Saturday, April 30, 2005

The US has similarities to Argentina?

A Bloomberg news piece entitled "U.S. Shows Some Parallels With Argentina of '90s:" by John M. Berry

April 28 (Bloomberg) -- The U.S. is not Argentina. Certainly not.

Real wages in this country aren't 20 percent lower than they were seven years ago, goods imported from Europe don't cost more than four times as they did then and 40 percent of the population isn't living in poverty.

Still, there are some disturbing parallels between the U.S. of today and the Argentina of the 1990s when the country was living well beyond its means, borrowing abroad to finance large budget and current account deficits, while government leaders ignored the urgent need for more prudent fiscal policies.

And in the final pages of a new book that tells in exquisite and chilling detail the Argentine story of borrowing, boom and bust, Washington Post financial reporter Paul Blustein notes some of those parallels in terms of large foreign borrowing and the possibility of a shock associated with a reduction in such flows

``It could happen here,'' Blustein writes in ``And the Money Kept Rolling In (And Out)'' (published by Public Affairs).

``Americans who give Argentina's story fair consideration and conclude otherwise are deluding themselves. The risks are much lower for the United States than they were for Argentina, but they are unacceptably high.

``The words of Miguel Kiguel, Argentina's former finance undersecretary, are apropos: `Once you know the markets are there, and there is financing, you behave as if financing will be there forever.'

Same `Cavalier' Attitude

``The United States has shown every sign of having adopted that same cavalier, incautious attitude in the first few years of the twenty-first century,'' Blustein says.

Argentina had its spree and since the end of 2001 has paid a horrendous price for its folly. It had borrowed in dollars and hadn't nearly enough to repay its exploding debt when foreign investors shut off the flow of new money.

There has been no similar day of reckoning yet for the U.S., and the eventual price to be paid is unknown. It shouldn't be on a scale vaguely comparable with that of Argentina's, though it may be uncomfortably large.

The U.S. economy is far larger than Argentina's of the '90s, and thus better able to sustain even a large shock. More importantly, this country's foreign debt is also denominated in dollars, which the Federal Reserve can create at will -- though last week Fed Governor Donald L. Kohn warned there is a distinct limit to that will.

Sharing the Blame

The book by Blustein, a former colleague of mine at the Post, is a fascinating, well written international tale, as the subtitle indicates: ``Wall Street, the IMF, and the Bankrupting of Argentina.'' Some key U.S. government officials also played a role and hardly covered themselves with glory.

Everyone gets a share of the blame. Argentine politicians who would not curb deficit spending so long as foreign financing was available, International Monetary Fund officials who foolishly helped the country defend an ultimately unsustainable currency peg of one peso to $1, and investment bankers who made tens of millions of dollars in underwriting and trading fees on Argentine government bonds while issuing misleading research reports on the country's prospects.

Blustein, a meticulous reporter, quotes liberally from previously unpublished internal IMF staff memos that called for taking a tougher line with the Argentine government as its debts mounted. When only a miracle could have allowed Argentina to maintain its currency peg and avoid defaulting on its debt, top IMF officials temporized, partly to avoid having the IMF blamed for triggering a default.

Current Account Deficit

The delay in recognizing reality made the eventual cost of changing policies far greater. For one thing, the government forced banks to buy large quantities of government debt, which in the end all but destroyed the Argentine banking system. In the process, the savings of many ordinary citizens were wiped out.

In his speech on April 22 at Bard College in Annandale-on- Hudson, New York, Kohn said the burgeoning U.S. current account deficit, which is predicted to be close to 6 percent of GDP this year, is unsustainable. Eventually there will have to be an adjustment, he said.

``In all likelihood, adjustments toward reduced imbalances in the United States and globally will be handled well by markets, without, by themselves, disrupting the good, overall performance of the U.S. economy -- provided, of course, that the Federal Reserve reacts appropriately to foster price and economic stability,'' Kohn said.

Restoring Fiscal Discipline

On the other hand, likelihood is not certainty.

``Complacency would be ill-advised,'' he cautioned. ``Although the odds seem favorable for an orderly adjustment, the current imbalances are large and -- importantly for gauging risks -- unusual from a historical perspective.''

