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XMFSinchiruna (26.98)

My thoughts...

Recs

40

January 13, 2010 – Comments (18)

Let's start with a review of a few fresh headlines:

Here's a nugget from Mr. Ambrose Evans-Pritchard (also posted by jesusfreakinco on his blog). [Important enough to warrant repeating.]

"Difficult decisions will have to be made regarding spending and tax to underpin market confidence in the long-run sustainability of public finances. In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will approach levels by the latter half of the decade that will bring pressure to bear on the US’s ‘AAA’ status", he said.

 

China Accelerated Stimulus Exit Signals Higher Rates:

Earlier in the day, that headline had read:

China’s Accelerated Exit From Stimulus Signals Higher Yuan and Lower Dollar

The earlier version contains less spin.

 

1 in 7.5 U.S. homeowners now delinquent or in foreclosure.

Join the Quest for Recovery Confirmation

Ready for Round II of the Mortgage Meltdown? Delay does not equal avoidance.

 

Here is a nugget from GFMS today:

"Because of the market's dependence on investment, the biggest threat to the gold price will obviously be the eventual shift to “business as usual” in the world's economies, Klapwijk said."

Don't worry, Mr. Klapwijk. We're a looong way from business as usual. Understatement of the year about gold: "might even go as high as $1,300". I predict $1,500 - $1,650 will be touched in 2010 or early in 2011. We may yet have volatility before we re-take $1,220s, with $1,000 still potentially in play. The longer we stay up here near $1,150, however, the greater the likelihood that the $1,080 neighborhood was our low for this corrective pause.

See also:

Your last chance to buy cheap gold and silver

Easy Does it, Goldfinger!

 

 

Sorry the news isn't better, Fools. The extent and scope of the Second Depression will begin to be understood during 2010. Hopefully thereafter fiscal sanity will prevail. Sadly, the dollar is toast.

An orchestra of interventions, bailouts, stimuli, financial propaganda, fluffed-up equity markets, and non-transparent market-making has delayed the inevitable continuation of the deleveraging event, but not avoided it.

The $600 trillion in notional derivative "assets" hiding on global balance sheets are no more sound today than they were before Bear Stearns or Lehman collapsed. Denominated primarily in dollars and Euros, these contracts are ultimately a lead weight around the neck of both currencies. This is the reality of our time.

A structural shift in our economy away from leverage, absorbing what will by now have grown into the mother of all deleveraging events even by 2008's standards, is the only way forward to a sustainable economic solution in my opinion. This I have said from the first day of Bailouts and TARP, and I will continue to believe that the collective response to the fiancial crisis in the west was 180-degrees the oppposite from a sound fiscal approach to rectify the situation we faced. 

"Let them fail" seems virtually inconceivable now that we have responded with so many unfathomable trillions to reflate the giant monster of failed securitized leverage, but the irony is that it may be the final outcome no matter what actions are taken from here on. I am extremely cautious of generic investment exposure to the U.S. economy at this juncture. Please tread carefully.

With all my hope that I am wrong,

Sinchi

18 Comments – Post Your Own

#1) On January 13, 2010 at 9:06 PM, XMFSinchiruna (26.98) wrote:

And here's my comment to a recent roundtable discussion comparing prospects for gold to those for oil in 2010:

"Both are solid choices for capital preservation amid a currency crisis for the U.S. dollar and other structurally impaired fiat currencies.

All the untold trillions of dollars in failed derivatives contracts -- and the unavoidable resurgence of the deleveraging event -- land squarely upon the lap of these strained currencies. As the one currency that is immune to debt-driven impairment, gold remains the superior choice.

Oil could outperform gold if counter-cyclical relative strength in the dollar continues amid the artful perpetuation of a fairy-tale recovery myth, but when the enormity of our predicament becomes common knowledge, it's gold that you want to hold. Yamana Gold (NYSE: AUY) remains enormously undervalued. But there's a third color of gold: silver. With a ratio of 65:1, silver is the obvious choice at this juncture, which is why I chose Silver Wheaton (NYSE: SLW) as my top pick for 2010."

