10-Oct (The Wall Street Journal) — Recent stock market volatility reminds some analysts and economic historians of the past: the distant past.

Today’s volatility is worse than the 1970s, they say. You have to go back to the 1930s to find volatility as bad as it has been since the late 1990s.

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10-Oct (MarketWatch) — Gold and silver futures rallied Monday, with investors showing strong appetite for commodities and stocks as the U.S. dollar fell sharply against other major currencies.

Gold for December delivery rose $32.80, or 2%, to $1,668.50 an ounce on the Comex division of the New York Mercantile Exchange.

“Gold is remaining bid-up on not just [on] a slightly weaker U.S. dollar, but particularly buoyant physical demand amongst retail investors,” said Ross Norman, chief executive officer at London-based bullion brokers Sharps Pixley.

“Demand in China has been especially strong…”

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Europe Claims to Have a Plan…Again

10-Oct (USAGOLD) — Gold is pressuring the upper end of the recent range in the wake of the latest in a long string of pledges and promise that a plan to save Europe will be forthcoming. The euro rebounded and stocks firmed on improved risk appetite after French President Sarkozy and German Chancellor Merkel vowed a coordinated “master plan” in response to the eurozone debt/banking crisis by the end of the month. Haven’t we heard similar promises of plans in recent months? The plan now seems to be about inserting an adjective ahead of the word “plan” to make the market think that EU policymakers are getting serious. Nonetheless, it probably bought Europe an additional 3-weeks of time.

The latest plan is expected to include bank recapitalization and perhaps a restructuring of Greek debt. “Restructuring” is a polite way of saying Greece will default. Of course the announcement lacked specifics, the most important being, where’s the money going to come from? The EU summit that was scheduled for 17-Oct was pushed back to 23-Oct, presumably to provide an additional week to finalize the details of the plan.

Last week the ECB took a more accommodative stance, indicating that the central bank would initiate a new €40 bln covered bond purchase program. This came on the heels of the Bank of England’s £75 bln expansion of its asset purchase plan. Meanwhile, the Fed remains fully engaged in its own quantitative easing programs. Perhaps therein lies the answer to that all important question about the source of the money…they’re going to print it. BoE governor Mervyn King stated quite succinctly last week, “We’re creating money because there’s not enough money in the economy.” Well that’s not entirely true, there’s adequate money in the system, it’s just all being held in reserves against the latest anticipated catastrophe…a Greek default and potential contagion.

Essentially the new plan is the same plan that has been in place since the financial crisis began 3-years ago. Governments and central banks respond with extraordinarily low interest rates, a flood of liquidity and debt monetization. The argument in favor of this response is that such measures have been successful in staving-off a complete collapse of the global financial system. However, such measures have also resulted in rather unprecedented market volatility and may well be condemning at least the industrialized nations of the West to anemic growth and high unemployment for years to come. It has become a game of lesser-evils, with the West concluding that the Japanese scenario of a lost decade — or more accurately decadeS — is more tolerable than the political mayhem and systemmic risks that would be expected in the event of a true breakdown of the financial system.

The problem is that in responding to a debt crisis by creating more debt and more currency, we get stuck in a vicious cycle of perpetual slow growth and high unemployment, requiring ever-more monetary response. That’s a grim assessment, and the growth risks are already being confirmed by the central banks that recently initiated policy responses. The debt burden increases, currencies are competitively devalued, which in turn creates increased demand for hard assets like gold.

10-Oct (Bloomberg) — European Union President Herman Van Rompuy pushed back an Oct. 17-18 meeting of government leaders to Oct. 23 as the region seeks to stem the Greece- triggered debt crisis.

“This timing will allow to finalize our comprehensive strategy on the euro-area sovereign-debt crisis covering a number of interrelated issues,” Van Rompuy said today in a statement. “Significant progress has been accomplished in the implementation of the July package.”

The EU’s 27 national leaders had been due to meet on Oct. 17 and euro-area leaders planned to gather on Oct. 18.

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10-Oct (Reuters) — The euro rose to its highest in more than a week versus the dollar on Monday, supported by a renewed German and French pledge to unveil a comprehensive plan by the end of the month to rescue the region from a sovereign debt crisis.

However, analysts said the rebound could run out of steam if no concrete euro zone plan emerges in coming weeks, with the risk of renewed bickering between euro zone policymakers seen as a threat to quick decision making.

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10-Oct (Reuters) — Fitch Ratings has downgraded Instituto de Credito Oficial’s (ICO) Long-term Issuer Default Rating (IDR) to ‘AA-’ and affirmed its Short-term IDR at ‘F1+’. The Outlook on the Long-term IDR is Negative.