While it isn't clear the shift from federal budget surpluses in the late '90s to today's large and continuing deficits has played a large role in making the current account deficits worse, a better fiscal balance going forward could help when they begin to shrink, as the eventually must.

``A permanent correction to the spending imbalances must involve the restoration of fiscal discipline and long-run solutions to the financing problems of Social Security, Medicare and Medicaid,'' Kohn said. ``Achieving these objectives are important in any event, but they take on added weight to the extent that we cannot count on an ever-increasing flow of global savings coming into the United States.

The Need for Listening Up

``Without a resolution of these fiscal problems, the balancing of aggregate production and spending would be much more difficult and would result in intensified pressures on interest rates,'' Kohn said.

And he concluded by saying that no one should assume that monetary policy could necessarily offset those pressures on interest rates if cutting rates would jeopardize price stability. Indeed, if inflation threatened, the Fed should not ``hesitate to raise rates because higher rates mean higher debt-servicing burdens for the current account, the fiscal authority or households,'' Kohn said.

Yes, the Fed could provide a plentiful supply of dollars when the foreign capital inflow slows down, only it won't if the cost is a surge in inflation. The fiscal authority -- that is, President George W. Bush and Congress -- ought to listen up.

Tuesday, April 26, 2005

Steven Roach knocks Greenspan/US Fed

Steven Roach of Morgan Stanley does a pretty good job of knocking / critizising the US central bank and Greenspan:

Roach's piece "Original Sin" on Morgan Stanley's site

"In all my years in this business, never before have I seen a central bank attempt to spin the debate as America’s Federal Reserve has over the past six or seven years. From the New Paradigm mantra of the late 1990s to today’s new theories of the current-account adjustment, the US central bank has led the charge in attempting to rewrite conventional macroeconomics and in making an effort to convince market participants of the wisdom of its revisionist theories. The problem is that this recasting of macro is very self-serving. It is a concentrated effort on the part of the Fed to exonerate itself from the Original Sin of failing to address asset bubbles. The result is an ever-deepening moral hazard dilemma that poses grave threats to financial markets."


"I am not a believer in conspiracy theories. But the Fed’s behavior since the late 1990s is starting to change my mind."


"This whole story, in my view, remains balanced on the head of a pin of absurdly low real interest rates."



"I don't know.
I don't know.
I don't know where I'm a gonna go when the volcano blows."
- Volcano, Jimmy Buffet

What the US is looking at, not that most Americans have a clue:

Gold Price Per Ounce
"I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change." - Paul Volker

Saturday, April 23, 2005

James "Mr. Gold" Sinclair on liquidity

Liquidity: that humungus supply of USD sloshing around in the world. These are important points to get you through the rest of this bull market in gold and silver, say the next 7-8 years or so.

Wednesday, April 20, 2005, 7:32:00 PM EST

Gold and Dollar Market Summary

Author: Jim Sinclair


Tonight, let’s talk about liquidity. Liquidity in the traditional sense is a product of Federal Reserve money market activities.

In the case of open market operations, the Fed constantly buys and sells U.S. government securities in financial markets, which in turn influences the level of reserves in the banking system. These decisions also affect the volume and the price of credit (interest rates).

The term "open market" means that the Fed doesn't independently decide which securities dealers it will do business with on a particular day. Rather, the choice emerges from an open market where the primary securities dealers compete. Open market operations are the most frequently employed tool of monetary policy.

In the non-traditional sense, liquidity became not a national equation but an international phenomenon. As the Bernanke Electric Mayhem Money Printing Press began to function, there was no consideration of bank reserves as a major tool of monetary policy nor was the dealership traded with just the Wall Street crowd. Also included were the City in London, the Banhofstrasse and all others willing to offer US Treasuries across all maturities.

The funding for this operation was not an internal exercise of the normal Fed blank check but rather the huge intervention Japan was practicing in order to maintain a non market related dollar/yen level.

Liquidity under the definition of the non-traditional method was international and in a practical sense out of control. That conclusion is best explained by the fact that the US Treasury instruments purchased cannot be sold nor can the liquidity injected into the system be withdrawn.

