bob chapman on the economy

The Keynesians are on the edge of implementing more quantitative easing (QE) as we predicted they would.

No sooner had the ECB President Trichet proclaimed that “stimulate no more – it is now time to tighten,” when the President of the St. Louis Fed informed us that to avoid the Japanese outcome we must extend the QE program through the purchase of treasury securities. It looks like Europe’s Illuminists want to take a different tact than those in the US. After 15 months of reducing money and credit from plus 17% to minus 9.6%, the Fed now believes they have plenty of room to run those numbers back up to 17% again. One of the more interesting aspects of Mr. Bullard’s commentary is that call to have the Fed buy more treasuries, when in fact he knows all about the Fed’s buying of Treasuries and Agencies for the last 18 months clandestinely. People like Bullard must think we are dumb. In addition this is exactly what the Japanese did. They engaged in QE. The difference is they borrowed in yen domestically rather than on the world market. Most of Japan’s debt is owed to Japanese citizens.

For the past 30 years policymakers have based their commitments on interest rates, rather than money supply, which they now refuse to publish. At zero rates the Fed certainly does not have much room for adjustment except for minus rates. Current rates make the alternative gold extremely attractive as a currency. Gold owes no one anything. Dollar creators owe owners trillions. Thus, we see no possible choice. Gold today is the world’s premier currency and has been for the past 15 months. The dollar’s recent rally against a host of equally fiat currencies was just a man-made interlude. The rally versus the USDX was short lived. A move on the USDX from 74 to 89 and back to 81.66 completing a head and shoulders formation that on a long-term basis spells doom for the dollar. Anyone with any sense was selling the rally. Why would anyone with brains accept a 2.9% yield on a 10-year T-note, with real inflation in excess of 7%? World professionals look at the same numbers we do. What will dollar denominated buyers do when the yield is 2.5% or even 2% – hold the depreciating paper for ten years? In the meantime where do you think the Dow rally from 9800 to 10,500 came from? The insiders knew ahead of time what the Fed was about to do. That means Fed announcements and actions have already been discounted in stock prices by the elitists with inside information. Is it any wonder the dollar is falling and more inflation is just around the corner? The public hasn’t caught on yet, but what we are seeing is a replay of the summer of 2007. The dollar and the market fell and gold, silver and commodities rallied. We could easily have a repeat performance.

Wall Street and Washington continue to tell us a recovery is underway, when in fact that is not true. A second QE is underway and the sacrifice will be higher inflation, a lower dollar and higher gold and silver prices. What will be interesting will be if we have QE3, 4 and 5, etc.? Can it be pulled off? We do not know and neither does the Fed. What we do know is the elitists can have war on demand. You just saw that in Iraq and Afghanistan. When will the war begin and with it deflationary depression? Incidentally, all the polls for sometime have shown that Americans believe that inflation is still with us and do not believe government statistics. They also have fresh in their minds the failed monetary policy of the Fed and the fiscal disaster of the last two administrations and the current administration. The housing bubble supposedly was created to counter deflation and turned out to be an ongoing disaster. The public also is not unaware of the perpetual secrecy in both government and at the Fed and they know it is just a cover and they do not like it at all.

The Fed is about to really reignite inflation. If they do not the whole world financial system fails. Price levels can in no way be controlled nor can inflation by issuing phony numbers. Just like the industry and companies deliberately set earning’s goals lower, so as we just saw 75% of “estimates” were surpassed. People are not stupid. The Fed is really flying by the seat of its pants and so far has kept the financial system afloat. The question is can they continue to do that and what is the price we will have to pay? We have already seen what stimulus did in 2002 and in 2006 when government admitted inflation was 5-1/4%, but in reality was 14-3/8%. That was achieved by the doubling of mortgage credit over a 4 to 6 year period. The tactics of those years, as we predicted, has left our economy and the world economy in much worse condition. No one wants anything to happen on their watch, whether it is in corporate America, Wall Street or in government.

Market perceptions and expectations are for ever higher inflation. That means QE inflation will continue to be with us until we have a Weimar like event and then the game will be over. Inflation is now looked upon by most as an occupational hazard, which is accepted, because the alternative is too horrible to contemplate.

Under these rules monetary expansionism becomes a religion and bubbles become normal – all the time avoiding the solution, which is to purge the system of inflation and malinvestment.

You cannot make commentary on monetary and fiscal policy unless you understand that there are forces that control government from behind the scenes. If you do not strongly factor that in and the goal of world government you do not have a chance of figuring out what really is going on. Economists and analysts continue to avoid these factors and are doomed to being wrong 2/3’s of the time. We are in the same trap that Japan is in, and we will be lucky to do as well as they did since 1992. It will be an inflationary policy as usual. What else can it conceivably be? If we have inflation we get another temporary reprieve. Thus, most people are inflationists. They do not want to face the music. Who wouldn’t want inflation as apposed to standing in a bread line?

Weeks ago we forecast a move by the Fed to inject $5 trillion into the economy and we are happy to say other journalists are agreeing in greater numbers. The question is will the Fed move in August or after the election? There are no rules anymore so it could be at any time. Whenever they move there is not question in our minds that gold will then sell for $2,500 to $3,000 an ounce.

We wonder what the reaction will be of those holding dollar denominated assets, such as Treasuries and Agencies? Will they hold and be cheated of a just return, or will they accelerate abandonment of the dollar? We see the latter and in part a move to gold. We have to believe that bondholders have to see the theft of their dollar purchasing power, but they still hold on. Dollar forex holdings are down from 64.5%, 15-months ago to 59.5%, which has to mean some of the nations are catching on, but on the other hand Treasuries are at a high. Be as it may, there will be many dollar losers when the economy finally succumbs to deflationary depression. Gold and silver related assets will be the only place to be.

The Fed’s interest rate policy. The government pretends inflation is close to zero when in fact it is much higher. That is caused by government manipulation. We just saw the same thing in GDP figures, which are explained elsewhere in the issue. This obfuscation isn’t fooling anyone. This inflation is caused in part by low interest rates and monetization by the Fed and to some extent by fiscal profligacy. The high inflation has been used for seven years to offset high deflation and it has not been too difficult to make inflation and GDP appear normal on the surface by just lying about the statistics. The problem the Fed has is that it must always create more inflation than deflation for fear they’ll lose control of the game and deflation, which once in command is impossible to stop. Underneath this game is a boiling cauldron of instability that could break loose at any time raising havoc with the system.

This effort at normality allows gold to perform as a safe haven under both inflation and deflation. It is irrelevant whether it is inflation or debt duress. Gold moves upward to protect the owners of gold as others perceiving the same problems purchase gold as a safe haven. This effort of the last 11 years has effectively over the past 15 months allowed gold to become the world’s premier currency as the dollar wallows in debt. Capital destruction has overtaken the dollar leaving it second best. Just look at the USDX run of the dollar from 74 to 89 to 80. It proved to have little staying power versus other currencies and particularly a very sick euro. We see dollar denominated asset prices continuing to fall. Look at real estate, both residential and commercial, if you need visible proof. Then we have the misguided fighting for perceived safety in US Treasuries as the dollar plunges in value against a number of other things of value, such as currencies and gold. Capital destruction has been in process for years, but many do not seem to notice, or don’t want to notice, as the world financial system slowing implodes. Even with all the propaganda and bailouts banking, the center of this problem still is far from retaining public confidence. We do not see it returning until a new system is in place. Just saving the financial world is not enough. The whole system has to be saved and those in power, which can do that, refuse to do so. Negative return is what it is – a loss of purchasing power that can only be offset by owning gold. You cannot go on indefinitely with negative returns in spite of government lies to the contrary. The road we believe the monetary powers have chosen is one that ends in hyperinflation. That is why no matter how hard the Treasury and the Fed try to resuscitate the system, it cannot be done and every effort to suppress gold is met with failure. The fiat dollar is collapsing and they cannot stop it.

As we said 11 years ago no matter what happens gold and silver are a lock for higher prices. At that time gold was $260 and silver $3.50. We have been dead on and have never wavered, because the game is not over, and as long as the public allows such a corrupt monetary system, it may never be time to exchange gold for anything. You do not worry about the end game, and the exit. We will know when that event occurs, and it may never occur. You just want your assets in the game. Why, because you have no other alternative. We see no other positive alternative in the face of a breakdown in sovereign debt and rampant inflation. QE will be a backbreaker sending inflation right through the roof. This will be the end of sterilization and the beginning of monetization by banks, which are sitting on more than $1 trillion and it will begin soon. This will begin another round of monetary debasement, which will further lower the value of the dollar. There can be only one reason that bankers have leveraged the way they have and have wrecked the financial system. They have done so at the major banks deliberately, by again using QE of $5 trillion. A new level of breakdown is being established that will bring sovereign debt into closer focus as gold and silver reflect this monetary mismanagement.

Weeks ago we forecast a move by the Fed to inject $5 trillion into the economy and we are happy to say other journalists are agreeing in greater numbers. The question is will the Fed move in August or after the election? There are no rules anymore so it could be at any time. Whenever they move there is not question in our minds that gold will then sell for $2,500 to $3,000 an ounce.

We wonder what the reaction will be of those holding dollar denominated assets, such as Treasuries and Agencies? Will they hold and be cheated of a just return, or will they accelerate abandonment of the dollar? We see the latter and in part a move to gold. We have to believe that bondholders have to see the theft of their dollar purchasing power, but they still hold on. Dollar forex holdings are down from 64.5%, 15-months ago to 59.5%, which has to mean some of the nations are catching on, but on the other hand Treasuries are at a high. Be as it may, there will be many dollar losers when the economy finally succumbs to deflationary depression. Gold and silver related assets will be the only place to be.

U.S. local governments may cut almost 500,000 jobs through next year to cope with sliding property taxes, a decline in state and federal aid and added need for social services, according to a report. The report, a result of a survey by the National League of Cities, the U.S. Conference of Mayors and the National Association of Counties, showed local governments are moving to cut the equivalent of 8.6% of their workforces from 2009 to 2011. ‘Local governments across the country are now facing the combined impact of decreased tax revenues, a falloff in state and federal aid and increased demand for social services,’ said the study. They called on Congress to pass a bill that would provide $75 billion in the next two years to local governments and community-based groups to stoke job growth and forestall deeper cuts.

