17-Oct (MarketWatch) — The Federal Reserve should target the level of gross domestic product, Goldman Sachs economists said ahead of a wave of speeches from central bank officials.

In a note published Friday night, Goldman Sachs said the best way for the central bank to loosen policy significantly further would be to target a GDP path, and commit to using more asset purchases to achieve that path.

“While a shift to a nominal GDP level target would be a big decision, it would be consistent with the Fed’s dual employment and price mandate,” the economists wrote.

[source]

PG View: A timely position taken by Goldman Sachs in light of the inflation piece written by John Mauldin on Saturday. Yes, it does indeed seem that “inflation as a solution” is gaining traction. I say tom-a-to, you say tom-ah-to. I say inflation targeting, you say GDP targeting. Whatever you call it, it’s synonymous with dollar devaluation and you best be saving in something other than dollars if you hope to come out the other side unscathed.

By John Mauldin
15-Oct (JohnMauldin.com) — I was inspired for this week’s letter by a piece by Art Cashin (whom I will get to have dinner with Monday). His daily letter always begins with an anecdote from history. Yesterday it was about Weimar, told in his own inimitable style. So without any edits, class will commence, with Professor Cashin at the chalk board.

[Cashin's recounting of the nightmare German inflation, which we posted last week.]

…”We know that the world is drowning in too much debt, and it is unlikely that households and governments everywhere will be able to pay down that debt. Doing so in some cases is impossible, and in other cases it will condemn people to many hard years of labor in order to be debt-free. Inflation, by comparison, appears to be the easy way out for many policy makers.

“Companies and households typically deal with excessive debt by defaulting; countries overwhelmingly usually deal with excessive debt by inflating it away.

…But now even serious economists are recommending inflation as a solution. Given the powerful deflationary forces in the world, inflation will stay low in the near term. This gives some comfort to mainstream economists who think we can create inflation to solve the debt problem in the short run.

[source]

PG View: Another great and comprehensive piece by Mauldin on the threat of hyperinflation. Even though Mauldin believes that an independent Fed, mandated to keep inflation in check, will prevent the unthinkable…what if he’s wrong? He cites an “ill-conceived” proposal by Financial Services Committee ranking member Barney Frank that could severely impede the Fed’s independence as a reason for concern. But even if Mauldin is correct, and inflation of the magnitude needed to meaningfully reduce our oppressive debt burden is never unleashed, it means that that very debt burden is going to be an interminable head-wind to economic growth and job creation. We are truly caught between Scylla and Charybdis.

17-Oct (The Wall Street Journal) — German Chancellor Angela Merkel expects a package of measures towards solving the euro-zone debt crisis to be agreed on Oct. 23, but warned against hoping that all of Europe’s debt woes would be resolved, her spokesman said Monday.

Spokesman Steffen Seibert said a “package” of measures would be agreed upon at the European Union summit in Brussels this coming Sunday, but “the chancellor reminds [everyone] that the dreams that are emerging again, that on Monday everything will be resolved and everything will be over, will again not be fulfilled,” Mr. Seibert said.

The comments, which saw stock markets in Europe and the U.S. pare gains, echo those of German Finance Minister Wolfgang Schäuble, who earlier Monday said he expects European leaders to agree on new measures to combat market uncertainty at the coming summit—including a 9% Tier-1 capital ratio for systemically important banks—but cautioned that a permanent solution to the debt crisis is unlikely to come out of the summit.

[source]

17-Oct (USAGOLD) — Gold edged closer to the $1700 level in overseas trading, despite a firmer dollar, but momentum remains generally lackluster. The euro retreated into its range after German Finance Minister Schäuble and a spokesman for Chancellor Merkel warned that the 23-Oct summit would not provide a final solution to Europe’s debt and banking crisis.

Spokesman Steffen Seibert said “the chancellor reminds [everyone] that the dreams that are emerging again, that on Monday everything will be resolved and everything will be over, will again not be fulfilled.” A refreshing bit of candor for a change; for even with the promised big bazooka approach, the root causes of the crisis will once again be left unaddressed. Whether it is a kick of the can, or a big blast down the road, there is no-way that everything will be resolved.

In fact, efforts to prevent a Greek default, contagion and a banking crisis are arguably making the problem even bigger. In fostering a negative real interest rate environment, providing endless liquidity and creating ever-more debt, policymakers may be forestalling the day of reckoning, but that day will come.

• US industrial production +0.2% in Sep, in line with market expectations; cap use 77.4%.
• NY Empire State index rose to -8.48 in Oct, below market expectations of -4.0, vs -8.82 in Sep.
• UK Rightmove house prices (nsa) +2.8% m/m in Oct; +1.2% y/y.
• Japan industrial production (sa) for Aug revised lower to 0.6%, vs 0.8% previously.