 

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#2) On January 13, 2010 at 9:47 PM, russiangambit (29.38) wrote:

Sinchi, I wanted to ask you for a while. All this information you compile, it has implications for the economy as a whole, right, not just gold/silver price. How can you focus just on gold like the rest of it doesn't matter? Unless you are sure about the context in which the gold will be trding how cn you be sure what will happen? 

If you expect second depression, there will be deflation. But I think you are betting on stagflation. I am also in the stagflation camp right now. Tha absolute willingness of the FED to print money no matter what happens is pointing to stagflation. The possible black swn is that the populist anger is so strong that FED is neutralized and is forced to stop printing. Then it will be deflation.

Also, consider the impact of China. China is trying to control inflation right now, if chinese market cools down it will be aa death knel for commodities and with commodities fall all the markets will break down, including gold.

If China decides that controlling inflation is too dangerous, then we'll get imported inflation in the US and stagflation scenario. But it will take probably just  year of high inflation in the US  ( don't forget all the unemployed nd retired people already in bad shpe) for the wheels to come of the wagon  in terms of the populist anger.

We are existing right now in some sort of suspended disbelief situation, which will resolve one way or another.

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#3) On January 13, 2010 at 9:49 PM, XMFSinchiruna (26.98) wrote:

Here's the view from Latin America:

http://globaleconomicanalysis.blogspot.com/2010/01/constitutional-crisis-in-argentina.html

It's not pretty. 2010 is going to be a tough year.

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#4) On January 13, 2010 at 10:04 PM, XMFSinchiruna (26.98) wrote:

russiangambit

I don't focus just on gold. I track the holistic macroeconomic picture to guide the whole of my investment strategy, and for the scenarios at hand gold and silver and related equities represent in my view the safest investment vehicles. That's not to say I advocate full or aggressive exposure to them in the manner I have chosen, but rather that they form an important component of any portfolio under the circumstances.

Yes, I am firmly in the stagflation camp. The powers that be have yet to see a threat to "growth" that they weren't prepared to combat with limitless trillions in dollars we do not have to spend. Without question, the persistent structural deficiencies in the domestic economy will continue to be addressed by desperate attempts to stimulate and backstop. That is the path that has been chosen.

It's not the deflation that must be feared, but rather the response to deflation ... the enormously inflationary response that prints dollars like they are going out of style (which they are, by the way). Paradoxically, when a government has chosen the response strategy that our western governments have, and dug themselves in with no practicable means to change course, deleveraging actually becomes hugely inflationary.

Please consider the comments I made quite some time ago to an article by a fellow Fool. The following is from April 23, 2009:

"Bernanke's interventions don't have to be successful to spur inflation.

When you have a contracting economy, but massive spending transitioning into quantitative easing in a failing attempt to counteract de-leveraging, and foreign creditors grow increasingly wary of the entire mess... these are clear ingredients for stagflation.

Eroding value of the USD (looming) vis-a-vis bailouts and quantitative easing can indeed stoke double-digit inflation even as several key asset classes like housing experience falling nominal prices in a contracting overall economy. I prefer the term stagflation because it differentiates from the commonly understood hyperinflationary model which presupposes some measure of economic stabilization to precede the event (thus increasing velocity of money).

I believe the bailouts and fiscal interventions will fail to generate economic recovery in the face of an insurmountable mountain of toxic derivatives (at least $684 trillion). I believe that the recent foray into quantitative easing is just the beginning, which creates a dangerous vicious cycle for the USD, prompting further acceleration of the printing press and sealing the downward trajectory of the USD against the basket of foreign currencies.

This will yield higher USD prices for core commodities like oil, food, metals, etc., forcing the hands of foreign holders of USD reserves to begin unloading in one form or another and making the eventual emergence of a replacement reserve currency system a certainty. Foreseeing this scenario, I believe, China and Russia have held no punches in voicing their level of discomfort with our policies and the continuing role of the USD as the reserve currency of the world.

