02-Oct (AP) — The Federal Reserve has lowered its growth forecasts and raised its unemployment projections, suggesting the economy has a longer path to recovery.

The central bank’s latest forecast released Wednesday predicts that the economy will grow just 1.6 percent to 1.7 percent for all of 2011. For 2012, growth will range between 2.5 percent and 2.9 percent. Both forecasts are roughly a full percentage point lower than the Fed’s projections from June.

The unemployment rate has been stuck near 9 percent for more than two years. The Fed doesn’t see that changing this year. It predicts it will fall between 8.5 percent and 8.7 percent next year. In June, the Fed had predicted unemployment would drop next year to as low as 7.8 percent.

The new forecast takes into account the substantial slowdown in growth that occurred earlier this year.

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02-Nov (CNBC) — Federal Reserve Chairman Ben Bernanke defended the central bank’s record on keeping inflation low, in the face of criticism that the central bank’s weak-dollar policies have driven up consumer prices.

Speaking at a post-Fed meeting news conference, Bernanke rejected claims that the Fed’s various moves to keep interest rates low and monetary policy accommodative will lead to high levels of inflation.

…Bernanke refused to get too far into the politics but said the committee is comfortable with the current level of inflation, which is around 2 percent excluding volatile food and energy prices but 3.9 percent including gasoline, groceries and similar items.

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02-Nov (HousingWire) — Federal Reserve Chairman Ben Bernanke said the central bank may consider purchasing more mortgage-backed securities to help further stabilize the economy and the troubled housing sector if growth is insufficient in coming quarters.

Speaking at a press conference following the most recent monetary policy decision from the Federal Open Market Committee, Bernanke said the Fed has taken the aggressive actions necessary to try and stimulate growth.

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Bloomberg (Nov 2) — The most accurate forecasters say gold will rebound from its biggest monthly plunge since 2008 and reach a record by March because economic growth is stagnating and Europe’s debt crisis is unresolved.

Futures traded in New York may rise 13 percent to $1,950 an ounce by the end of the first quarter, according to the median of estimates compiled by Bloomberg. The predictions are from eight of the top 10 analysts tracked by Bloomberg over the past eight quarters.

“When we look at gold five years from now, we will say gold was wildly cheap,” said Jason Schenker, the president of Prestige Economics LLC in Austin, Texas, and the fifth-best forecaster tracked by Bloomberg. “What happens to gold is going to hinge on what happens to the dollar, and that is going to be influenced by what happens in Europe and monetary policy.”

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Europe in Chaos

02-Nov (USAGOLD) — Gold has rebounded to approach the recent highs on ongoing uncertainty in Europe. Greek Prime Minister Papandreou is sticking by his call to submit the latest bailout deal to the citizenry, and he now has the backing of his cabinet. It is a political gamble to be sure, but Papandreou is fighting for his political life and rational thought frequently goes out the window in such circumstances. The Greek newspaper Eleftherotypia dubbed Mr. Papandreou as “The Lord of Chaos.”

Certainly he has angered much of the rest of Europe, and is expected to face the ire of German Chancellor Merkel and French President Sarkozy in advance of the G20 summit. The referendum plans delay implementation of measures that may prove critical to other EU countries. Italy leaps to mind immediately, given the continued rise in their borrowing costs, which has been exacerbated by the Greek uncertainty. If Italy plunges into the abyss, as New York Times economist Paul Krugman is anticipating, all bets are off. The EFSF, even geared up to 4x is not big enough to save the Continent’s third largest economy.

It also raises uncertainties in the banking industry, as financial institutions have already started down the path of capitalizing for a 50% haircut on Greek debt. If the impending Greek default turns disorderly, the haircut could be much bigger; as in 100%. And again, if contagion strikes Italy in any significant way, it’s game-over. Krugman may be right when he says that the only way for Europe to avert a financial apocalypse is for the ECB to “change its spots, fast.” That means print euros with abandon. If the German’s continue to oppose such measures, it’s important to remember that the true lender of last resort to the world is our very own Fed. If the ECB and/or the Fed concede once again that liquidity is the only answer…gold will likely be off to the races.

There are some lingering expectations that the Fed may announce QE3 today, with a likely focus on mortgage backed securities, at least initially. However, I believe that the October rally in stocks bought the Fed some more time. QE3 may indeed be forthcoming, but probably not today. They’ll hold steady on rates and perhaps tweak their language to be a little more accommodative.

