. In its February Inflation Report the BoE concluded that inflation would be slightly above the 2.0% target in two years time if the repo rate stayed at 5.25%. And while the MPC seems to be feeling more sanguine - even the two most hawkish members voted to stay on hold this month - they are not yet ready to rule out the need for additional tightening.” Another article in the FT on the 4th of June carried the following quote from Robert Lynch at HSBC: “UK interest rates are seen staying at 5.5 per cent, even though inflation concerns remain prominent following recent data pointing to the increased pricing power of British companies. Interest rate futures suggest another quarter-point increase to 5.75 per cent is likely by August.” We are now in July and the BoE has already raised rates (June) to 5.75% and 6% is expected in August!

We at ForSoundMoney think it is very important to follow money supply growth as inflation is the growth of the money supply which leads to rising prices of goods and services. In the U.K. the broadest measure of inflation or the money supply is the M4. We have warned our readers in the past that it is imperative that the Bank of England do whatever is necessary to keep money supply growth under control. We think the Bank of England has lost control of inflation and that the only way it can bring it back under control is through much higher interest rates than we have got at present (5.75% BoE rate). Check out the chart below and notice how the last time the M4 growth rate was hovering around 14%, like it is now, how the 10 year Gilt yield was around 10% and the R.P.I. was also at 10%.

The share price of Newmont Mining, the second biggest gold minig company in the world, recently touched an almost two year low of $38.08 on the 27th of June. This was the lowest level for NEM (ticker symbol) since August 2nd, 2005! It also marked a very significant drop from the high of $62.72 reached on January 31st, 2006. It would seem that Newmont Mining’s share price has no future and that the gold mining sector is not the place to be at the moment but if one looks at the bigger picture it is possible that what we have witnessed in the last sixteen months is nothing more than a gut wrenching correction in a long term bull market. It happened in the mid 1970’s when the price of gold dropped from around $200 in 1975 all the way down to around $100 in 1976 before it started its ascent to $887.50 in January of 1980!

The first chart below shows the fibonacci retracement in the Newmont share price since the beginning of its bull market in October 2000. Newmont bottomed at $12.75 in October 2000 and traded all the way to $62.72 in January of last year. As can be seen NEM failed to hold the 38.2% retracement of the above-mentioned move. We think, nevertheless, that the recent low at $38.08 is near enough the 50% retracement of $37.735 to probably point to a probable low.

The second chart shows a falling wedge formation which is usually a counter trend corrective move in a bull market. If NEM holds the $37.75/$38.00 area and goes on to trade above ( above the $43/$45 level) the white trend line of the falling wedge in the next couple of months or so it could be pointing to a new leg up in the gold mining sector bull market.

1stChart

2ndChart

Charts from Bloomberg.