It seems most folks are watching housing prices, unemployment figures, and other such domestic economic indicators for clues about when we could being to see deflation bottoming and allowing inflation to rear its head. I agree that such a reversal would indeed herald the arrival of inflation, but I consider this scenario far less likely than the stagflationary case.

Instead, I have my focus honed in upon Treasury bond auctions and quantitative easing, the USDX, gold, the growing crisis tally, strategic moves to secure future commodity supplies, and global currency developments with respect to concern over the fiscal health of the greenback, etc. These, I believe, provide the clues we need to follow to predict the onset of inflation.

http://www.fool.com/investing/international/2009/03/24/102-t...

http://www.fool.com/investing/international/2009/04/01/an-op...

Just one Fool's opinion. :)"

 

 

 

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#5) On January 13, 2010 at 10:57 PM, jesusfreakinco (28.98) wrote:

Sinch,

You say what the rest of us know, just much better.   Good recap of the coming tsunami.

JFC

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#6) On January 14, 2010 at 8:04 AM, XMFSinchiruna (26.98) wrote:

U.S. Has Record December Budget Gap of $91.9 Billion.

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#7) On January 14, 2010 at 10:41 AM, leohaas (31.35) wrote:

"Sorry the news isn't better, Fools. The extent and scope of the Second Depression will begin to be understood during 2010. Hopefully thereafter fiscal sanity will prevail. Sadly, the dollar is toast.

An orchestra of interventions, bailouts, stimuli, financial propaganda, fluffed-up equity markets, and non-transparent market-making has delayed the inevitable continuation of the deleveraging event, but not avoided it."

Agreed that the news is not good. But isn't that normal when the world economy is just starting to recover from the worst recession in three quarters of a century?

You are correct when you say that all the stimuli, bailouts, etc have delayed deleveraging. But you fail to draw the conclusion that that is how a Second Depression was avoided! Fast deleveraging, which would have happened without the bailouts, stimuli, and QE, would have thrown us into a depression immediately. We can debate whether that would have been good or bad (needless to say which I would argue--just imagine the soup lines in the thirties), but fact is we are currently not in a depression.

Deleveraging will continue, but not to the extent it would have happened without the intervention. When individuals or companies go bankrupt (or when they are foreclosed on), they put those whom they owe money in direct danger of going bankrupt as well. This is especially true in a financial environment where so many big investors are so heavily leveraged. This is a domino effect that had to be stopped or at least slowed down.

All this does is buying time, but time is of the essence when bankruptcy or foreclosure are the threat. That is because both are more of a cash flow problem than an asset problem. Giving people and companies more time to pay their debt (even better: combined with some debt forgiving), gives them a chance to recover. Granted, far too few grab this chance, but every single one who does is one less bankruptcy or one less foreclosure. In other words: one less domino to fall, resulting in fewer dominos to fall down the line. Dominos which would have fallen without the bailouts, stimuli, etc!

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#8) On January 14, 2010 at 10:48 AM, XMFSinchiruna (26.98) wrote:

And it doesn't exactly reflect well on our culture as a whole that a guy like this can remain on the airwaves for decades. I've been incredulous for decades at the consistency with which this guy makes horrible remarks at the worst possible times, and still apparently finds an eager audience of millions. Enough, already ... boycott the advertisers and cancel the show. Let him go live with the Waterboy's momma.

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#9) On January 14, 2010 at 11:13 AM, XMFSinchiruna (26.98) wrote:

leohaas

"but fact is we are currently not in a depression".

That might be your fact, but it's not my fact.

You seem to ignore that new originations of securitized loans and mortages have continued unabated since the interventions swooped in to buy time. By reflating a broken system, you only increase the distance to fall. Dominoes have not been removed, but added since this crisis began, because now the dominoes include the very common stock of the USA ... the dollar.

There is no recovery in the U.S. If you have evidence of recovery, bring it on.