17-Oct (Finance Asia) — Hong Kong’s Chinese Gold & Silver Exchange Society officially starts trading gold denominated in renminbi today, in a bid to attract the HK$600 billion of Chinese currency sitting on deposit in the city’s banks.

Haywood Cheung, president of the 101-year-old bullion exchange, said the so-called Renminbi Kilobar Gold contracts could boost trading volumes by up to 30%, or HK$40 billion a day, during the next six months. Growth has already been strong this year, with average daily electronic transactions reaching HK$136 billion after a full-year average of just HK$31 billion in 2010.

“By attracting both local and international investors, the Renminbi Kilobar Gold is a significant step towards internationalising the renminbi,” said Cheung. “It also consolidates Hong Kong’s position as an offshore renminbi centre by providing investors with a new alternative in leveraged trading of renminbi.”

[source]

14-Oct (Financial Times) — The lead negotiator for private holders of Greek debt has said that investors are unwilling to accept greater losses on their bonds than the 21 per cent agreed in July, jeopardising eurozone plans to finalise a second Greek bail-out by the end of next week.

Charles Dallara, managing director of the Institute of International Finance, criticised European leaders on Friday for failing to allow the July deal to proceed. He said any greater losses imposed on Greek bondholders could prompt investors to sell the sovereign debt of other eurozone countries, destabilising the single currency.

“We do not see that a compelling case has been made to reopen the deal,” Mr Dallara told the FT. “A deal is a deal.”

[source]

PG View: Oh come on now; the private investors had to know that a mere 21% haircut was not a real offer. It was just thrown out there to appease the market. I would suggest that the newly proposed 50-60% haircuts are probably too good to be true as well…

14-Oct (Der Spiegel) — The European Union is fighting to save its common currency — and its future. In Germany, more and more politicians are calling for a new European convention that would agree on changes to the EU treaties, protecting the bloc against future crises. But other EU member states are less keen on the idea.
Info

A new idea to solve the euro crisis has suddenly become popular among Germany’s political parties. People from all sides of the political spectrum are falling over themselves to call for a new European convention in a bid to fix the crisis that is putting the whole future of the European Union at risk.

According to the proposal, the convention — which would be composed of representatives of national parliaments and governments, the European Parliament and the European Commission — would revise the current European treaties as quickly as possible. There is a widespread belief in Germany that the euro crisis, which has long since become a crisis of the European Union, cannot be solved in the long term without fundamental changes to the treaties.

[source]

14-Oct (Bloomberg) — European officials are considering writedowns of as much as 50 percent on Greek bonds, a backstop for banks and continued central bank bond purchases as key planks in a revamped strategy to combat the debt crisis, people familiar with the discussions said.

The Greek bond losses may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, said the people, who declined to be identified because the negotiations will run for another week.

In the works is a five-point plan foreseeing a solution for Greece, bolstering of the European Financial Stability Facility rescue fund, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty amendments to tighten economic management.

[source]

14-Oct (Reuters) — Standard & Poor’s cut Spain’s credit rating Friday, sending the euro briefly lower and underlining the challenges facing Europe’s major powers as they meet G20 counterparts over the euro-zone debt crisis.

S&P, whose move mirrored that by fellow ratings agency Fitch last week, cited high unemployment, tightening credit and high private-sector debt among reasons for cutting the nation’s long-term rating to AA- from AA.

[source]

14-Oct (USAGOLD) — Gold remains firm within its recent range. With all generally calm on the European font and better than expected US retail sales in September, risk appetite remains heightened. The euro and stocks are maintaining their bids and the dollar has fallen to new lows for the month. The softer dollar is helping to keep gold in the upper reaches of its 3-week range.

While consumer confidence came in weaker than expected, stocks are now feeling they have a couple weeks of reprieve until details of the Franco-German rescue plan for Europe are to be announced. Oh, but not so fast; the Bank of Italy acknowledged today that the economy is under “severe strain” and there is a growing sense that Europe’s banking crisis won’t be truly resolved unless Germany is prepared to stand behind the debt of the regions biggest borrowers, Italy and Spain.

The challenge over the next couple of weeks will be for President Sarkozy and Chancellor Merkel to craft the details of their promised plan so that they provide the market at least the perception of such support, without angering the taxpayers/voters in their own country. No small task.