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09-Oct (Financial Times) — Asian and Middle Eastern central banks and sovereign wealth funds are increasingly anxious about the safety of their investments in the debt of Fannie Mae and Freddie Mac , despite the assurances of US government officials.

Spooked by US political wrangling, major investors including the National Pension Service of Korea and the Kuwait Investment Authority have sold out of their holdings of the debt of the US Treasury-backed housing agencies since the 2008 global financial crisis. Officials from central banks, including the Bank of Japan, say they will be far more cautious in future.

“The GSEs [government sponsored enterprises] are not safe,” said one senior official at an Asian central bank, who added that his institution was reluctant to sell its existing holdings because of fears of spooking the market.

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PG View: Quietly, largely below the radar, US mortgage based financing remains a train-wreck amid a moribund housing market. The Fed is currently supporting the agency mortgage-backed securities market by reinvest principal payments from its holdings of agency debt and agency MBS. However, with the retreat of traditional buyers of such debt, the Fed may be obliged to do more. If there is a QE3, I wouldn’t be surprised at all if the Fed started buying agency debt and agency MBS outright once again.

07-Oct (The Wall Street Journal) — The International Monetary Fund is crafting a proposal to offer new short-term credit lines to governments to prevent the spread of global financial crises, senior IMF and finance officials say.

The program has the tentative backing of key world financial leaders who are expected to approve the new lending tool at the coming meetings of the Group of 20 industrialized and developing economies, according to three senior officials from G-20 countries.

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PG View: Yes! Absolutely! More credit, more debt is the answer to the global debt crisis.

07-Oct (The Wall Street Journal) — U.S. bank exposure to the European debt crisis is estimated at $640 billion, nearly 5% of total U.S. banking assets, according to recent research papers written for Congress.

While U.S. Treasury Secretary Timothy Geithner says the U.S. banking sector’s vulnerability to the euro zone problems is “very limited,” the Congressional Research Service estimate is one of the first public assessments provided by the U.S. government that quantifies the potential risks.

According to two different reports provided to federal lawmakers last month, the debt problems of Greece, Ireland, Portugal, Italy, and Spain constitute a ”serious risk” to the European banking system, particularly German, French, and U.K. banks, which have close ties to U.S. banks. Markets believe there’s a very high likelihood Greece will default in the coming weeks. That could cause a cascade of other crises throughout Europe.

…The estimate doesn’t include U.S. bank exposure to European bank portfolios that include assets in the weak member countries. Also, it doesn’t account for euro-zone assets held by money market, pension, and insurance funds.

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PG View: Geither’s sense of reality seems to have been distorted by all the absolutely huge numbers bandied about in recent years. Does he really view $640 bln is “very limited?” The Congressional Research Service goes on to say that, “depending on the exposure of non-bank financial institutions and exposure through secondary channels, U.S. exposure to Greece and other euro-zone countries could be considerably higher.” What exactly does “considerably higher” mean? Is it twice the $640 bln? More?

07-Oct (Reuters) — Fitch on Friday cut Italy’s sovereign credit rating by one notch and Spain’s by two, citing a worsening of the euro zone debt crisis and a risk of fiscal slippage in both countries.

Fitch cut Italy’s rating to A+ from AA- and lowered Spain to AA- from AA+.

It kept both countries, respectively the third and fourth largest in the euro zone, on a negative outlook suggesting further downgrades could come in future.

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07-Oct (The Wall Street Journal) — Author Michael Lewis says the U.S. and many European nations suffered a moral failure that led to economic collapse.

PG View: Supposed first world countries — including the US — hid risk, which was consequently mispriced, leading to crisis.

06-Oct (The Telegraph) — Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.

Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.

Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.

“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

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07-Oct (Bloomberg-BusinessWeek) — Once upon a time, like this summer, Dexia SA, the French-Belgian bank, was stable. By the measures global regulators deem important, its capital ratio stood at 11.4 percent of risk-weighted assets, according to data compiled by Bloomberg. That’s well above the 10 percent regulators plan to require of the world’s largest banks under new international rules.

What a difference a summer makes. The Belgian and French governments now have a complicated mess on their hands. Dexia, which had received a government bailout in 2008, saw its shares plummet after Moody’s Investors Service put its main units on review for a downgrade on Oct. 3. Within days, Belgium and France said that they would stand behind the bank’s deposits and suggested a “bad bank” structure could be used to wind down its toxic assets.

How this will be resolved is unclear. But Dexia crystallizes the need for smarter capital rules, credible stress tests and an aggressive plan to recapitalize Europe’s banks quickly should financial calamity strike.