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#10) On January 14, 2010 at 11:15 AM, 4everlost (29.45) wrote:

This is the most disconcerting bit of news on the Telegraph site:

Beer supplies to run dry amid Belgian brewery protests

Rec #18

 

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#11) On January 14, 2010 at 1:07 PM, XMFSinchiruna (26.98) wrote:

Rick Santelli strikes again. :)

He is presently blowing the cover of anonymous buying interest in the Treasury market with the suggestion that it is indeed "undercover quantitative easing".

Eric Sprott agrees.

So do I.

The mystery money behind the equity rally may come from the same sources.

 

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#12) On January 14, 2010 at 1:58 PM, leohaas (31.35) wrote:

No, by reflating you slow the rate of deflation. That is making sure the dominos don't fall.

Unemployment no longer going up and positive GDP growth are clear signs of the having passed the bottom: recovery.

Stay depressed!

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#13) On January 14, 2010 at 2:37 PM, XMFSinchiruna (26.98) wrote:

leohaas

Unemployment is no longer going up? Sure didn't look that way in December.

GDP growth is a fiction of fiscal intervention.

The foreclosure data and the looming domino of commercial real estate would tend to call the perception of a bottom into question. Banks are still failing just about every week, and the FDIC is insolvent.

Stay happy in Pleasantville. :)

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#14) On January 14, 2010 at 5:52 PM, leohaas (31.35) wrote:

December unemployment data shows 10.0%, unchanged from the previous month, and 0.2% down from the month before. No longer going up! That is not good data, but the worst data is to be expected around the end of a recession. Especially for unemployment, which is a trailing statistic. 

Sure, you don't like a statistic (such as GDP), you can always call it fiction.

Foreclosure data is indeed not good. But to judge the effect of the stimulus, bailouts, etc the comparison should be with a situation in which there would have been no stimulus, no bailouts, and no QE. In that case, foreclosure data would have been way worse.

Look, I am not saying all is happy in the economy. Far from it. Just trying to counter the negativity here on CAPS...

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#15) On January 14, 2010 at 6:42 PM, mtf00l (48.04) wrote:

leohaas re comment #7

"Giving people and companies more time to pay their debt (even better: combined with some debt forgiving), gives them a chance to recover. Granted, far too few grab this chance, but every single one who does is one less bankruptcy or one less foreclosure."

I know of no banks forgiving or foregoing. 

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#16) On January 14, 2010 at 7:00 PM, bigcat1969 (91.13) wrote:

Unemployment numbers are virtually worthless, look at population versus employment numbers.  Slight improvement in November, crashed back in December as the trend of losing 0.2% or more a month since this started hasn't slowed.  In three years we might see only half the population working, down from almost two thirds at the peak.  Lets see them spin that.

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#17) On January 15, 2010 at 4:13 PM, silverminer (30.49) wrote:

POSCO Postures for Unfettered Pan-Asian Growth

http://www.fool.com/investing/international/2010/01/15/posco-postures-for-unfettered-pan-asian-growth.aspx

TMFSinchiruna (aka silverminer)

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#18) On January 17, 2010 at 5:52 PM, LiveOakGrey (< 20) wrote:

Hi Sinch,

Undercover buying by the Treasury?  I KNEW they'd have to resort to either that, or some deal with banks to buy bonds in a quid pro quo of some kind. The question is is it going to be a complete transfer of bond buying to the new undercover buyers, or is there going to be a shortfall?  You mention that we'll have a tough 2010, and it seems absolutely reasonable it can't be otherwise.  

Do you see the inflation, stagflation, etc. lasting for years, since 'the dollar is toast?'  I wonder how long it CAN last, before some end-stage crisis.  Are you thinking the Fed, or it's proxies will keep the fantasy running for several years?  Any idea of schedules for when it begins getting severe and when/if it collapses?  

If there is a several year run on this economic situation, has anyone applied at this Fantasy destination for the 'greeter's job' where they give you that spanking white suit, and the height-challenged, frog-voiced support staff?  (Boss, de plane! De plane!)

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