• US Michigan consumer sentiment (prelim) 57.5 in Oct, below market expectations of 60.0, vs 59.4 in Sep.
• US business inventories +0.5%, just above market expectations of +0.4%; sales +0.3%.
• US retail sales +1.1% in Sep, well above market expectations of +0.5%, vs upward revised 0.3% in Aug; ex-auto +0.6%.
• US import prices +0.3% in Sep, above market expectations of -0.3%, vs upward revised -0.2% in Aug; export prices +0.4%.
• Eurozone HICP inflation confirmed at 3.0% y/y in Sep, vs 2.5% in Aug; core accelerated to 1.6%.
• Eurozone trade balance (sa) narrowed to -€1.0 bln in Aug, from -€3.7 bln in Jul.
• China CPI 6.1% y/y in Sep. PPI moderates to 6.5% y/y.
• Singapore retail sales (nominal) 3.3% y/y in Aug, vs 10.7% y/y in Jul.

Slovakia Passage of EFSF Initiates Relief Rally in Euro

The euro rebounded and the dollar came under renewed pressure after Slovakia passed the ESFS expansion a day ahead of the expected vote on Friday. The passage comes at the expense of the government itself, which collapsed earlier in the week when the initial ESFS vote was tied to a confidence vote.

While the ESFS bailout fund may now end up with additional fire-power, the details remain up in the air. Nonetheless, bailouts have proven over the last several years to be nothing more than a delaying action, as they do nothing to fundamentally alter the underlying problem. In fact, they may make things worse; as evidenced by the fact that Greece continues to teeter on the edge of insolvency despite multiple bailouts. The US economy too remains moribund despite a huge stimulus in 2009 and extensive and ongoing monetary easing.

The euro rebounded on the latest glimmer of hope that the end is not necessarily nigh. The dollar and gold retreated into their respective ranges as the need for a safe-haven was seen to have diminished; although arguably the greenback is no safe-haven at all. However, movements in all these markets have been generally tepid, amid persistent doubt that debt crisis can indeed be contained.

Now focus is truly on the grand Franco-German deal to save Europe. Details on this as yet undefined plan have been promised by the end of the month. The plan is widely expected to involve bank recapitalization and perhaps a final solution for Greece. They’ll call it a restructuring of Greek debt, but at best it will be a controlled default. Estimates of the haircuts that will be required on Greek debt continue to vary widely, but they’re all generally higher than the 21% haircuts that were promised just in July. Most current estimates are in the 30-50% range, although some still believe they may prove to be as high as 90%.

If the haircut is ultimately closer to that 90% then the low end of the range, the EU is going to have to do some serious recapitalization to prevent the European banking system from imploding. Where the money will come from remains in doubt, but as the ‘too-big-to-fail’ mentality continues to rule the day, they’ll find the liquidity somewhere. Much of it may in fact come from the Fed; and the requisite swap lines are already in place.

One thing we can be reasonably assured of, is that a massive liquidity-pump to save Greece and/or the European banking system and prevent contagion to core-Europe will elevate gold; both as a result of the heightened systemic risk and due to the resulting devaluation of fiat currencies.

13-Oct (Reuters) — Slovakia’s parliament backed a plan to bolster the euro zone’s EFSF rescue fund on Thursday after political parties agreed to hold an early election, concluding the ratification process in all euro zone countries.

The euro zone’s European Financial Stability Facility (EFSF) will now gain more powers to fight the debt crisis in the 17-member club, although political leaders are already planning further measures to counter the deepening crisis.

[source]

13-Oct (ZeroHedge) — Today, instead of the traditional market observations by the Chairman of the Fermentation Committee, we share with readers a critical historical lesson from Art Cashin, focusing on an event that took place 89 years ago, which as Cashin says “one of the most devastating economic events in recorded history and an important backdrop to Europe today. It all began with the efforts of a few, well intentioned government officials.” Many will know what we are talking about already…
—-

Originally, on this day (-2) in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to “jump start” a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental “more is better” theory they simply created more and more money.

But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then, suddenly prices began to explode unbelievably (but, perversely, not business activity).

[source]

PG View: The hyperinflation of the Weimar Republic is unquestionably Germany’s defining economic moment, much like the Great Depression is ours. It goes a long way toward explaining why Germany continues to balk at further bailouts, leveraging, bond buying and expansive liquidity measures; they understandably fear the inflation. Keynsian thinking says governments should be printing and spending like mad in the face of grim growth prospects and an impending banking crisis, but German’s recall all-to readily that when über-easy monetary policy gets out of control, things can go from bad to catastrophic in a heartbeat.

Cashin’s piece is indeed an important history lesson we all should take heed of. For further insight into the Weimar hyperinflation, be sure to read The Nightmare German Inflation.