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07-Oct (USAGOLD) — Stocks were somewhat impressed by this morning’s better than expected nonfarm payrolls report for September and the jump in August wholesale sales, but gold remains narrowly confined. Persistent uncertainty surrounding the eurozone debt crisis continues to underpin the yellow metal, along with concerns about an impending banking crisis on the Continent. There will be increasingly intense pressure on EU leaders to devise a solution to the dual crises in advance of the November G20 summit.

• US wholesale sales surged 1.0% in Aug, well above market expectations of 0.2%; inventories +0.4%.
• US nonfarm payrolls +103k in Sep, well above market expectations of+56k, vs upward revised +57k in Aug. Jobless rate steady at 9.1%.
• UK output PPI accelerated to 6.3% y/y in Sep, just above expectations, vs revised 6.0% in Aug; input PPI rose to 17.5% y/y.
• Germany industrial production (preliminary) -1.0% m/m in Aug, above market expectations of -2.0%, vs 3.9% in Jul; 7.7% y/y.
• Switzerland unemployment rate steady at 3.0%.
• Japan leading index (preliminary) -0.8% m/m in Aug, vs 2.0% in Jul.
• Japan coincidence index (preliminary) 0.3% m/m in Aug, vs upward revised -0.3% in Jul.
• BoJ holds target overnight call rate steady at 0%-0.1%.

07-Oct (BLS) — Nonfarm payroll employment edged up by 103,000 in September, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. The increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August. In September, job gains occurred in professional and business services, health care, and construction. Government employment continued to trend down.

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Highlights:
• Positive back-month revisions totaled +99k jobs.
• Average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour over the month to 34.3 hours following a decrease of 0.1 hour in August.
• Average hourly earnings for all employees on private nonfarm payrolls increased by 4 cents, or 0.2 percent, to $23.12.
• Broader U6 measure of un/under employment climbed for the third straight month to a seasonally adjusted 16.5%.
• Average duration of unemployment climbed to a record 40.5 weeks.

07-Oct (Belfast Telegraph) — It’s make or break time for the Bank of England. By throwing another £75bn at the economy they really are scraping the bottom of the fiscal stimulus barrel – and they’ll have their fingers crossed that this time it’ll work.

…”We’re creating money because there’s not enough money in the economy,” Bank of England governor Mervyn King told Sky News.

…This is all very good and markets are cock-a-hoop, but is repeating something which obviously hasn’t worked in the past a sensible move?

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I would be remiss if I didn’t say a word publicly about Steve Jobs.

For me and for a lot of us, his passing is a personal matter. I can’t quantify the contribution he made to my life and this website. Without him and Apple, I don’t know if any of this would have happened. His genius was to simplify the complex so that all of us could use it in our daily lives — something he did consistently from the first Mac computer to the I-Pad and now the latest version of I-Phone. I am glad he got these last seven years. He made the most of it.

My start with Apple occurred in the early 1980s. I may have been one of the first people in Colorado to own a Macintosh computer. A friend and client who owned a successful high-end audio outlet called me and said that he was going to send me a computer from one of his stores outside of Colorado for me to test drive. “This is something,” he said, “you aren’t going to believe.” I said “OK, if you feel that way about it, send it to me.” I got my Macintosh a few days later, locked myself in a room for a week and learned how to operate it (staring at that tiny black and white screen). The rest is history. It changed my life and contributed mightily to who I am. My friend — and Steve Jobs — dropped the computer age on my front doorstep and opened a whole new world to me that I still appreciate beyond words. USAGOLD might not have happened without Steve Jobs — and I am sure there are good many others who are thinking the same thing tonight.

We’ll miss you, Steve Jobs. God be with you, and thanks. . . .

Mike Kosares

06-Oct (Financial Times) — “We told you so”. That captures the reaction of many American bankers and policymakers towards Europe these days. Ever since America unveiled its own troubled asset relief programme in 2008, observers in Washington and New York have muttered darkly about Europe’s failure to grasp its banking nettle.

More specifically, it has long been suspected that Europe’s banks were shying away from revealing their bad loans; it has also been clear that some banks would need more capital, particularly if they had to write down deteriorating sovereign debt. Thus the obvious solution to some is what might be called euro Tarp – or a eurozone version of the capital injections and stress tests that in effect halted the American banking crisis back in late 2008 and 2009.

This may yet occur. This week eurozone leaders signalled that they are – belatedly – moving that way.

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Bloomberg (Oct 5)
Video – 4 min

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Let the QE Roll

06-Oct (USAGOLD) — The Bank of England held the repo rate steady at 0.5% and announced an additional £75 bln in quantitative easing this morning. This was bigger and sooner than the market was expecting. Caught off-guard, Gilts surged and Sterling tumbled to a new 15-month low. The BoE cited strains in the bank funding market as the catalyst for their decision, but the central bank is also apparently worried that inflation will drop below the 2.0% target in 2012. The sovereign debt turmoil across the channel on the continent of Europe undoubtedly factored into the BoE decision as well.