Americans in the second quarter tapped the smallest amount of home equity in a decade. Owners took out $8.3 billion while refinancing prime home loans. Twenty-two percent chose to reduce loan principal, matching the third-highest rate since records began in 1985.

U.S. apartment landlords are seeing a surge in rentals as mounting foreclosures reduce homeownership and an improving job market for young adults encourages them to find their own places to live.  The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half of the year, according to MPF Research, almost twice the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6% last month from 8.2% in December.  ‘Overall demand is pretty stunningly strong in the first half,’ Greg Willett, a vice president at the research firm said.

U.S. state governments project revenue will climb in the current fiscal year after they raised taxes and cut spending to close budget gaps of $84 billion, a report from the National Conference of State Legislatures found.  Revenue will increase 3.7%, after falling 1.5% in fiscal 2010. Even so, deficits of more than $12 billion may open for at least 29 states should Congress fail to extend extra aid, while two-thirds already forecast fiscal 2012 gaps of $72 billion. The revenue chasm was so deep that climbing out of it is going to take some time.

As we have warned for months, survey bias is perverting PMI surveys. The Chicago PMI unexpectedly increased to 62.3 from 59.1; 56.0 was expected. There is no other data that supports this increase. The only credible explanation for the jump is GM’s decision to produce cars over the summer, when they normally retool for the next year’s models.

The Goldman Sachs Analyst Index fell 6.1 points to 55.4 in July, indicating less widespread economic growth than in June. This decline is consistent with recent weakness in other recent economic indicators. The GSAI now stands at its lowest level since November 2009.

Most of the movement in the GSAI this month is attributed to significant declines in the sales and new orders indices, which fell 12.3 and 9.7 points respectively.

Ambrose Evans-Pritchard: Hot political summer as China throttles rare metal supply and claims South China Sea The United States and Europe have been remarkably insouciant about supplies of rare earth minerals so crucial to frontier technologies, from hybrid engines to mobile phones, superconductors, radar and smart bombs.

China’s commerce ministry has cut export quotas for these metals by 72pc for the second half of this year. It is perhaps the starkest move to date in the Great Power clash over scarce resources.

The July ISM Manufacturing Index was 55.5 versus June’s 56.2. Prices paid were 57.5 versus 57.

June construction spending rose 0.1%, up from May’s minus 1%.

CDR Financial Products Inc. and three of its employees aren’t entitled to early access to prosecution evidence in a U.S. antitrust investigation of the $2.8 trillion municipal bond market and more indictments are expected, a prosecutor told a federal judge in New York.

Lawyers for the CDR defendants went to court yesterday to ask U.S. District Judge Victor Marrero to direct the government to give them early access to the evidence and identify material that might help clear their clients. Rebecca Meiklejohn, a lawyer with the Justice Department’s antitrust division, said the government’s investigation is still moving ahead.

“This is a very expansive case,” Meiklejohn told Marrero. “Just this week the government indicted more individuals in connection with this investigation. This is a continuing investigation and we expect there to be more indictments.”

CDR and the three employees are charged as part of an ongoing probe of bid- and auction-rigging in the municipal bond market. Three ex-bankers with a General Electric Co. unit were indicted on July 27 in the same federal probe.

The federal probe already has drawn in more than a dozen banks and financial services companies, including JPMorgan Chase & Co., Bank of America Corp. and UBS AG, according to court records and regulatory filings.

A grand jury in New York in October indicted David Rubin, founder of Beverly Hills, California-based CDR, the firm’s former chief financial officer and a vice president, for allegedly taking kickbacks for running sham auctions for the investments. All three men have pleaded not guilty to the charges.

Just because being the most corrupt organization in the world was not enough, the SEC decided, courtesy of Donk (aka Frankendodd), that it is beyond accountability to anyone, even the constitution, after it was recently made public that the world’s most incompetent and bribed regulators will continue watching kiddie porn, instead of regulation, only do so in complete opacity from now on, as in the future the SEC would be exempt from FOIA responses. And with retail investors saying “no more” to trading stocks in a rigged casino that shares the same level of integrity as its regulator, and is programmed to generate profits for the house and the computers on 99.9% of trades (except of course for those newsletter and subscription peddlers who catch every single inflection point ever, and can predict what the market will do not only tomorrow but a week, a month and a year from now) the market will soon be a ghost town. Recent attempts by Senator Kaufman to bring some honesty to stocks have so far been met with failure as the Sisyphean task is far too great for any one individual. Which is why we are glad to learn that Ron Paul has joined those few who still hold the long-forgotten dream that the market should be fair and impartial for all (and yes, that means eliminating discount window access for the chosen few Bank Holding Company hedge funds out there) and has introduced the SEC Transparency Act of 2010 (HR 5970), a bill designed to force greater transparency in the Securities and Exchange Commission. Little by little, every single “intervention” by the world’s two most corrupt politicians is being overturned: first the rating agency accountability provision which nearly destroyed the shadow market with a complete lockup of all new ABS issuance, and now the SEC’s exclusion from that simple concept known as “checks and balances.” Soon FinReg will finally be exposed for the fraud it has been since its inception – the much touted Obama financial regulatory reform is nothing but a scam designed to allow Wall Street to steel what middle class wealth remains faster, bolder and in ever greater amounts, as the point where the system breaks is now months away, and the Wall Street-DC joint venture is all too aware. As a result all must be done to allow theft to be bigger than ever, all the while the “regulator” is no longer held responsible for looking the other way.

In continuing with the trivial approach of actually caring bout fundamentals instead of merely generous (and endless) Fed liquidity, we peruse the most recent RealPoint June 2010 CMBS Delinquency report. The result: total delinquent unpaid balance for CMBS increased by $3.1 billion to $60.5 billion, 111% higher than the $28.6 billion from a year ago, after deteriorations in 30, 90+ Day, Foreclosure and REO inventory. This represents a record 7.7% of total outstanding CMBS exposure. Even worse, total Special Servicing exposure by unpaid balance has taken another major leg for the worse, jumping to $88.6 billion, or 11.3%, up 0.7% from the month before. And even as cumulative losses show no sign of abating, average loss severity on CMBS continues being sky high: June average losses came to 49.1%, a slight decline from the 53.6% in May, but well higher from the 39.6% a year earlier. Amusingly, several properties reported loss % of 100%, and in some cases the loss came as high as 132.4% (presumably this accounts for unpaid accrued interest, and is not indicative of creditors actually owning another 32.4% at liquidation to the debtor in addition to the total loss, which would be quite hilarious to watch all those preaching the V-shaped recovery explain away. Of course containerboard prices are higher so all must be well in the world). Putting all this together leads RealPoint to reevaluate their year end forecast substantially lower: “With the combined potential for large-loan delinquency in the coming months and the recently experienced average growth month-over-month, Realpoint projects the delinquent unpaid CMBS balance to continue along its current trend and potentially grow to between $80 and $90 billion by year-end 2010. Based on an updated trend analysis, we now project the delinquency percentage to potentially grow to 11% to 12% under more heavily stressed scenarios through the year-end 2010.” In other words, the debt backed by CRE is getting increasingly more worthless, even as REIT equity valuation go for fresh all time highs, valuations are substantiated by nothing than antigravity and futile prayers that cap rates will hit 6% before they first hit 10%.

U.S. bank failures reached 108 so far in 2010 on Friday as regulators seized five small banks in the Pacific Northwest and the Southeast, none publicly traded.

The banks seized on Friday were LibertyBank of Eugene, Oregon; The Cowlitz Bank of Longview, Washington; Coastal Community Bank of Panama City Beach, Florida; Northwest Bank & Trust of Acworth, Georgia; and Bayside Savings Bank of Port Saint Joe, Florida, according to the Federal Deposit Insurance Corp.

The five banks would cost the agency’s deposit insurance fund about $335 million, the FDIC said.

The largest of the five banks was LibertyBank with 15 branches and about $768.2 million in total assets and $718.5 million in total deposits. The smallest was Bayside Savings Bank with just two branches and $66.1 million in total assets and $52.4 million in deposits.

Although failures are still occurring at a rapid pace, it is mostly smaller institutions that have been collapsing recently.

The biggest bank failure of the crisis was Washington Mutual, which had $307 billion in assets when it was seized in September 2008.

The annual level of bank failures has not reached the levels during the savings and loan crisis, when 534 institutions were seized in 1989 alone. In the current crisis, the problems dogging the banking industry have migrated from home mortgages to commercial real estate, especially for community banks that tend to have higher concentrations of commercial real estate loans.

Regulators have not publicly revealed estimates of how many bank failures are still to come, but the FDIC has said it expects the cost to hit $60 billion from 2010 through 2014.


bob chapman explains the economy

As we long ago predicted, 2005 was the beginning of the collapse of the housing bubble. The result was financial chaos and a credit crisis that enveloped the US, Europe and eventually the world. Some would like us to believe that materialism and selfishness were the reasons for bubbles, but the causes go far deeper than that. US, UK and European central banks, due to their greed for power, and a desire for world government, allowed debt to get totally out of control.

America’s monetary problems began on August 15, 1971, when the country left the gold standard, although GATT, which became WTO in 1986, began the cycle of destruction in the early 1960s. The presidency of Ronald Reagan opened and initiated the floodgates of debt after cutting taxes far too much and then destroying upper income taxpayers with the 1986 Tax Reform Act, which thrust 8 million millionaires into bankruptcy. Reagan’s failure to cut spending set a precedent, which lives with us to this day. During his time in office debt doubled. The result was the economy came unglued in 1989 and didn’t recover until the beginning of 1994. His successors had the opportunity to purge the system of debt and malinvestment, but they and the Fed passed up that opportunity to again cover up the mess they created. A boom in the stock market followed in the late 1990s and economic failure by 2007.