Liquidity is not the grease of the wheels of business but rather the grease of the wheels of the market that it selects to chase. When a particular market's wheels are greased, it moves faster on the UPSIDE.

In the 1930s when there was a de-linking of currency from gold and international liquidity was increased, a huge rally in the equities market took place. Today, the excess liquidity in the system has selected the equity market to follow.

The thesis pointed out by Chairman Greenspan is that liquidity injections affect the equities market which in turn impacts the thinking and actions of consumers and business executives producing a business activity recovery.

You just experienced that and during the Bernanke experiment, the equities market achieved its high water mark in this counter-trend rally in a long term equities bear market. This is a simple replay of the 1930s with one major difference: Today, the largest amount of liquidity ever injected into the world monetary system in the shortest time in history CANNOT BE WITHDRAWN.

As the equities market was making new highs, the shift began in this liquidity juggernaut from equities into commodities and the CRB was making new highs as equities made new highs. That is an unsustainable phenomenon because of the impact on profits as raw material rise in price. Something had to give.

What may well have given up the ghost is the equity market but the liquidity is STILL OUT THERE now looking for a new home. The difference between the huge equity rally of the 30s and today is the critical component of NO PRACTICAL METHOD OF LIQUIDITY WITHDRAWAL. Indeed, it will also be the MAJOR FACTOR in forming the future.

The inability of the Federal Reserve to drain liquidity negates any possible increase in the cost of money to dampen the impact of a mountain of Bernanke-produced liquidity. While that liquidity was pleasant at first, it will now blast any commodity with positive fundamentals up to heights that cannot be easily explained. Look at crude today as one example.

It is this mountain of liquidity that will pounce on the dollar and ram gold through $480 and to $529 and in time to over $1650. The reason is that there is no tool or policy to drain this international liquidity until it exhausts itself in its own bubble. That bubble will form from this moment forward to blow its top between 2011 and 2013. The game has just begun!

A few salient points:

1. Liquidity is the placement of cash into the hands of financial institutions - not businesses or the common man.
2. Those financial entities will put this new found cash to work in some form or another.
3. It is normal that their first target will always be the equities market.
4. The positive action of the equity markets impacts the decision making powers of the consumer and the companies that provide them with consumer products.
5. The positive decisions of consumers and producers will produce a recovery in economic indices.
6. In time, this liquidity - sensing that the equities market should be distributed and profits taken - will begin to accumulate cash again.
7. As cash is accumulated by the now Fatter Cats, it transitions to the commodities market with positive basic fundamentals.
8. For sometime, both the equity and commodities markets move up in tandem.
9. The cost of basic goods increase and profits are reduced as the cost of goods produced climb.

In normal circumstances, the Fed steps in draining liquidity in the traditional sense thereby increasing the cost of money and killing the entire party.

However, now the international explosion of liquidity cannot in any practical sense be drained, so anything with a clear fundamental case in commodities will be blasted to the moon beyond the capacity and knowledge of talking heads to understand. No one outside of you will understand why this locomotive of inflation, which does not depend on business activity, can be blunted in its power or impact on prices by interest rates.

Now you have to add currencies to the game because this is the largest of all markets into which this liquidity must go. So those currencies with positive fundamentals will go up beyond reason and those with negative fundamentals will go down beyond reason.

This is why I have been saying against all other advisors that the currency market is the most fundamental of all markets. Here the fundamentals will flatten the technicals, bottom callers, the Chairman of the Federal Reserve, soothsayers and anybody else that assumes any short covering rally is meaningful or long term.

Interest rates have NO ability whatsoever to blunt anything except the hope of a reduction in the US Federal Budget Deficit. They only serve as another tax on the consumer and business and thereafter on individual income and corporate profits. Therefore, there is no question in my mind about the US dollar plunging below .8000. That being said, gold is going to $480 and $529 and in time to $1650.

Former Chairman of the Fed Paul Volker

Volker was chairman of the Federal Reserve from 1979 to 1987. This is from a February speech at an economic summit sponsored by the Stanford Institute for Economic Policy Research.

