The Markets: The Myth Of The Gold Bubble By Gareth Milliams

April 23, 2009

SPDR Gold (GLD) is the most successful ETF in history. Back in 2004, it opened with 260,000 troy ounces of gold. It now has 35,000,000 ounces of which 16,000,000 have been added in the last year alone.

I get told so often that gold is in a bubble, but how can that be? There is presently no correlation between gold purchase and return. This is partly because there is no perceived gold shortage - yet. It is also because certain other economic factors dictate gold value, such as dollar strength and inflation.

Inflation is at a comparative low. In fact at the moment we are currently experiencing a slight deflation of -0.38% (click on the chart below). The dollar is also relatively strong and therefore hedging against dollar weakness is not required. Yet despite this, gold still holds its value. Last year, as the markets crashed and banks failed, GLD even garnered an 8% profit.

courtesy of www.dshort.com

So what will defeat deflation? Unfortunately, it is rabid government spending that will create the inflation that will reflate the global economy. After the Great Depression, Roosevelt regretted that he hadn't spent more on infrastructure projects. Luckily (?) World War 2 came along, which (at the time) led to the greatest government spending initiative in history and deflation disappeared only to return in the late 1940's. Click on the chart above and you'll see that on the clearly marked 1940 line that there is a tiny spike in inflation (lendlease?) followed by a massive surge at the beginning of 1942.

A more modern example close to home is the deflation experienced in Japan during the 1990's. Despite a global boom, Japan's economy stayed in the doldrums because of a lack of internal investment and the government's inability to confront zombie banks that weren't lending and were in fact, bankrupt.

My point is this: Whilst spending for the sake of it goes against the grain, deflation is the greatest enemy of growth. To reflate we need to inflate and that means massive spending programmes from central governments. Click the chart below to see a shocking graphic of how the Adjusted Money Base (AMB) of the United States has increased.


All of this spending means that there will be a huge reduction in the comparative demand for US dollars. Excessive supply of any asset only weakens its value. The problem is, is that the US dollar is the lifeblood of the international finance and trading system and this level of printing will cause a massive weakness in dollar value and therefore a systemic increase in the cost of commodities such as gold and oil.

That is where gold comes into its own as a flight to quality and as a simple hedge against persistent dollar weakness. At some point there may be a mass hysteria for this finite metal pushing the price up toward record inflation adjusted highs.

So for my portfolio clients, I heartily endorse GLD and for monthly investors, the resource funds from JP Morgan, Black Rock, Martin Currie and Investec.

Inflation is coming, that is certain. We must prepare to benefit from it.

The Markets: Bull Or Bear By Gareth Milliams

The global financial crisis has been described as economic warfare. Yet for the last month, we have watched the S&P grow nearly 30%. But is it sustainable?

Last week the second largest US mall owner, General Growth announced one of the biggest bankruptcies in US history, going down for $27 billion. Additionally the bondholders of MGM Mirage in Las Vegas led by Carl Icahn have asked for that casino to announce bankruptcy with debts of more than $13 billion.

The big four autos are on their last legs with Chrysler being forced into a marriage of convenience with Fiat and General Motors who after having had to sack their President on White House orders are now seriously considering Chapter 11.

What I find more worrying is that much of this rally has been led by the financial sector who (as Goldman Sachs have shown) are quite willing to outright lie about their quarterly results. Additionally, there is nothing fundamentally strong about the American banking industry.

For those who believe that happy days are here again, take a look at the chart below (with thanks to Doug Short-dshort.com):



These are what Doug Short calls the "Four Bad Bears", 1929-32,1973-74, 2000-02 and 2007-09. 2007-2009 just looks too short, considering that this is (according to Alan Greenspan) a hundred year recession. If this is truly to be a short but deep recession then results have to beat expectations for more than one quarter. It seems to me that the markets are going up, but are leaderless. There is no recovery but only misplaced optimism.

Below is another DShort.com chart, this time looking at previous bear market rallies during this downturn. You'll notice a pattern, that the deeper the point drop, the greater the upswing when the market rallied back.



Looking at the chart, the so called 'new bull' looks suspiciously weak. Presently, the main equity indexes appear overbought and the fundamentals still look negative. From Reuters April 15:

Washington, April 14 - US retail sales unexpectedly fell by 1.1% in March due to declines in all major retail categories except food and beverage stores and health and personal care stores. But the surprise drop in March retail sales follows a 0.3% increase in February, which the Commerce Department upwardly revised from a 0.1% decline.