After the collapse of 1987, it was decided that the economy and financial structure needed support and insurance and derivatives came on to the scene to replace productivity in the economy. Free trade, globalization, offshoring and outsourcing began its bite into the economy. After the collapse of 1987 in August 1988 the President’s Working Group on Financial markets appeared having been created by Mr. Reagan’s executive order to assist collapsing markets as Alan Greenspan flooded the economy with money and credit in an attempt to halt the severe correction in real estate and the market. That eventually worked after five years more of debt creation. A great opportunity to purge the system had been deliberately lost. This last opportunity began the failure of the middle class as wages versus inflation stagnated, buying power was decimated and debt accumulation by individuals began in an ever-widening cycle. During the 1980s deregulation was the watchword and we were treated to the criminal collapse of the savings and loan industry. We predicted a $500 billion collapse although to this day the government only admits to $300 billion. Every crook in the nation was involved, led by the Bush and Clinton crime families. As usual few heeded our warnings.

Over the past 30 years, as a result of lower purchasing power and debt, savings fell from 12% to minus 2%, finally recovering over the past two years to 3%. From 1990 on debt became a way of life, because purchasing power was falling every year. The banks were very happy to lend at 8% to 10%, as they created credit out of thin air. As we all now know lenders lent to anyone starting in 2002 and they knew better. These are professionals who are responsible for 80% of individual debt problems. Not only did they lend when they should not have been lending, but they encouraged debt along with the government, particularly for those unable to pay. Then came zero interest rates and market intervention by the Fed, which has kept all interest rates low. Even 10-year US T-rates are yielding 2.93%. Essentially all the rules have been thrown out the window. This is really a continuum of what we have seen since 2002.

We had the chance to fix the system in 1990 and again in 2000, but the Fed refused to do so. The Fed created one last fling. It was undecided whether to go ahead with the real estate and credit bubble. In June of 2003 they made the decision to go ahead knowing they couldn’t turn back after that time. The party is over and the unraveling has been going on for three years. The credit crisis is about to enter a second phase worse than the first phase. After two stimulus packages and $3 trillion, the economy has continued slightly higher to sideways at a terrific price. Now in addition we have a massive sovereign credit crisis that has only begun. The gravity of the fiscal and monetary madness has yet to be assisted. Over the next several months all the furies will break loose as pessimism deepens. Government deficits will worsen as will residential and commercial real estate and the stock market will finally again move lower, as the presidents, “Working Group on Financial Markets” finds there is a limit to what they can accomplish through manipulation. The powers behind government are going to find out they cannot do anything they want. Due to the internet and talk radio the public is being quickly educated and it won’t be long before most everyone understands what the Illuminists are up to and what their intentions are and that is for world government and the enslavement of humanity.

Why is it we hear that the US economy is emerging from its credit crisis and the worst economic crisis since the depression, even from conservative writers? As far as we can see the monetary and fiscal situation along with unemployment haven’t improved. Congratulating the administration and the Federal Reserve is ridiculous in as much as they were both responsible for the horrible situation we are in today. Over the past four years the euro zone governments’ debt has grown more than 20% and the US and Japan by 45%.

In Europe the head of the ECB, the European Central Bank, says austerity now. No more government stimulus, because of the great risk. In Washington we find just the opposite opinion. Wall Street, banking and government want more stimulus, Fed intervention and manipulation. Europe is pleased with recent stress tests, which were self-conducted, and which did not include the banks’ capital exposure to sovereign debt risk, which renders their test invalid. We might also ask about their two sets of books. What a farce.

Investors looking for safety and shelter have been piling into US Treasuries as the dollar falls again instead of buying into gold. Gold has no yield, but essentially speaking after inflation is factored in, neither does Treasuries. Wall Street, banking and Washington see no problem with debt. It is only 66% of GDP and next year should be 82%. They believe that is better than most countries and it is of no concern at present.

Money and credit creation has been expanding for 15 years and the Treasury and the fed and other central banks have been fighting the results for seven years. This has enabled the consumer and the financial sector, never mind government, to spend far beyond their ability to pay back, as a method of temporarily saving the financial system. That battle still rages and it is a battle that is un-winnable for the elitists.

We wonder how long other nations, which hold 59-1/2% of their foreign reserves in US dollars, are going to tolerate massive monetization and fiscal ineptitude? Seven years ago we wrote that Fannie Mae and Freddie Mac were broke and everyone within the beltway knew it. We said it was America’s way of nationalizing housing, so 60% as a goal. This way renters could be herded hither and yon wherever government wanted to put them. Since then both became wards of the US taxpayer.

The big banks have borrowed substantial amounts of money from the Fed to hold as reserves at zero interest rates and rent it back to the Fed at higher rates. We wonder how much of those funds have been used to monetize treasuries and whether the banks will ultimately lend those funds, which will eventually monetize them? On the other front the government tells us they’ll have fiscal deficits of $1.5 trillion annually. That certainly isn’t the way to put the government’s house in order and adds to monetization. We find it of interest that such issues are not discussed on CNBC and Fox or other elitist venues. At the same time the financial system is being torn apart internally and little is done about it. Outright fraud by Warren Buffett’s Berkshire Hathaway – they steal $300 million and pay a $100 million fine. Goldman Sachs defrauds for $5 billion and gets a $550 million fine, which is two weeks income. Is it no wonder these Wall Street criminals do what they do. Look at the rating agencies, all partners in crime and no charges. And, of course, none of the Illuminists go to jail.

We find it of interest that the administration and its Treasury Department, an extension of Goldman Sachs, wants the tax cuts imposed by the previous administrations to lapse. That would increase taxes 15% and smother the economy. Such a position makes us wonder whether the Fed will loosen up on quantitative easing.

Then there is the matter of Treasury securities sales, which are running about $145 billion a month. The question is where is all the money going? This is about 50% more money then the government needs. As we have pointed out many times before the Fed, we believe has been printing money and using various fronts to run the money through, and has been indirectly and directly funding Treasury and agency sales. We reported on this as long as seven years ago. First it was emergency loans to European and US banks, then swaps and now we have nations like England buying boatloads of Treasuries and they cannot even pay their bills. We supposedly have American households buying massive amounts, which is ludicrous. There is massive monetization going on and the Fed is hiding it. Mind you, this has been going on for a long time, but especially so over the past three years. It is out of control and we should have written more on it previously. Between foreign buyers, the household sector and the Fed about $1.5 trillion of Treasuries were purchased last year, which is simply impossible and it is part of which the Chinese are complaining about. This is how surreptitiously the Fed has supplied the Treasury with funding and offset deflation at least temporarily.

It now looks like the next step is to re-liquefy; the domestic economy via bank lending. This past week the Fed said it intends to stop paying interest on bank deposits with the Fed. This ability of the Fed to pay member banks interest is relatively new. Excess reserves of banks heretofore were lent out into the market. The funds were kept at the Fed in reserve, bearing interest, and remained sterilized. They served the purpose of giving banks interest. The banks borrowed from the Feds at zero interest and then lent it back to the Fed to hold at 2-1/2% interest. That was a blatant action to keep the banks in income and an unbelievable scam that the taxpayer got to pay for. The end of the interest payments will force banks to either return the funds or lend them and, of course, they’ll be lent out probably in a large way to small- and medium-sized companies that will find various uses for those funds and their use will create jobs. Lending to these companies has fallen 25% over the past 15 months. These companies also produce 70% of the jobs in the economy. Thus, you can expect a business resurgence and falling unemployment. That activity should also keep the Dow above 8,500 and perhaps take it back to 11,200. The banks, the lenders, may also use part of those funds to buy Treasuries, which will take pressure off of the Fed’s subliminal Ponzi scheme. This is in part where the $5 trillion will come from to fund the economy over the next 28 months, which will take us through two elections. This will be wave 2 of quantitative easing, which few will pick up on until next year. We domestically will go from sterilization to monetization.

Due to these massive influxes of funds the dollar should head down again, which it is in the process of doing presently. The Fed will not admit this monetization fraud, nor will fiscal deficits be reduced. Both are like a train under full power headed toward the bunter, which will end in a spectacular crash. Even with all this liquidity the economy will only show at best 3% to 3-1/2% GDP growth as it did over the last 1-1/2 years. A futile attempt to keep the system functional until the elitists decide to pull the plug and accompany the event with another war. These actions are not an attempt to save an unsaveable economy. They are part of the far bigger picture of the deliberate attempt to destroy the US and European economies and as a result force people to accept world government.

These events are laying the groundwork for higher gold and silver prices, which will reflect the loss in buying power in all currencies, as they have over the past five years. Gold prices could range from $3,000 to $7,600 based on today’s rate of inflation. Silver will follow in lock step and could have an even more powerful move.

The move to monetize is on and the signal for the beginning was the signing into the law of the financial reform package that made the Fed a financial and monetary dictatorship. This is what Andrew Jackson and others warned us would happen if we are not vigilant.

2011 will be a banner year for bank failures as toxic securities and real estate are written off and we move toward nationalization of banking and many other major industries. This is the corporatist fascist model of maintaining power. More and more industries and services will leave the US and Europe bringing both further to their knees.

During this period an attempt will be made to dethrone the dollar and introduce a gold-less SDR, Special Drawing Right, which has been kicking around the IMF since 1965. This is where the dollar is headed, or at least this is where the elitists will try to take us.

This past week the Dow gained 3.2%; S&P 3.5%; the Russell 2000 6.6% and the Nasdaq 100 4%. Banks rose 1.8%; broker/dealers 3.1%; cyclicals surged 7.1%; transports 6.1%; consumers 2.9%; utilities 2.3%; high tech 3.4%; semis 4.4%; Internets 5.1% and biotechs 3.6%. Gold bullion fell $5.50, the HUI rallied 1.8% and the USDX was unchanged at 82.49.

The 2-year government yields fell 1 bps to 0.56%; the 10’s rose 8 bps to 3.00% and the 10-year German bunds rose 10 bps to 2.71%.

Fed credit remained unchanged. Foreign holdings of Treasury and Agency debt surge $18.1 billion to a new record $3.132 trillion. Custody holdings for foreign central banks have increased $176 billion YTD or 10.7%. Custody holdings have risen $176 billion YTD and YOY by $345 billion, or 12.4%.