An Economy On Thin Ice

By Paul A. Volcker

The U.S. expansion appears on track. Europe and Japan may lack exuberance, but their economies are at least on the plus side. China and India -- with close to 40 percent of the world's population -- have sustained growth at rates that not so long ago would have seemed, if not impossible, highly improbable.

Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.

We sit here absorbed in a debate about how to maintain Social Security -- and, more important, Medicare -- when the baby boomers retire. But right now, those same boomers are spending like there's no tomorrow. If we can believe the numbers, personal savings in the United States have practically disappeared.

To be sure, businesses have begun to rebuild their financial reserves. But in the space of a few years, the federal deficit has come to offset that source of national savings.

We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing.

What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar.

Most of the time, it has been private capital that has freely flowed into our markets fr m abroad -- where better to invest in an uncertain world, the refrain has gone, than the United States?

More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.

And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

It's not that it is so difficult intellectually to set out a scenario for a "soft landing" and sustained growth. There is a wide area of agreement among establishment economists about a textbook pretty picture: China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving, thereby reducing its import demand.

But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all?

The answer is no. So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. We had a taste of that in the stagflation of the 1970s -- a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions.

The clear lesson I draw is that there is a high premium on doing what we can to minimize the risks and to ensure that there is time for orderly adjustment. I'm not suggesting anything unorthodox or arcane. What is required is a willingness to act now -- and next year, and the following year, and to act even when, on the surface, everything seems so placid and favorable.

What I am talking about really boils down to the oldest lesson of economic policy: a strong sense of monetary and fiscal discipline. This is not a time for ideological intransigence and partisan posturing on the budget at the expense of the deficit rising still higher. Surely we would all be better off if other countries did their part. But their failures must not deflect us from what we can do, in our own self-interest.

A wise observer of the economic scene once commented that "what can be left to later, usually is -- and then, alas, it's too late." I don't want to let that stand as the epitaph of what has been an unparalleled period of success for the American economy and of enormous potential for the world at large.

Gold Demand / Supply

Most people do not realize that the demand for physical gold is increasing in the world. Here is an example:

Gold Price Per OunceTukish Imports

This is what is causing a problem for the attempts to control the US futures market price of gold.

Another problem is that the supply of gold being produced in the world is declining while demand is increasing. Count on higher prices for gold.

According to Frank Veneroso, back in 1998, gold demand deficit over mine and scrap supply:
2000 - 1379 tonnes
2001 - 1500 tonnes
2002 - 1627 tonnes
2003 - 1763 tonnes
Extrapolating, 2005's deficit should be about 1900 tons. This year's mine supply should be about 2500 tons. Remember, mine supply should continue to decrease for about the next 5 years or so. How can the US government and any of the other central banks that care to support the US government keep coming up with *increasing* amounts of gold to dump on the market to keep gold prices contained or moving up slowly?


SINGAPORE, April 19 (Reuters) - Premiums for gold bars doubled in Hong Kong on Tuesday and were strong in Southeast Asia as jewellers built up stocks amid tight supply … Gold bars were 50 U.S. cents an ounce higher than London spot price in Hong Kong versus 25 cents last week …Gold bars were last offered at such high premium in early 2001, said some dealers.
(JB emphasis)

"Some people who have never dealt with us before are trying to get kilobars from us because the tight supply," said one dealer with Bank of China in Hong Kong…. "Demand is there but we are running out of supply…" said Ellison Chu, a senior manager at Standard Bank London in Hong Kong.

In India, dealers said gold buying in the country's financial capital of Bombay had surged to 800 kg a day from around 250 kg in March. In the western city of Ahmedabad, daily gold demand doubled to 1,500 kg from 700 kg a month ago."

Showdown - Part II

Dan Norcini's analysis of the Comex's COT report, including positon total charts, is now public at:
Dan's report on's site

Ted Butler, perhaps the world's formost expert on the silver market, also noticed this anomaly in the COT reports for both gold and silver:
"The latest Commitment of Traders Report (COT) in gold has generated great interest, and for good reason. The numbers are out of line with any time in the past. You may recall, that a few weeks ago, I actually labeled the gold COTs as a mistake, so unusual were the numbers. The CFTC assured me there was no mistake. After thinking it over for a while, I now conclude that they are right and I was wrong. I now feel that the report reflects positions correctly. But the numbers are still so out of line with normal historical patterns, that an explanation is called for."