While the economic outlook in the UK may indeed be grim, that second part of the BoE’s justification is dubious at best. Inflation is presently running at more than twice their target and is likely to hit 5% before the end of this year. If UK policymakers really believe the January VAT hike (in conjunction with lower energy and commodity prices) will tank consumption enough to net a 300 bps (or more) decline in inflation, they’d be better off reconsidering the tax hike than increasing asset purchases.

There is a considerable and growing record from a number of major economies that pretty decisively shows that QE has very little stimulative impact. Nonetheless, the absence of meaningful fiscal action on the part of lawmakers in industrial nations — because it will be painful to some of their constituency — means central banks must at least make some effort to stimulate via monetary policy…even if it is largely pointless.

The ECB also held steady on rates today and edged further down the QE path. In his last press conference as President, Jean-Claude Trichet also painted a bleak picture of Europe’s economy, saying, “The economic outlook remains subject to particularly high uncertainty and intensified downside risks.” He also anticipates that inflation will remain elevated in the months ahead, but will decline thereafter.

Trichet went on to announce that the Governing Council has decided to launch a new covered bond purchase program of €40 bln to be conducted in both the primary and secondary market, via direct purchases from November 2011 through October 2012. In addition to its regular and special-term refinancing operations, the ECB will also conduct two longer-term refinancing operations in October (12-month) and December (13-month).

Finally today, the Fed was a seller of $8.870 bln in shorter-term securities. The proceeds of this transaction will ultimately be used to fund the purchase of longer-dated securities as part of the Fed’s Operation Twist. While yields at the long-end of the curve have indeed come down as a result of Operation Twist, initial mortgage refinancing and new mortgage demand data suggest market reaction to the Fed’s program has been tepid, at least initially.

In testimony earlier in the week, Fed chairman Bernanke gave his own dire assessment of the US economy, saying the recovery is “close to faltering.” He hinted that the Fed had more bullets; suggesting that further monetary easing could be forthcoming. With interest rates already at zero and Operation Twist already being implemented, that further easing almost assuredly would be in the form of more full-on QE; debt monetization.

While gold’s reaction thus far has been nonplussed, the reality that the central banks seem to be spooling up their printing presses once again is likely to be seen as broadly supportive to the yellow metal. If/when it is proven that the latest measures aren’t having the desired affect, and once again in the absence of meaningful fiscal policy, do the central banks throw up their hands and say we’ve done all that we can do? Or, do they pile on additional measures? Because with an unlimited supply of ink and paper — or more appropriately computer bits and bytes — there is always more they can do…consequences be damned.

06-Oct (Reuters) — Venezuela will begin repatriating its gold reserves from Western nations by mid-November, the central bank head said on Wednesday.

“We’re in the final phase of the logistics … Soon the Venezuelan people will know when the first boat is coming,” Nelson Merentes said, according to state news agency AVN.

President Hugo Chavez announced in August that the South American OPEC member nation would bring bring home almost all its $11 billion in gold reserves held abroad — a nationalistic move that has hurt market confidence.

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05-Oct (NPR – PlanetMoney) — Europe’s banks are in trouble. They urgently need to raise money to serve as a safety cushion against losses. If private investors aren’t willing to invest, governments should step in.

That’s what Christine Lagarde, the new head of the IMF, said in a big speech this summer.

European officials immediately attacked the idea, calling it “confused” and “misguided.”

Now, just over a month later, European officials are talking about doing exactly what Lagarde said: injecting public money into Europe’s banks.

“Germany is prepared to move to recapitalization,” German Chancellor Angela Merkel said today.

“Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” European commissioner for economic affairs Olli Rehn told the FT.

The quick reversal explains a lot about a problem European leaders have been struggling with for more than a year now: They’re perpetually a step behind in dealing with the continent’s debt crisis.

Even when European leaders know what needs to be done, they don’t always have the power to do it. The European Union doesn’t have much central authority. Big decisions have to be separately approved by the parliament of each country in the euro zone.

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06-Oct (Der Spiegel) — After they joined the euro zone, the countries of southern Europe suddenly discovered they could borrow money at German-style rates, and any hope of sorting out their dodgy finances vanished. But it was France and Germany who set the worst example, when they broke the euro-zone rules they had forced on others.

…while central governments tried to cap their national budgets to comply with the Maastricht requirements, municipalities piled on debt that was not documented or recorded anywhere at the European level.

Low-interest loans were available everywhere, and it was all too easy to postpone their repayment to a distant future and refinance or even expand government spending.

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