M2, narrow, money supply expanded $14 billion to $8.603 trillion. It is up $90.4 billion YTD and 2% YOY.

The total money market fund assets fell $17.8 billion to $2.798 trillion. YTD assets have fallen $496 billion and YOY 23.5%.

The Chicago Fed says economic activity weakened in June. The national Activity Index fell 0.63 in June, down from plus 31 in May.

The FDIC’s Friday Night Financial Follies continued its dismal record as: Seven banks were seized in seven U.S. states, marking the second year in a row in which at least 100 lenders have collapsed.

Banks with total deposits of about $2 billion were shut down yesterday, according to statements on the Federal Deposit Insurance Corp. website. The failures cost the FDIC’s deposit- insurance fund $431 million. The U.S. bank-failure count this year rose to 103.

Iberiabank Corp., based in Lafayette, Louisiana, acquired Lantana, Florida-based Sterling Bank in its fifth FDIC-assisted transaction. Iberiabank picks up six branches and about $372 million in deposits.

“This acquisition is an excellent fit for our company, providing a nice complement to our current franchise in Broward and Palm Beach counties,” Iberiabank Chief Executive Officer Daryl G. Byrd said in a statement. “We anticipate a smooth transition.”

Regulators may close the most banks this year since 1992 as souring residential and commercial mortgages impair capital levels. The FDIC included 775 banks with $431 billion in assets on the confidential list of problem lenders as of March 31, an increase from 702 banks with $402.8 billion at the end of the fourth quarter. FDIC Chairman Sheila Bair has said 2010 failures will surpass last year’s total of 140.

Banks were also closed in Georgia, South Carolina, Kansas, Minnesota, Nevada and Oregon, the FDIC said.

Renasant Bank, of Tupelo, Mississippi, paid a 1 percent premium to take on the deposits at Crescent Bank & Trust Co. in Jasper, Georgia, the FDIC said. Renasant picked up “essentially” all of the more than $1 billion in assets at Crescent, the agency said.

South Valley Bank & Trust of Klamath Falls, Oregon, paid the FDIC a 1.05 percent premium to acquire the deposits of Cave Junction, Oregon’s Home Valley Bank, which stood at about $230 million at the end of March, the FDIC said.

Roundbank of Waseca, Minnesota, acquired New Prague, Minnesota-based Community Security Bank. First Citizens Bank & Trust Co. of Columbia, South Carolina, acquired Williamsburg First National Bank of Kingstree, South Carolina.

Las Vegas-based SouthwestUSA Bank and Thunder Bank of Sylvan Grove, Kansas, were also closed.

Goldman Sachs Group Inc. said it made payments to banks including Germany’s DZ Bank AG and Banco Santander SA of Spain for mortgage-related losses as it received U.S. taxpayer funds through the American International Group Inc. bailout in 2008.

The list of 32 counterparties to Goldman Sachs on collateralized debt obligations was released today by U.S. Senator Charles Grassley. The largest payments were to European lenders that also included the London branch of Rabobank Nederland NV, Zuercher Kantonalbank and Dexia Bank SA.

“The majority of these beneficiaries appear to be foreign entities,” Grassley wrote in a set of questions directed at Elizabeth Warren, chairman of the Congressional Oversight Panel, and published on his website. “Can you please explain how ensuring that these institutions were paid in full, rather than required to suffer the consequences of the risks that they took, benefited the U.S. taxpayer?”

Goldman Sachs turned over the list to the Congressional Oversight Panel and Financial Crisis Inquiry Commission, which are reviewing the use of taxpayer funds in financial bailouts. Grassley, the ranking Republican on the Senate Finance Committee, had suggested Goldman Sachs could be subpoenaed if the New York-based bank didn’t provide the information.

Goldman Sachs executives including Chief Operating Officer Gary Cohn and Chief Financial Officer David Viniar had defended the firm’s collection of $8.1 billion after AIG’s bailout, tied to swaps contracts. The money helped Goldman Sachs pay out offsetting contracts with other parties, they said, without naming the companies until now. In addition, Goldman Sachs received $4.8 billion after the bailout for securities lending contracts.

“We had transactions on the other side,” Cohn, 49, told members of the Financial Crisis Inquiry Commission at a hearing earlier this month. “In AIG, we sat in the middle of buyers and sellers.”

The documents released by Grassley’s office show that Goldman Sachs’s counterparties received a total of about $14 billion in payments for the bonds that ended up going into the Maiden Lane III special purpose vehicle established by the Federal Reserve for AIG’s bailout.

Other names on the list include the Hospitals of Ontario Pension Plan and a GSAM Credit CDO Ltd., a collateralized debt obligation managed by Goldman Sachs Asset Management. Collateralized debt obligations, or CDOs, are securities backed by pools of financial instruments such as mortgage bonds or loans. [Now after 2 years we should all feel warm and fuzzy about who our money went too and the secret bailout, which the Fed refused to disclose.]

Goldman Sachs Group Inc. documents show that it depended on banks including Citigroup Inc. and Lehman Brothers Holdings Inc. for protection against a failure of American International Group Inc.

Citigroup, which received the biggest government bailout of any U.S. bank, was Goldman Sachs’s largest provider of credit- default swaps on AIG as of Sept. 15, 2008, according to documents released by Senator Charles Grassley. Lehman Brothers, which declared bankruptcy that same day, is listed as fifth- biggest. Credit-default swaps act like insurance contracts, paying the owner in the event of a default.

Goldman Sachs, the most profitable securities firm in Wall Street history, has argued that it didn’t depend on the U.S. government’s $182.3 billion rescue of AIG because the investment bank had collateral and credit-default swaps to protect itself. Joshua Rosner, an analyst at research firm Graham Fisher & Co. in New York, said the list of counterparties indicates that Goldman Sachs may have had difficulty collecting on those swaps.

“Clearly Goldman’s calculation was more tied to their expectation of the political dynamics of forcing moral hazard than the fundamental realities of the financial strength of counterparties,” Rosner said. Moral hazard is created when government bailouts are perceived to reward risky activity.

Goldman Sachs’s relationship with AIG has been under scrutiny since AIG revealed in March 2009 that the bank had received $8.1 billion after the insurer’s 2008 bailout. The funds made good on credit-default swaps that AIG had provided to Goldman Sachs on mortgage-linked investments called collateralized debt obligations.

bobchapman on the world

The crisis affecting Europe is nothing new. It goes back three years and the beginning of the credit crisis, 60% of the subprime CDOs, collateralized debt obligations, had been sold to European institutions. These were the mortgage bonds, which contained a variety of toxic waste, which the rating agencies, S&P, Moody’s and Fitch, in collusion with banks and brokerage houses, had sold as AAA bonds, when in fact their ratings should have been considerably lower. The holders of these bonds in many instances became insolvent and had to be bailed out by capital injections from central banks, most of the funds were lent by the Federal Reserve.

These debt problems, as in the US, have never been resolved. Those companies and institutions have over the past three years been allowed to keep two sets of books.

Six months ago the Greek crisis arose adding another financial and economic problem not only for Greece, but also for four other euro zone members and their debt holders, namely banks and other sovereign debt holders.

You might say the current additional crisis was frosting on the cake, because unbeknownst to most Europe has never emerged from its original crisis. We have now an internal bank and sovereign debt crisis combined. What is of passing interest is that the raters and sellers of the toxic waste, that started all this, have never been prosecuted nor pursued civilly.

European banks a year ago used a temporary ECB loan facility funded by more than $500 billion, which was in part funded by the Federal Reserve and has been due for the past two weeks. Needless to say, the introduction of the Greek crisis and the recognition of the problems in Portugal, Ireland, Italy and Spain have put European banking into a very compromised position. If the ECB liquidity is removed very simply the bottom could fall out. This is still a severe crisis with no solution in sight. What we have is crisis upon crisis caused in part by the US subprime crisis, but also the result of European credit expansion that began ten years ago and structural problems caused by one interest rate fits all within the euro zone. The cost of money fell during the past ten years due to perceived safety and guarantee that all euro zone debt would be equal to the quality of German debt. It did not work out that way and as it turned out Germany in varying degrees ended up carrying all the other members, especially when it came to balance of payments deficits.

In last weeks missive we cited the end of the one-year loan program for refinancing on July 1st. That now has been replaced by another facility. The new loans of $166 billion for three months and a $140 billion six-day facility and numerous other offerings now replace the original facility. The original one-year facility was for $557 billion. If you total the 3-month increments for a year at least $664 billion is available, plus the other goodies. The bottom line is more and more money is being lent into a failing system.

ECB President Jean-Claude Trichet in last week’s press conference would not give any details on the current “stress test,” but did say results would be published on July 23rd. He says there will be no quantitative easing, due to 1% interest rates. We wonder what he calls loans of $664 billion plus? This does not improve bank capitalization – it masks the lack of adequate capitalization and says nothing of their two sets of books.

Lenders under the ECB rule, one interest rate fits all, must have lost their sanity. In Spain in 2006, 700,000 homes were built, that was more than in the UK, France and Germany combined. Part of this was social engineering. A good many of them were for cheap housing for Latin American migrant workers. Today official unemployment is 21% and savings banks own almost 60% of all mortgages.

The availability of cheap money allowed banks to search for new markets. They had no compunction in making loans, because of the euro zone guarantee. It wasn’t long before they were making many subprime loans and they were in way over their heads, especially in Eastern Europe.

Such strong guarantees and low profit margins tempted German banks and savings banks to use derivatives and to buy US CDOs, and other toxic assets.

No one thought about demographics and resale as the European birthrate collapsed.

There is much consternation over issuing bank interest rates in the interbank circuit. The secret is banks again do not want to lend to each other, because they do not trust each other. This is the wholesale money market known as LIBOR. The ECB has stepped in to augment lending, but the solution is to only temporary lend. If confidence doesn’t return rates could shoot back up to near 5%. Last time the Fed came to the rescue, and it may end up that way again.