Here is the link to his latest report on the unusual COT numbers:
Ted Butler's April 19th report

Basically the US government and it's cronies met a supply of entities willing to step up and place long bets in the futures gold and silver markets large enough to make the government retreat its defensive line back to *higher* gold and silver prices.

Most market technicians/analysis are by definition "the crowd". Most are wrong at major turning points in markets, since "the crowd (in financial markets) is always wrong". Most are quite bearish on gold and silver right now. This is in fact quite bullish. Gold never broke its long term trend line that has been in place since the gold market started. Silver did not break its second more steep uptrend line let alone its most basic trend line since its bull market started.

Those long gold and silver have been waiting a long long long time for this correction to end (what? 15 months?) and to see the resumption of increasing prices. That time has come. 2005 is going to be a very good year for gold and silver bulls.

On America:

"Unconstitutional or not, the individual income tax (or any other tax, for that matter) will not by itself drive this country's economy to collapse tomorrow, next month, or next year. But the monetary and banking systems will--if not tomorrow, surely someday soon. And the resulting chaos will offer the occasion and excuse for the General Government to impose a police-state tyranny beside which the worst excesses of today's tax Gestapo will resemble Jeffersonian libertarianism."
- Dr. Edwin Vieira, Jr., Ph.D., J.D., April 9, 2005

Saturday, April 16, 2005

The Latest US Treasury/Fed TIC Report

Once again the Caribbean Banking Centers category had the biggest monthly increase in US debt. France had a smaller increase. Other than those two, basically, nobody was increasing their holdings of US debt. Mostly smart moves, but when is a country going to panic and actually start selling US debt? We'll probably have to wait a while for that to happen.

Here are the just released February numbers which are compared to January's numbers:

Friday, April 15, 2005


Dan Norcini over at just reported in on the COT (the Comex's Commitment of Traders report) numbers that just came out. For the first time in this bull gold market, for the last three weeks or so, the commerial funds (the US government's, the US Treasury's and the Fed's partners in crime) are increasing their short positions while the spec funds (the commercial funds opponents) are increasing their long positions while *gold moves basically sideways* in a relatively tight price range. All the rest of the time in this gold bull market gold would be either moving up or moving down in price. The commercial funds are pulling out the stops, doing whatever it takes to suppress the price of gold, not let it go above the 430/432 level. When gold gets down to the 425 level the spec funds step up to the plate and go long even more, and get out of old short positions which requires buying on their part.

It looks like the Cartel is particularly desperate at this point, that they particularly fear something out there. Maybe it has to do with gold and interest rate derivatives. Big holders of derivatives are companies like General Motors, JP Morgan Chase and others whose shares have been taking a dive these past weeks. Which side is going to win? Which way is gold going to break out of? Because of the rising demand for physical gold in the world, particularly the increasing amounts of buying in Turkey, the spec funds will win. Here's hoping. This relatively tight gold trading range can not last for long.

Here is a really good article by Edwin Vieira (author of Pieces of Eight and co-author of Cra$hmaker with Victor Sperandeo) about the future of the US. It is not pretty.
If you are an American, read it and weep.

"...a man may see straight and clearly and yet be-come impatient or doubtful when the market takes its time about doing as he figured it must do." - Jesse Livermore, in Edwin Lefevre's 1923 classic "Reminiscences of a Stock Operator"

Wednesday, April 06, 2005

Silver Backwardation

The last trading day for the March 2005 COMEX silver contract, the spot delivery month at the time, was Tuesday, March 29. That contract had a 3 cents (USD 0.03) premium (greater price than), upon expiration, over the May contract. This is quite rare and indicates that somebody (a user?) needed silver immediately. It indicates tightness in deliverable supplies.
Read Ted Butler, one of the few experts on the silver market, for the details.