12-Oct (The Wall Street Journal) — The recent violent volatility in gold prices is disrupting traditional buying patterns in Dubai, with customers moving from jewelry to bullion as they renew a focus on the yellow metal’s investment potential, a trend that is prompting more city jewelers to stock gold in the form of coins and bars.

Dubai, known as the city of gold, is a long-established market for bullion and wholesale and retail jewelry. Its trade is fueled by demand from India, the world’s number one gold consumer, and domestic consumption which, at 19 tons in the second quarter of 2011, makes the United Arab Emirates the second-largest consumer of gold jewelry and bullion in the Middle East after Saudi Arabia.

Whereas traditional retail demand was for jewelry, there has been a change in buying patterns, said Pradeep Unni, senior relationship manager at Richcomm Global Services, a Dubai-based commodity services company and a broker of the Dubai Gold and Commodity Exchange, or DGCX, which trades a gold futures contract.

…those who are looking to invest in gold now are “those who don’t have gold in their portfolios; people who think that in addition to having a bank account, they need to have gold.”

[source]

12-Oct (USAGOLD) — Minutes from the September 20-21 FOMC meeting show that some participants thought large-scale asset purchases (QE3) should be retained as a more “potent” policy option in support of a stronger recovery. Two members, in fact, favored stronger action.

Two members thought that he current conditions and weak growth outlook “could justify stronger policy action.” They ultimately supported Operation Twist “as it did not rule out additional steps at future meetings.”

[FOMC Minutes]

12-Oct (CNBC) — Euro zone countries will ask banks to accept losses of up to 50 percent on their holdings of Greek debt, officials said on Wednesday, as part of a grand plan to avert a disorderly default and try to end a crisis that threatens the world economy.

Ahead of a make-or-break summit of European leaders on October 23 at which a comprehensive new Franco-German crisis plan is expected to be discussed, four euro zone officials told Reuters that a “haircut” of between 30 and 50 percent for Greece’s private creditors was under consideration.

That is far more than the 21 percent loss they had asked banks, pension funds and other financial institutions to accept in July as part of a second rescue package for Athens.

[source]

12-Oct (Bloomberg) — Harrisburg, Pennsylvania, facing a state takeover of its finances, filed for bankruptcy protection after failing to pay the debt on a trash-to-energy incinerator.

The council made its 4-3 decision against the advice of a city attorney who said the panel did not follow proper procedure. It was the ninth bankruptcy filing this year by a municipal-bond issuer, according to James Spiotto, a partner at Chapman & Cutler in Chicago who tracks such cases.

“This was a last resort,” Mark D. Schwartz, the council’s Bryn Mawr-based lawyer, said after he faxed the documents to a federal court yesterday. “They’re at their wits’ end.”

[source]

12-Oct (The Wall Street Journal) — As the world awaits the details of the grand plan hatched by Angela Merkel and Nicolas Sarkozy over the weekend, one can’t help but be reminded of the South Sea Bubble. Like the German and French leaders, a famous 1720 stock offering promised investors “an undertaking of great advantage, but nobody to know what it is.” All that we know about the new euro grand plan will be even grander than the July 21 grand plan that didn’t survive 24 hours of market scrutiny. It will aim to address at one stroke the inter-related problems of sovereign debt, bank capital and bank funding—what U.K. Prime Minister David Cameron has dubbed the big bazooka. What could possibly go wrong?

[source]

by Nick Barisheff
12-Oct (GoldSeek) — The recent correction in gold has once again led, to financial commentators warning of a bubble—just as they have incessantly since it first passed $400 an ounce. A bubble usually ends with day after day of speculative higher highs, not corrections like we have just seen or as we saw in August where a $200 fall was followed by the resumption of its decade long rise. That gold continues to climb a wall of worry, and that so many are even calling it a bubble, is actually an extremely bullish indicator since financial bubbles burst only after sustained periods of exuberance. We are far from the days when people lined up for blocks each day to buy gold, as they did in Toronto in 1980.

A simple rebuttal, however, is never enough when discussing gold. It will continue to be subjected to the most aggressive “perception management” assault of any asset class, because it is a direct challenge to all the world’s fiat currencies. Since no paper currency is convertible to gold at this time, this is some challenge. The warnings of bubbles and the many other reasons for not owning gold will continue unabated as gold persists to $10,000 an ounce, or higher. Independent study of the underlying causes of gold’s rising price, in my opinion, is the best way to gain sufficient confidence to buy and hold gold long enough to protect one’s wealth through the turbulent years ahead.

[Source]

JK View: A solid overview of the long term fundamentals underpinning the gold price. Author shows how an “appropriate” perception of the value of gold ought to give any doubter pause. Well worth the read.