Contrary to what the IMF’s experts think global growth is about to take another swan dive and all banks with problems won’t be able to grow out of their problem. Making matters worse the clock is ticking. It is very obvious European banks are in serious trouble. Over the past year, if you add up all the loans received from the ECB, the total was $1.15 trillion.

In order to roll these loans and expand profits these institutions and the total economies have to have growth and that won’t happen unless there is more quantitative easing, both in Europe as well as in the US and the UK.

We don’t know how they expect to accomplish this in Europe under austerity programs. Remember as well that the euro zone consists of 16 members and the EU has 27 members of which the 16 are part of. Efforts are being made to coordinate another European centralized bank regulator, which to us is the antithesis of what is needed. The ECB wasn’t able to prevent the fiasco of the past several years, so what makes the bureaucrats in Brussels and Frankfurt think a centralized regulator will work? Here we are back to more centralization. Europe has a banking crisis just like the UK and US have. They might consider fixing that first. Throwing temporary funds at insolvent institutions is not the answer. In the meantime banks still do not want to lend to each other and except for AAA companies they are reluctant to lend at all. The same syndrome is prevalent in the US, where business loans to small and medium sized businesses are off over 25%. This is a waiting game to see who goes under first. In addition, these banks, state banks, have issued $3.78 trillion in state debt. In order to pay back such loans governments have to reduce spending, which, of course, curtails growth. In socialist Europe governments make up a large part of overall spending.

We believe the austerity program will work long term, but in the interim Europe not only faces giant debt to service, but also could easily fall into depression. If this happens the profits needed to help banks recover won’t be there. The bottom line is Europe’s banks, like those in the US and UK, are in a box and they cannot get out. Almost all of them are insolvent and no matter what they do there is no easy way out. Now you can understand why another war is being prepared. It is to be a major distraction from these terrible economic and financial problems.

If Europe thinks for one second that devaluing the euro deliberately is going to solve their problems they are mistaken. Their goods may be 15% cheaper, but if other economies are in a tailspin, they are not going to be able to be buyers. The US and the UK are good examples.

The ECB has been progressively facilitating the purchase of state bonds to cut budget deficits, which is really no solution to the problem. The big floaters of these bonds have been those in the deepest of trouble, who cannot pay the interest and principal. Again, European banks that are insolvent continue to create money out of thin air as all within the fractional banking system do. The easy money still flows, as again the day of reckoning is thrown into the future. Every bank in Europe is probably going under. There is no way for these debts to be repaid. The game being played in Europe is different than that being played in the US and UK, but in the end they are all going under.

Stage two of the credit crisis is well underway having been kicked off by our elitists in Wall Street, banking and Washington. You might call this blow back from the delaying tactics used over the past almost three years. As you can see, policymakers do not have things under control. Greece is failing and the exposure of the other PIIGS brought a new dimension to the frailty of the world financial system.

The US dollar’s rally from 74 on the USDX to 89 was powerful. A head and shoulders formation makes the dollar very vulnerable. We recently saw it at 82.36. It could be the decent has begun. Those who own US Treasuries and other dollar denominated paper could be at great risk, especially with zero interest rates. In addition, there has been a major pullback in speculation as well, which will put further downward pressure on the dollar and Treasuries. Watch out because the technical play is over. Now the dollar has to fight to stay at the peak of being the world’s reserve currency, not because of the possibility of the SDR taking over, but because of its losing battle against the only real money, gold.

The debt overhang as we previously mentioned is staggering. In order to give you prospective, in 1998 debt to GDP was 257%. Today it is at 357%, which means the private sector is still overleveraged in a big way. This means inventories will be slow to liquidate, manufacturing will slow and unused space will expand in factories, retail and offices. Foreclosures continue a pace. No one really knows what the total of residential vacancies are, but the figure has to be near 1-1/2 years supply, whereas four months is normal. By the end of the year, that figure could be more than two years. The tax credits are over and now comes the avalanche. In addition, builders will build 535,000 homes this year. Next year should be a big year for builder bankruptcies. That is unless there is another tax credit or the Fed literally floods the economy with money and credit. After four years we just may start to cover our housing shorts. As we mentioned some time ago government intends to consolidate the housing industry into three companies, which will then be nationalized.

All of the above means higher unemployment. Building and manufacturing should reflect higher unemployment for years to come. America needs a net monthly gain of 150,000 jobs just to keep up with the birthrate. In the last 11 years eight million jobs were lost to free trade, globalization, offshoring and outsourcing, plus another 5.3 million jobs have been lost in our three year depression and some ten million are forced to work part-time or 34.1 hours per week. Unemployment is 22-3/8% and will hit 25%, the same as it was during the “Great Depression,” by the end of the year.

As America waits to see if the Fed is going to inject $5 trillion into the US economy, Spanish banks stumbled and borrowed $161 billion from the ECB in June, an 18% increase from May. Spain is in deep trouble as European bankers and politicians continue to lie concerning Europe’s financial problems. There is no liquidity. Germany realizes this and wants to write off 2/3’s of the PIIGS debt, and finally exit the euro. It is also significant that no one has lent funds to any Spanish financial entity for more than two months, except the ECB. We should also mention that $560 billion has already been written off since the beginning of the global credit crisis in 2007, now almost three years old.

Spain has the 3rd largest deficit among countries in the euro zone. One third of the euro zone members are insolvent and that is why stress tests have not been released and probably won’t be. Even the solvent nations and their banks are in serious trouble. Sovereign bonds and CDOs are not worth the paper they are written on. Worse yet, they, like US banks and other corporations, are carrying two sets of books. If one set of books were kept all the toxic waste would have to be written off and that would deplete their capital and most likely put them out of business. Is it no wonder banks do not want to lend to each other? Banks and nations are lying, the ECB and its president Jean-Claude Trichet are lying about it. European banks were almost all involved in the same speculative activities that the US banks were involved in. The ECB is doing the same thing in Europe that the Fed has done in the US, and both are equally insolvent. It is incredible that the public doesn’t understand that the system is broken. The bankers still control the system from behind the scenes and still are making billions. European lenders have $3.3 trillion at risk in PIIGS loans. German banks alone are preparing to write off some $325 billion this year – a bill to be paid by German taxpayers. It is now only a matter of time until the PIIGS leave the euro zone and the euro is no more. The write offs could last 30 to 50 years, and that as well could be how long the depression will last. Ninety-five percent (95%) of the bad debt on average in Europe and the US has yet to be written off. Worse yet, nothing has been done to solve these problems, which has resulted in record unemployment in Europe and the US. The ECB has lent out $1.3 trillion it created out of thin air. This means the world will experience the Japanese experience of the past 18 years for another 30 to 50 years. In addition, most of this is done in secret, so the citizens won’t know what is going on. Banks are doing their own stress tests and lying about the results. Even at that the results are dreadful. Derivatives now reflect 60% losses on Greek bonds. By the time this is over all the bad paper will be 62.5% written off, not just in Europe but in the US and UK as well, as we predicted months ago. This is where we are headed and it is not good. Your only protection is gold and silver assets.

As we said a month ago we expect the euro to trade between $1.1875 and $1.30 for several months, indicating the dollar rally is over. As we also noted earlier the strong dollar would hurt the US balance of payments and so it did. It would have been much worse if oil prices hadn’t conveniently dropped $15.00 a barrel. May saw the worse deficit in 18-months as it widened to $42.3 billion. The deficit with Europe rose $6.2 billion and imports rose by 3.2%. The biggest deficit was with China, up 15.4%, $22.3 billion, or 53% of the deficit.

In Europe, as we have seen in the US, we only see short-term fixes, with the public footing the bill for the bailout of elitist bankers. If it wasn’t for the Fed and ECB’s buying of sovereign debt and CDOs, the system would have collapsed almost three years ago.

As we noted earlier, Spain’s debt to GDP is 54%, but their private sector debt is 180% of GDP.

Greece has a new BB+ rating, which is junk. The government wants to play by the ECB rules and the public wants out of debt and the euro.

Foreign investors reduced purchases of long-term U.S. securities in May, reining in their buying of U.S. government and corporate bonds, the Treasury Department said on Friday.

Net long-term capital inflows fell to $35.4 billion in May from a downwardly revised $81.5 billion inflow in April.

Net overall capital inflows into the United States, which include short-term securities such as Treasury bills, edged up to $17.5 billion in May from the prior month’s $13 billion.

Buying of Treasury notes and bonds fell sharply, with foreigners snapping up a net $14.9 billion in May compared with $76.4 billion in April. China remained the biggest Treasury holder but saw its total stash slip by $32.5 billion.

Peter Schiff: U.S. Is in a Depression

Peter Schiff: U.S. Is in a Depression

Alix Steel

06/26/10 – 09:24 AM EDT

NEW YORK (TheStreet ) — Peter Schiff, president of Euro Pacific Capital, Senate contender and author of How an Economy Grows and Why It Crashes, is sticking with his doom and gloom theme.

Schiff made his reputation in 2005 when he warned against the impending subprime mortgage crisis at a time when most investors were heavily invested in mortgage backed securities. Despite some improving economic data out of the U.S. and a stronger U.S. dollar, Schiff is no less pessimistic. Schiff has recently said that the U.S. is the next Greece and that we are in a depression.

I sat down with him recently to see just how bad he thinks the U.S. economy will get, what’s in store for other countries and how he’s making money.

Peter, let’s start with the headline of the day then. China letting the yuan appreciate, is this good or bad?

Tech Keeps Ticking After Yuan Move

Schiff : Well, it’s good for China. For the U.S. it’s going to lead to a rude awakening. For now, it’s going to be a slow appreciation so it will take a little while before the impact of a stronger RMB affects the U.S.

But it will affect us in the short run in a very negative way … because if the Chinese are going to allow their currency to rise, they don’t have to buy as many [U.S.] dollars, they don’t have to buy as many Treasuries. They don’t have to export as much to us because their own consumers have the purchasing power to purchase their own products.