March's 1.1% drop is the biggest decline since December and well below the 0.3% gain economists expected.

A big factor in the overall decline was a 2.3% drop in auto and parts sales, which followed a 3.0% drop in February. Automotive sales are now down 23.5% from the level seen in March 2008. Gas station sales fell 1.6% in March and are down 34.0% from a year earlier.

Sales at electronics and appliance stores fell 5.9% in March, and clothing store sales fell 1.8%.

Retail sales excluding autos fell 0.9% in March, below economists' expectation of flat sales for the month. Commerce upwardly revised February sales ex-autos to a 1.0% gain from the 0.7% increase it first reported.


So as unemployment keeps rising, house prices continue to tumble and people cut their spending, there are those who are announcing a new bull market.

I'm convinced that it is not. I believe that it is a reaction to earlier sell offs and that the higher the bounce, the greater the upcoming downturn will be.

We have further tests to come in this recession. The first will be in the financial sector and heavy manufacturing such as auto's.Then we will have inflation. Interest rates will go up, testing many home and small business owners, but there will be growth. Inflation is a byproduct of growth & no recovery can happen without it. Higher inflation is created by greater demand than supply for goods and services. Until I see that happening, I'll protect my clients money and ignore these persistent false dawns.

The Crisis: Ever Get The Feeling You've Been Had?

Goldman Sachs shocked the financial world by declaring a $1.81bn Q1 profit.

In the middle of the biggest downturn since the great depression, GS showed the world why it is Wall Streets greatest bank. Or did it? Could it be that they were just being economic with the truth and imaginative with their accountancy?

Monday, April 13, 2009
Wall Street Emperor reports, sans appendage
In continuation of Wall Street's quarterly fantasy role playing game known as "gumptions and braggins", the Q1 Financial reporting charade I mean parade continues unabated with Wall Street Prince of Darkness firm Goldman Sachs reporting what looked like a blowout quarter until you read past the headlines to find that Goldman would have missed Analyst Estimates( oh the Horror!) if they stuck to their normal quarterly reporting cycle of Dec-Feb.

Is it any wonder that Goldman Lawyers are busy suing the new blogging site dedicated to uncovering their economically toxic machinations? http://www.goldmansachs666.com

It's unclear whether or not they are suing due to the said site's reference to Goldman or to the number of the Beast or do they hold the rights to both?

Not only did TARP bail out Goldman Sachs to the tune of around 25 Billion, but it also allowed them to skip their $2.15 per share/ 1 Billion loss incurred during December.( Isn't 1 Billion too round a number? hmmm...)

How are they allowed to get away with this you ask?

In our increasingly fictitious/fascist collusive Government/Media/Corporate environment, apparently being allowed to convert into a Bank holding company can allow you to skip a bad month if you choose to and you get a free pass from everybody including the media.

Why should the media shine a light to expose the truth yadda yadda yadda..... just give me my money and you can put my name next to the byline.

Out of more than 10 reports from mainstream financial media sources,

http://finance.yahoo.com/q/h?s=GS&t=2009-04-13T21:08:30

I've only noticed one glance over the "orphan" month of December 2008:

"Shifting the start of its fiscal year certainly helped the bank's overall results, said Denise Valentine, senior analyst at Aite Group, a Boston-based research firm.

"It's a little bit of fancy footwork, but for the market as a whole it's good news and it was needed," she said. "When your star does well or does what is expected, you breathe a little easier."

source: http://news.yahoo.com/s/ap/20090413/ap_on_bi_ge/earns_goldman_sachs

"Fancy footwork" You say? or is your job on the line if you say what you really mean about Goldman Sachs' accounting trickery?

Not only is Goldman Sachs seemingly allowed to report fictitious "mark to market" results that can only be generously referred to as "mark to fantasy" based on relaxed financial reporting regulations, now they can also skip reporting whole months altogether.

What's next in this rigged game?

Queue generic CFO voice: "Ladies and Gentlemen, we are proud to announce record profits this quarter and every quarter into the foreseeable future now that we are allowed to spin off our losing months into separate entities according to TARP...Sorry, I meant PRAT(Profit Realization Accretion Transfer).