So what that means over here in America is that American consumers are going to have to pay higher prices to buy Chinese goods and … the Treasury [will] have to pay more money if they want to go out and borrow. [This will lead to] higher interest rates so that’s going to ultimately disrupt the phony recovery that people think we have going here.

Schiff: Stronger Yuan Is Bad For U.S.

Are you going to try and invest in China at this point?

Schiff: Well I’ve been investing there for many, many years and I will continue to do so. In fact, a strengthening RMB is part of my thesis. They’re one of the reasons I’m in China. And my whole focus on my Chinese investments is domestic demand. I want to benefit from the increased purchasing power of the Chinese middle class, and that is exactly what a strengthening RMB is going to lead to.

Cramer: How To Buy China

How are you investing?

Schiff: Mostly Chinese companies that are growing market share in China. I also play the Chinese market by buying some of the resource companies around the world [in] Australia, Norway, Canada, that supply raw materials to Chinese industry … but my main focus is [on] Chinese companies and also companies that are on [the] periphery, you know in Singapore, other companies in southeast Asia, of course Hong Kong, which is now part of China. There are a lot of companies there that are very well positioned to benefit from a growing Chinese economy. That doesn’t mean that there aren’t any U.S. companies that can benefit as well. I just think that you get more bang for your buck investing in Chinese stocks.

So what does a stronger yuan mean for gold prices ?

Schiff: Well, I think ultimately it’s bullish for gold. Because as the RMB is appreciating, what that does is that it brings down the RMB price of gold. It makes gold cheaper for Chinese investors and savers to buy it. It creates a dip that they can buy into.

There’s still an inflation problem in China because the Chinese government is still artificially suppressing their currency even if they allow it to increase, it’s still artificially low … the Chinese want to protect themselves from inflation and they’re going to do so by buying gold, and stronger RMB simply makes that gold cheaper for them, so they will buy more of it.

So gold hitting a new high around 1,266. Where do we go from here? Is this the top now or are we going much much higher?

Schiff: I think we go much higher, certainly in terms of dollars … I think we’re still going to several thousand per ounce and ultimately maybe a lot higher if we refuse to do the right thing.

How would you recommend an investor to invest in gold ?

Schiff: Well, there are a lot of ways you can invest in gold. You can own the actual physical precious metal. I have been buying the physical precious metals for my clients at my brokerage firm Euro Pacific Capital since I think 2001, 2002. We’ve been buying it through a program in Perth … where we actually store the bullion for you in Australia free of charge.

Jim Rogers Loves Gold, Buys Silver

You want to avoid [collectibles]. Unfortunately there are a lot of gold dealers out there and a lot of these companies advertise very frequently on television … [people] who want to buy gold bullion should stay away from these coins because the mark-ups are horrific. In many cases you need the price of gold to double just to break even on the spreads. If you want gold, buy gold, don’t buy a coin that has a little bit of gold in it. Buy the real thing.

Also, I own a lot of mining stocks, personally, gold mining companies around the world. There are some in the United States, but more often than not they’re in Canada, Australia; they’re in Asia, South America, South Africa. There are a lot of companies that are going to benefit … because as gold prices go up, if the price of gold is rising faster than the cost of mining it, their profits really increase. And so you gain some leverage to a rising gold price.

Is four-digit gold telling us we’re going to see a gold standard? Is it telling us that the currency land as we know is going to be completely different?

Most Recent Quotes from

Schiff: I hope that we go back to a gold standard because it works. It’s constitutional. It’s sound money. It’s what gives you better economic growth and holds government spending in check and keeps inflation under control.

But I think what rising gold prices are telling us is that there is a lot of inflation in our future … As the world stops lending us money, my fear is that rather than making the necessary cuts, the way Europe is trying to do now … we try to avoid the pain by simply monetizing the deficits; that we just print money; that the Federal Reserve just buys more debt so that the government doesn’t have to make the hard choices.

If we don’t have the guts to level with voters, and instead we try to print money to avoid that, that’s when we have runaway inflation. I think that’s what gold is saying. Gold is telling you our politicians are most likely to act in their own interests rather than national interest. As you know, I am running for U.S. Senate myself in Connecticut; I want change that dynamic. I want to start making decisions that benefit the country, not that benefit the people who are leading the country.

Where do you stand then on the metals like silver, palladium and platinum that are very much tied to the global economic recovery vs. gold, which is just an investment?

Most Recent Quotes from

Schiff: I don’t think we’re headed for a global depression. I think we’re headed for a depression in the U.S. It’s going to be an inflationary depression, so you have to understand the difference. But I believe that other parts of the world, particularly in the emerging markets; they’re going to be very strong.

If you remember the 1990s, Japan had been the fastest-growing part of the economy during the ’80s. And [when we] removed Japan from the equation … the world continued to prosper despite the lost decade in Japan. I think you’re going to see something similar with the U.S. We’re going to be contracting, dealing with all the debt that we’ve created and the unproductive nature of our economy.

But as the rest of the world, or particularly China and the countries who have been loaning us money and supplying us with merchandise, stops using their resources to prop up our economy and instead use their resources to grow their own economies, then they’re going to grow even faster. I’ve often said people think America is the engine to the global economy. I think we’re the caboose. And I think when you sever the caboose, the rest of the trains will move along the tracks even faster.

Does that mean that you are bullish on other precious metals?

Schiff : Well, I’m bullish on precious metals silver [and] platinum. But I’m also bullish on industrial metals, bullish on commodities in general. I’m very bullish on oil. Not only because of the demand that’s going to come out of China, but because of what’s happened in the U.S. following the accident of BP(BP).

How To Buy BP

Not only are we losing that production [from BP] but we’re having a moratorium now on off-shore drilling. That’s going to take production away. Also, [there is the] cost of insurance … It’s going to cost a lot more to [drill off shore], so production is going to decline. So you’ve got lower supply, you’ve got increasing demand. Prices can only go up.

Do you think we’re going to see alternative energy? Wind, solar or natural gas?

Schiff: Oh sure there’s alternative energy already. I’m investing heavily in alternative energy myself. I’ve got investments all around the world in alternative energy, but I understand right now the best alternative is fossil fuels, oil and gas, because that’s the most economical today. It’s not going to be the most economical forever, and so I’m investing in some of these [alternative] technologies myself.

What I don’t want is to see Washington try to micromanage which alternative energies get investment by tax code. I don’t want them subsidizing or penalizing one form of energy over another because then you don’t get an efficient result. You get a politically motivated result that undermines our energy independence.

Do you have a favorite alternative energy that you’d be pushing?

Schiff: I’m investing in biodiesel. I’m investing in wind power. I’m investing in coal. I don’t know what’s going to win.

All right, let’s move to Europe, then. What’s your best prediction for the EU and the health of the euro?

Schiff: I think they handled the situation incorrectly with respect to Greece. The eurozone should have made it clear that Greece was on its own and Greece should have been allowed to restructure its debt. I mean, the Greeks borrowed too much money, and I think the best thing is the restructuring of that debt. Not that they walk away from their obligations completely, but that the creditors who loan them money … take a haircut, along with Greek citizens. Everybody needs to sacrifice. Everybody needs to take a reduction.

Unfortunately, they decided to bail out Greece, and I think that has very negative long-term repercussions for the euro. However, in the short run, they’re trying to repair the damage. What I do see that is favorable right now is that a lot of the European nations are starting to make cuts in government spending. They’re ignoring our advice, doing the opposite, and they are shrinking their governments and cutting back on spending. And in the short run, I think that’s going to be bullish for the euro.

I think that you have a lot of negativity now, a lot of negative sentiment built into the euro. I think that’s going to create the basis for a pretty big rally in the euro. I think the real problem is when the sovereign debt crisis moves here, moves to the U.S.

We are the country that is in the most trouble. We have debts that are enormous in comparison to Greece … You could say that Greek debt to GDP was larger than ours [but] not if you count all the off budget items, not if you count all the contingency items. Greece is tiny. The amount of money that they owe is tiny. We owe a fortune. And it’s a much, much bigger problem. And, of course, Greece wasn’t a problem a year or two ago … The reason it wasn’t a problem is because interest rates were still low. It wasn’t until rates started back up that Greece could no longer service the debt.

We’re in the same situation. We’ve borrowed $13 trillion to $14 trillion with T-bills. The reason we could afford the interest payments is because the rates are still low. But just like the subprime mortgage borrowers found out when their teaser rates reset, when the world starts to question our ability to repay and the risk premiums rise and rates start to rise, that’s when we [will be] exactly in the same situation as Greece.

So would you be buying the euro here and selling the dollar, if you had to choose?

Schiff: Between those two currencies, if they were my only choices, I would choose the lesser of the evils and take the euro. Fortunately, the world is bigger than just euros and dollars, and you have other currencies that you can own, which I do own. I own some euros, but I am very underweight the euro relative to other currencies. And of course, you don’t have to own currency at all. You can own gold. And the reason that gold is so strong is because investors around the world are expressing a preference for real money as opposed to just substitutes, which are fiat currencies.

What other currencies do you own?

Schiff: In Europe, I own the Swiss franc, the Norwegian kroner. We also own the Singapore dollar, Hong Kong dollar, Chinese RMB, Japanese yen, Australian dollar, New Zealand dollar, Canadian dollar.

economic commentary from europac

June 25, 2010

Suiting Up for a Post-Dollar World
By John Browne

The global financial crisis is playing out like a slow-moving, highly predicable stage play. In the current scene, Western governments are caught between the demands of entitled welfare beneficiaries and the anxiety of bondholders who fear they will be stuck with the bill. As the crisis reaches an apex, prime ministers and presidents are forced into a Sophie’s choice between social unrest and bankruptcy. But with the “Club Med” economies set to fall like dominoes, the US Treasury market is not yet acting the role we would have anticipated.

Our argument has always been that the US benefits from its reserve-currency status, allowing it to accumulate unsustainable debts for an unusually long period without the immediate repercussions of inflation or higher borrowing costs. But this false sense of security may be setting us up for a truly monumental crash.

There is fresh evidence that time is running out for the dollar-centric global monetary order. In fact, central banks outside the US are already making swift and discrete preparation for a post-dollar era.
To begin, the People’s Bank of China has just this week decided to permit a wider trading range between the yuan and the dollar. This is the first step toward ending the infernal yuan-dollar peg. While the impetus behind this abrupt change remains a mystery, I have a sneaking suspicion that, as my colleague Neeraj Chaudhary explained in his commentary last week, the nationwide labor strikes were a prime motivator.

In response to the 2008 credit crunch, the Fed printed so many dollars that the People’s Bank of China was forced to drive Chinese inflation into double digits to maintain the peg. The pain has fallen on China’s workers, who have seen their wages stagnate while prices for everything from milk to apartments have skyrocketed. This week’s move indicates that, regardless of its own policy motives, the Communist Party can no longer afford to keep pace with the dollar’s devaluation. The result will be a shift in wealth from America to China, which may trigger a long-anticipated run on the dollar, while creating investment opportunities in China.

Just days before China’s announcement, Russian President Dmitry Medvedev rattled his monetary sabre by telling the press of his intention to lead the world toward a new monetary order based on a broad basket of currencies. Giving strength to his claim, the Central Bank of Russia announced that it would be adding Canadian and Australian dollars to its reserves for the first time. Analysts suggest that the IMF may follow suit. While Russia floats in the limbo between hopeless kleptocracy and emerging economy, it does possess vast natural resources and a toe-hold in both Europe and Asia. In other words, it will be a strategically important partner for China as it tries to cast off dollar hegemony.

Speaking of Europe, the major powers there are moving toward a post-dollar world by rejecting President Obama’s calls to jump on America’s debt grenade. The prescriptions coming from Washington translate loosely to: our airship is on fire, so why don’t you light a candle under yours so that we may crash and burn together. Given that dollar strength is largely seen as a function of euro weakness (as Andrew Schiff discussed in our most recent newsletter, debt troubles in the eurozone’s fringe economies have created a distorted confidence in the greenback. However, as you might imagine, Europe has higher priorities than being America’s fall guy. Led by an ever-bolder Germany, the European states are wisely choosing not to throw themselves on our funeral pyre, but to wisely clean house in anticipation of China’s rise.

In another ominous sign for the dollar, the Financial Times reported Wednesday that after two decades as net sellers of gold, foreign central banks have now become net buyers. What’s more, more than half of central bank officials surveyed by UBS didn’t think the dollar would be the world’s reserve in 2035. Among the predicted replacements were Asian currencies and the euro, but – by far – the favorite was gold. This is supported by Monday’s revelation by the Saudi central bank that it had covertly doubled its gold reserves, just about a year after China made a similar admission. There is no reason to assume these are isolated incidents, or that the covert trade of dollars for gold doesn’t continue. To the contrary, this is compelling evidence that foreign governments are outwardly supporting the status quo while quietly preparing for the dollar’s almost-inevitable devaluation. What people like Paul Krugman believe to be a return to medieval economics may, in fact, be the wave of the future.

In peacetime, hardened troops will likely tolerate a blowhard general for an extended period; but when the artillery opens up with live ordnance, an ineffectual leader risks rapid demotion. The newspapers are now riddled with hints that foreign governments have lost faith in Washington and the dollar reserve system. It seems to me only natural that after a century of war, inflation, and socialism, the next hundred years would belong to those people who hold the timeless values of hard money and fiscal prudence. Unfortunately, our policymakers are not those people.

Please note: Opinions expressed are those of the writer.

bobchapman on the economy

What now that stimulus packages are ending, money set to plunge, market control by insiders has to end, Fed doesnt need a monopoly, bond sales down, still high expectations for gold.

We believe an inflationary depression began in February of 2009, and little has changed. Since then factory output has increased, as have inventories and other outward signs, such as retail sales. We believe that one-year spurt is ending, unless a new stimulus program is put in place. This past week we saw a $78 billion addition to unemployment benefits and Larry Summers has said they need an additional $200 billion. In order to keep the economy going sideways a total of another $800 billion will be needed. The Fed may have cut back the creation of money and credit to zero, but it is still dishing out trillions to domestic and foreign banks, which can only affect the domestic economy in a residual way. The key is real personal income. Including government programs it has fallen $500 billion over the past 16 months. In addition real unemployment remains at a high of 22-3/8%. That is U-6 less the birth/death ratio. This terrible dilemma is a first and is surprising in as much as government addition to income has gone past 18% for the first time ever. We expect that part of the reason for both situations is the perpetual drag of free trade, globalization, offshoring and outsourcing, which has continued unabated.

There is no question that the $800 billion stimulus has come to an end. During the past 16 months $200 billion of that $800 billion has shown up in consumer spending. The rest has raced through the economy and the result is a budget deficit in the vicinity of $1.8 trillion.

Over the past several months we have seen a decreasing number of new unemployed, but last month those official figures rose. That to us was the signal that the growth in employment had ended as well as the mini-recovery. We will know better the situation when May’s figures are released. The small increase in non-farm payroll tells us our appraisal of offshoring and outsourcing is correct. We predicted the effects of offshoring and outsourcing in 1967, but, of course, no one was listening.

Small business’ contribution has been zero. Many of these businesses are failing and most cannot get loans. We expect that condition to persist indefinitely, which means job stability is nowhere to be seen in the immediate future. In spite of bogus government figures the economy is not growing and won’t grow. Unless the system is totally purged in a classic way there will never be any recovery.

Sooner or later the deflationary depression and purging will come. The economy is stagnant and that is with an $800 billion stimulus program and $2.3 trillion in spending by the Fed, some of which had to have entered the economy. Just think of where we would be without both additions. With stimulus, over the past year, we have only seen an average of 2.38% growth. This is certainly a very weak “recovery,” especially in view of the tremendous amount of money and credit injected into the economy.

As a result excessive spending is over. Over 70% of Americans expect to be savers and to lower their credit card balances; that is those who are still employed. We see consumers back at about 70% of GDP. Without stimulus we see much lower figures; with stimulus only 68% at best can be maintained.

Manufacturing is climbing yet employment in the sector is stagnant. That means people are working much harder to keep worker productivity at a very high abnormal level. This is all well and good, but who will buy the products produced? Exports did well through March, but we have to believe the much stronger dollar will make US exports at least 15% more expensive and those of the euro zone 15% less expensive. Exports make up 20% of GDP.

Even with auto and appliance incentives sales are still under the weather. We have also just seen an end to housing purchase incentives. All indications are we are headed toward a flaccid economy without major stimulus. Business will find out again how dangerous it is to listen to your government. The residential housing inventory is again going to build this time to a real three-year inventory overhang. We expect 20% lower prices over the next year. These are not the things recovery is made of.

As we look forward we see money supply plunge to the same levels of the 1930s. This is the same thing the Fed did between 1929 and 1933. We have zero interest rates, but they really only help the large borrowers and those with AAA ratings. In the first quarter $300 billion was removed from the economy, or a contraction of 9.6%. By the way that proves the upward move in gold and silver have not been the result of anticipated inflation, but by other factors, such as Europe’s problems. We cited the fall a year ago of European M3 and M4 like figures, and as usual, no one was listening. We, as you can see, have had the same result in the US. These reductions obviously were well coordinated. In addition, the assets of institutional money market funds have fallen at a 47% rate, the sharpest drop ever. Part of this Fed move is for banks to raise capital asset ratios as the Fed removes and overpays them for their toxic assets, which the taxpayer gets to pay for. That in part is why banks won’t lend to small and medium-sized companies, and this is why there cannot be a recovery. The banks, Wall Street, and insurance companies are selectively being bailed out, irrespective of the consequence to the US and European economies. Unfortunately, we are following the path of the “Great Depression.” That means gold and silver are being purchased in a flight to quality. Yes, we believe inflation is on the way in bigger numbers, but unless things change dramatically it won’t be long before that inflation is overcome and deflationary depression takes hold.

As you have seen the titans of banking and Wall Street savaged the market on 5/6, and again are in the process of doing so, to convince Congress not to audit the Fed and to give it tyrannical monopoly powers to run America. Congress is being threatened. They are being shown the power of the Fed and its owners, if they do not do what they are being paid to do. It shows you the power of Goldman Sachs, which controls 72% of all NYSE trades and can move the market at will by front running all orders and by restricting all credit into the system. Isn’t this what derivatives are all about? They totally control all markets and it has to end. That is why you have to unseat almost all the incumbents in Congress and the Senate and bring this monopoly to an end. The Working Group on Financial markets” has to be disbanded and “Executive Orders” have to be terminated. The “Imperial Presidency” has to end if we are to continue to have a democracy. How can you have markets recovering every time they fall, as if by magic? You cannot have manipulation of markets, as we have experienced in gold and silver since 1988. We wrote our first article on the subject in August 1988 in the “Bull & Bear,” which David still publishes. How can we continue to have SEC authorized rule breaking by allowing naked shorting?

How can we allow corporations to carry two sets of books and mark assets to model? What is wrong with American businessmen and our representatives? They allow this to go on supposedly for the better good, as they stuff their pockets with cash. Now they want to allow a Federal Reserve monopoly, what is wrong with these people? What has happened to our country? The Illuminists who run our country from behind the scenes do whatever they please and it has to stop. Our country has become the laughing stock of the world, as Europeans and Asians, as well as Latin Americans rush to buy gold and silver. They cannot get rid of dollars and euros fast enough. Obviously some people are waking up, but not more than 2% of Americans. In Wall Street and banking if you do not roll with the establishment you get destroyed. Look at what we have had to put up with for 50 years. Look at what happened to Bear Stearns, Lehman Brothers and countless others who you have never heard of. Most people on Wall Street know what is going on, but they won’t talk about it. They do not want to be ostracized or run out of business. We as well can assure you Wall Street and banking owns the SEC, CFTC and most of the House and Senate.

It was a year and one-half ago we told you that $800 billion in stimulus wasn’t enough. That is now proving to be the case. Get ready for another liquidity barrage, called quantitative easing. It will also mean real interest rates will rise again. The backbone of most all nations of the world is debt not gold, silver or a basket of commodities. Greece is being blamed, but all told, 19 nations are on the edge of bankruptcy. In fact, central banks in these countries are among the biggest speculators. In the euro zone countries cannot print money so they sell bonds in spite of the rules of the bailout. Many are having a hard time selling bonds. Thus other nations are secretly doing so.