Voila, I've made our massive losses vanish into the SEC ether. Now hurry up and dilute the bagholders which allows us to pay the TARP back so I can get my damned bonus thanks to the PRAT act."


The quarterly reporting Emperor, apparently having no shame in addition to his lack of wardrobe, has decided to leave one of his sight for sore eyes limbs in the castle before venturing out into the open.

update: There is some reporting of the accounting loophole that caused Goldman to "smash" analysts estimates.

>>>>>>>>>>>>>>>>>>
by Dan Wilchins


"A RARE OPPORTUNITY

But Goldman's report was not all positive. The bank said its net loss for common shareholders was $1.03 billion in December, prompting some to question whether the change in financial years had allowed Goldman to dump much of its bad news into that one-off period and start afresh in the first quarter.

"December was a rare opportunity for both Goldman Sachs and Morgan Stanley," said Brad Hintz, an analyst at Sanford Bernstein. "A single month, without any comparisons that can be made with any other months, so none of us will ever know what goes into the month of December. It's one of those rare opportunities that CFOs dream about." Hintz is a former Lehman Brothers chief financial officer.

The bank said in January that it recorded a roughly $850 million loss from loans extended to units of chemicals company LyondellBasell in December, though the units filed for bankruptcy in January.

Between the December losses and the subsequent profit, Goldman's tangible book value per common share was essentially unchanged from the end of November, at $88.02, the bank said. Tangible common equity is a measure of the bank's net worth, ignoring intangible assets such as goodwill.

A measure of the bank's trading risk, average daily value-at-risk, surged to $240 million in the first quarter of 2009, compared with $157 million for the three months ended February 28, 2008, implying that the bank took more trading risk."
<<<<<<<<<<<<<<<<<<<<<<
http://finance.yahoo.com/news/Goldman-beats-forecasts-to-rb-14915717.html

It is good to know that there are still some reporters like Dan Wilchins with enough backbone who are digging deeper but unfortunately for every one sentient report, there are 10 mindless company PR rehashes that drown them out.

The question to ask on the conference call in a couple of hours is how much they made in profit in their march 2009 quarter since it is taking place of their orphaned 1 Billion loss Dec 2008.

A safe estimate based on the frozen credit markets might imply that their Dec 2008 loss would have wiped out their profits from Jan and Feb of 2009 leaving them missing Analyst estimates by a country mile instead of crushing them.

But then again, we are not in the midst of a financial based economic collapse in spite of the accounting gimmicks of Wall Street firms but due primarily to the lax accounting standards that allow such chicanery to exist.

Another piece of irony is that Goldman made most of their profits using the same tactics of excessive leverage that have led to the horrendous tax payer money bailout of these bankers and it does not seem these bankers have learned any lessons about risk and leverage.

How long can they continue the same old same old while fleecing the public?

We shall see.

(With thanks to AB)

Economics: Soros Speaks To Reuters And Tech Ticker And States That "I'm Not Good At Predicting Markets!"

Legendary investor George Soros is asked questions by a roundtable of journalists. He expects greenshoots to begin to appear not this year but in 2010.

Its a fascinating and sobering 13 minutes.




His next interview was with Tech Ticker where he stated that "the danger of collapse has passed," but that the stock rally is not sustainable.

The Crisis: The Legacy Of The G20 By Gareth Milliams

The G20 conference was always going to be success. This was preordained. Conversely, previous to the first day, China and France took clear positions that they either softened or were virtually ignored once the conference began. These pre-battle shots across the bow were local politics designed to appeal to their own respective electorates or more accurately in China's case, proletariat. It was merely theatre. Like all of these shindigs, most of the spade work was done by the advance negotiating teams, leaving the politicians to just craft nuance.

However, the positions taken by these major actors did emphasise the comparative weakness of the Anglo Saxon nations. Overly dependent upon our banking sectors we had sacrificed manufacturing real goods for esoteric financial instruments and brought the world down with us. President Lula of Brazil famously said that the crisis had, "white skin, blonde hair and blue eyes".

The big announcement was the $1.2tr donated to the IMF, but much of that was promised way before the G20 (such as the $100bn from Japan and $40bn from China). Requests from Britain and the United States for more radical European stimulus packages were refused by the French and Germans. It seems that the Europeans still believe that the price for their lukewarm support is that the US does all the hard work whilst they sit on the sidelines. They consider this crisis to be essentially Anglo Saxon and thus expect the Brits and Americans to do all of the heavy lifting (this is despite major exposure to SIV's and CDS's for Deutsche Bank, BNPP et al).