There is talk of another Northern European currency backed by gold. If that happens the dollar will fall because it won’t be able to compete. Those in the southern tier will have to return to their own currencies and do as Argentina did ten years ago. Those long dollars do not get too comfortable. The corporatist fascist corrupt model will fail because it is already bankrupt, as will many other countries.

Last week was another mixed week for most markets. The Dow fell .06%; S&P rose 0.2%; the Russell 2000 rose 1.9% and the Nasdaq 100 rose 1.6%. It was a week of “Hail Mary” finishes. That is averages reversing in the last hour of trading. Broker/dealers rose 0.2%; cyclicals 1.7%; transports 2.2%, as consumers fell 0.5% and utilities 0.1%. High tech rose 1.2%; semis 1.9%; Internets 1.7% and biotechs 1.1%. Gold bullion rallied $37.00, the HUI 5% and the USDX rose 1.7% to 86.78.

Two-year T-bills fell 1 bps to 0.75%; 10-year notes 5 bps to 3.30% and the 10-year German bund 2 bps to 2.68%.

Freddie Mac 30-year fixed rate mortgages fell 6 bps to 4.78%; the 15’s fell 3 bps to 4.21%; one-year ARMs fell 5 bps to 3.95% and the 30-year jumbo rose 5 bps to 5.64%.

Fed credit fell $15.3 billion to $2.324 trillion, up 11.6% ytd and 12% yoy. Fed foreign holdings of Treasuries and Agency debt jumped $9.6 billion. Custody holdings for foreign central banks rose $111 billion ytd, or 9.3% or 12.6% yoy.

M2, narrow, money supply rose $43.9 billion to $8.573 billion.

Money Market fund assets rose $5.2 billion to $2.849 trillion. Year-to-date funds are off $444 billion, after a 1-year decline of $940 billion.

The House passed a bill on Friday that would end a tax break for executives of investment funds, leaving hedge funds, private equity firms and venture capitalists scrambling to ease the effects of the bill before it is taken up by the Senate next month.

It seeks to change the tax treatment of “carried interest,” which is the portion of a fund’s investment gains taken by fund managers as compensation. Under current rules, carried interest is taxed federally at a rate of 15 percent because it is treated as a capital gain. That contrasts with the tax rate on ordinary income, which can be as high as 35 percent.

So, it appears that wise-guy welfare might be repealed. However, wise guys made one of their best investments ever by bribing Congress with hundreds of millions of dollars. In return, wise guys garnered tens, if not hundreds, of billions of dollars in compensation.

Companies sold the least amount of bonds in a decade this month as concern Europe’s sovereign debt crisis will slow the global economy drove up relative borrowing costs by the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse.  Borrowers issued $66.1 billion of debt in currencies from dollars to yen, a third of April’s tally and the least since December 2000.

Yields on junk bonds rose to the highest since December relative to Treasuries. Spreads widened 27 bps yesterday to 724 bps, the highest since Dec. 9. That’s up from a low this year of 542 basis points on April 26.  High-yield debt has lost 4.6% in May, on pace for the first drop in 15 months. ‘We’re seeing high yield under a lot of pressure here,’ said Nicholas Pappas, the co-head of flow credit trading in the Americas at Deutsche Bank. ‘There is a flight to quality to solid investment-grade companies.’ The percentage of corporate bonds considered in distress surged this week to the highest since 2009 as investors dumped debt of the neediest borrowers.  Some 17% of junk bonds yield at least 10 percentage points more than Treasuries, up from 9.2% last month. The jump is the biggest since the distress ratio rose 11 percentage points in November 2008.

The U.S., Spain and Greece are among developed nations whose borrowings put them in a ‘ring of fire’ amid sovereign debt concerns, said Pacific Investment Management Co.

The Netherlands has experience with controlling water: 2,000 miles of dykes preventing the sea from flooding the country’s nether regions have taught the Dutch a thing or two about hydroisolation and spillover control. Unfortunately, as the last 40 days or so demonstrate so amply, neither the US nor the UK have the faintest clue how to stop the GoM oil spill which is now entering into the realm of the surreal. Which is why it may be time to learn from those who do know something about the matter. Zero Hedge has received the following proposal from Van Den Noort Innovations BV, which asserts it can get the GoM oil spill under control within days, and it doesn’t even involve nuking the continental shelf.

The US ISM Manufacturing index fell to 59.7 in May from April’s 60.4; remaining above market expectations of a decline to 59.0. The Prices Paid index fell to only 77.5 from last month’s 78.0, an upside surprise on an expected fall to 72.0.

Construction spending in the U.S. rose in April by the most since 2000 as demand related to the end of a tax credit spurred builders to break ground on more houses. The 2.7 percent increase brought spending to $869 billion, after a revised 0.4 percent gain in March that was more than previously estimated, Commerce Department figures showed today in Washington. Economists projected no change for April, according to the median forecast in a Bloomberg News survey.

Sales boosted by a government incentive of as much as $8,000 helped reduce the number of unsold new houses in April to the lowest level in more than three decades, spurring housing starts. While government construction also increased for a second month, spending may be limited by tighter state and local budgets.

“The turn in housing is encouraging,” Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado, said before the report. “We’ve cleared away enough new homes inventories that at least we can add some construction. Non- residential construction is still quite weak.”

The gain in April was the biggest since August 2000. Estimates of 53 economists surveyed by Bloomberg ranged from a drop of 1 percent to an increase of 2 percent, after a previously estimated gain of 0.2 percent in March.

Construction spending decreased 11 percent in the 12 months ended in April.

Private construction spending rose 2.9 percent, the most since July 2004. Homebuilding outlays jumped 4.4 percent, the biggest gain since October 2009. Private non-residential projects increased 1.7 percent, the most since September 2008 and led by factories and power facilities.

The IMF has announced its gold reserves declined to 2,966.4 in April from 2,981.5 tons in March, a 15.1 ton decline. And while the IMF sold well over half a billion worth of gold in April, Russia was once again taking advantage of what some are calling fire sale prices, bulking up its gold holdings by 5 tons, which increased from 663.7 to 668.7. Russia has now been adding gold every month since February. As has long been known, in 2009 the IMF announced it would sell 403.3 tons of gold, of which 212 was purchased in prearranged deals by India, Mauritius and Sri Lanka. This means the IMF, after accounting for all disclosed sales, has 152.1 tons of gold left to sell from its original quota. Bloomberg discloses who has been doing the most buying recently: “Central banks and governments added 425.4 tons last year to 30,116.9 tons, the most since 1964 and the first expansion since 1988, data from the World Gold Council show. Official reserves may expand by another 192 to 289 tons this year, according to CPM Group, a research and asset-management company in New York.” Keep your eyes on Russia: “Russia’s central bank bought 142.9 tons of gold last year, raising its holdings of the metal by 29%, RIA Novosti reported last month, citing Bank Rossii’s annual report submitted to parliament.

Tuesday spot gold rose $12.70 to $1,224.80, as July rose $12.40. Spot silver rose $0.13 to $18.54, as July rose $0.01. Gold traded as high as $1,229 in London. Physical gold dictated prices in spite of strong selling. Gold open interest fell 10,394 contracts to 547,525. Silver OI rose 472 contracts to 120,952. The HUI traded higher earlier, but the outside month for silver just couldn’t hold its gains. The HUI fell .69 to 454.39, whereas it should have been up about 8 to 10 points. The XAU lost .91 to 173.02. Government was again unsuccessful in suppressing gold. They brought the Dow back from minus 150 to plus 80 to off 112. The S&P fared worse, off 168 and Nasdaq 208 Dow points. The euro hit a low of $1.21, and Larry Summers stepped in and drove it back up to $1.23. It closed off .0088 to $1.2236. There was plenty of bad news. Israel, Turkey, Syria, Iran, China, North and South Korea, Greece and most of Europe; then in California, Illinois, Pennsylvania and many other states. Canada raised interest rates. Italy is even being questioned regarding their financial situation. One European bank sold 3,645 ounces of gold last week worth 3 million euros. The IMF again sold 14.4 tons of gold in April. They said they would never sell into the market. This shows you what their word is worth. Wholesale premiums on British sovereigns have jumped from 3.5% to 7% in just one month.

The yen fell .0036 to .9106; the pound rose .0158 to $1.4646; the Swiss franc fell .0003 to $1.1564; the Canadian dollar fell .0024 to $.9485 and the USDX rose .20 to 86.79. The 10-year T-note closed at 3.30%.

Oil fell $1.70 to $72.27, gas fell $0.04 to $1.98 and natural gas fell $0.11 to $4.24. Copper fell $0.06 to $3.05, platinum fell $0.90 to $1,548.50 and palladium fell $3.85 to $453.45. The CRB Index fell 2.41 to 252.39.

Gold at $36,000 Not as Ridiculous as It Sounds? | May 26, 2010 | 07:20 AM EDT

Gold has reached record highs in recent weeks, but it will continue to rise, Ben Davies, CEO of Hinde Capital told CNBC Wednesday.

Gold should be viewed not as a commodity, but as a cash supplement, Davies said.

“There’s been such proliferation of currency,” he said. “As a consequence, gold is very undervalued.”

“I could be really obtuse and say $36, 000,” he said. “But actually it’s not as ridiculous as it might sound.”

If all the reported Fort Knox gold was re-valued at $36,000 per ounce, it would pay off all the debt in the US, he said.

On Monday, Dennis Gartman reversed his call for gold investors to rush to the exits, saying the precious metal was no longer overbought, but also warned that it was a technical call and he is “not a gold bug.”

Davies argued that as the money supply increases, gold will see an increase in use as currency, boosting demand. Emerging markets will also buy gold to increase reserves, he added.

Great dynasties in history have come out of crises with large amounts of gold to use in the markets to buy cheap assets, Davies said.