China did not make too much of the purported new reserve currency. It was (as I had said previously) pure political positioning. But don't be surprised if in the future, you see a repegging of the Yuan and a more aggressive use of the Renminbi as a regional currency or alternative to the US dollar. However, a global basket of currencies would be very difficult to achieve and would ratchet up the powers of the IMF to an unacceptable level. It helps its proponents that the present boss of the IMF is Dominique Strauss Kahn, an unreconstructed French socialist.

So what will happen to the Chinese currency?

According to Forbes:

China sets the yuan's value based on a narrow range of fluctuation against a basket of currencies, including the dollar, euro, yen and won, and does not disclose the different weights assigned to each currency. But, using new statistical methods that take into account concurrently the movements in exchange rates among the reference currencies, the change in the weighting of each foreign currency over time can be inferred. What Harvard economist Jeffrey Frankel has found is that, after Beijing de-pegged from the dollar in 2005, the yuan eventually became equally weighted between the dollar and the euro. In fact, the yuan's 20% appreciation against the dollar over the next three years to 2008 mostly reflected the euro's gain vis-a-vis the dollar.

But, as the global financial crisis unfolded and the dollar began to rebound against the euro, Beijing started by May 2008 to move the yuan back toward giving primary weighting to the dollar, a move that prevented the yuan from falling against the greenback. In fact, in the period from September 2008 to February 2009, Beijing's currency regime "has come full circle, virtually back to what it was in late 2005," said Frankel, who is the director of the Program in International Finance and Macroeconomics at the National Bureau of Economic Research. In the first two months of this year, in particular, the yuan apparently gave full weighting to the dollar. A report last Wednesday by Morgan Stanley similarly observed a "new renminbi [yuan] regime featuring a quasi-hard-peg to the U.S. dollar

This pragmatic repegging makes absolute sense for the Chinese as they look to protect their dollar assets against their own yuan.

China has unprecedented political strength right now. It is flexing its muscles, but it does not threaten, it negotiates. It looks not to dominate but to be accepted as an equal.

Much of the success of the G20 was due to the flexibility of their positions."At the summit, Hu Jin Tao said China was willing to work with other countries to deal with the crisis as a "responsible member of the international society". Hu said: "All countries are on board the huge boat of the world economy. When this boat is riding into the storm, all members on it must work together to steer it out of turmoil."

The world that we have left behind and the one that we journey toward are quite different. Anglo Saxon hegemony is coming to an end. The next ten years will define the west for the next century. The legacy of the G20 is that the global reformation began in London last week.

The Crisis: A Quick Thought By Gareth Milliams

Could China be preparing to launch the Renminbi as a convertible currency?

Beijing has signed Rmb650bn ($95bn, €72bn, £67bn) of deals since December with Malaysia, South Korea, Hong Kong, Belarus, Indonesia and, now, Argentina in an attempt to unblock trade financing that has been severely curtailed by the crisis.

I think it likely that the dollars position as the worlds reserve currency will be under threat over the next few days. Whilst I do not expect the dollar doubters to prevail, it makes sense that Russia and China use its underperformance as leverage in their negotiations.

For the first time since the end of the cold war, America's position as the global hyperpower is under question. To get what it needs to conclude the G20 succesfully, the United States will have to make concessions. The only questions are; to whom, what and how much?

China is on the cusp of becoming a super power. Russia is an authoritarian state and a defeated superpower, dependent upon a high oil price to keep its promises to its people and order on its streets. Both of these nations have great incentive (politically and historically) to declare victory over the US at the G20.

Their choice of language in their final communique's at conference end will be interesting. But what will fascinate will be what has been stated implicitly.

I think that the basket of currencies proposal as an alternative to the US dollar is a 'stalking horse' for the eventual launch of the Renminbi on the world markets.

According to the FT of March 31st, "Economists say the SDR plan is unfeasible for now but see Beijing's currency swap deals as pieces in a -jigsaw designed to promote wider international use of the renminbi, starting with making it more acceptable for trade and aiming at establishing it as a regional reserve currency in Asia, something that would also enhance China's political clout.

This weekend could be a defining moment in the short history of this century.