Heightened tensions in the Middle East are likely contributing to the interest in gold as well amid reports that Israel may be preparing a preemptive strike against Iranian nuclear facilities. Such concerns crop-up periodically and have never really amounted to anything, but I have no doubt that Israel feels threatened by Iran. Given that, I don’t think such reports can be completely dismissed.

02-Nov (SkyNews) — Israeli Prime Minister Benjamin Netanyahu is trying to rally support in his cabinet for an attack on Iran, according to government sources.

The country’s defence minister Ehud Barak and the foreign minister Avigdor Lieberman are said to be among those backing a pre-emptive strike to neutralise Iran’s nuclear ambitions.

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PG View: Heightened geopolitical tensions in the Middle East are undoubtedly contributing to the bid in gold.

02-Nov (Reuters) — Greece’s prime minister faces a grilling from the leaders of Germany and France on Wednesday after fighting to win the backing of his cabinet to hold a referendum on a 130 billion-euro ($178 billion) bailout package.

French President Nicolas Sarkozy and Germany’s Angela Merkel summoned George Papandreou for crisis talks in Cannes, before a G20 summit of major world economies, to push for rapid implementation of measures to tackle the euro zone debt crisis, which Athens has thrown into doubt.

“This announcement took the whole of Europe by surprise,” Sarkozy said on the steps of the Elysee Palace in Paris. “The plan … is the only way to solve Greece’s debt problem.”

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PG View: Yeah, Mer-kozy will read G-Pap the riot act for queering the bailout “deal”, but riots are exactly what Greece will have if they try and quash the referendum now. With G-Pap fighting for his political survival, I’m not entirely sure he’s thinking all that rationally right now anyway. Berating will likely fall on deaf ears.

By Paul Krugman
01-Nov (NY Times Blogs) — Things are falling apart in Europe; the center is not holding. Papandreou is going to hold a referendum; the vote will be no. Italian 10-years at 6.29 at pixel time; that’s a level at which the cost of rolling over the existing debt will force a default, even though Italy has a primary surplus. And with everyone simultaneously pushing for fiscal austerity, a recession seems almost certain, aggravating all of the continent’s problems.

I’ve been charting this trainwreck for a couple of years, and am feeling too weary to trace through it again right now. Let’s just say that the euro was an inherently flawed idea that can work only given a strong European economy and a significant degree of inflation, plus open-ended credit to sovereigns facing speculative attack.

…The question I’m trying to answer right now is how the final act will be played. At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira. Next stop, France.

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PG View: This is indeed a pretty “apocalyptic” prediction from Mr. Krugman. His solution starts with the ECB “changing its spots”. Meaning, print euros like mad. And while that presents a whole hosts of problems as well, it may in fact be the lesser of many evils.

By Mohamed El-Erian
31-Oct (Reuters Blogs) — It is time to say goodbye to the confident reassurances from American policymakers that Japan could not “happen here.” It is also time to regret the smug assertions that Japan’s “lost decade” of growth was due to a combination of uniquely Japanese failings – from insufficient policy activism to weak corporate governance and poor political leadership.

American policymakers, together with their European counterparts, are realizing something that Japan has been experiencing for a while: It is very difficult to manage well an economy hobbled by structural impediments and balance sheet excesses. Absent a major change in the effectiveness of the policy approach, this realization will likely lead to broadening societal concerns about the possible “Japanization” of America and, with that, worries that under such circumstances the country would not be able to navigate such a phenomenon as well as Japan has.

The US continues to find it difficult to generate meaningful economic growth and to create enough jobs. Despite multiple fiscal and monetary stimulus programs – indeed, record breaking ones – the economy has failed to recover decisively from the sharp contraction that followed the global financial crisis.

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01-Nov (Financial Times) — The premium Italy pays to borrow over Germany rose to a fresh euro-era high on Tuesday, leaping over a critical level that can trigger margin payments and that has previously exacerbated crises in Portugal and Ireland.

Italy’s 10-year bond spread to German Bunds hit 454bp, above the 450bp level used by some clearing house, as investors fretted that the latest eurozone deal was coming undone after Greece called a referendum on the measure.

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President Obama will open two days of the Group of 20 economic summit in Cannes, France, on Thursday with a pair of bilateral meetings dealing with the European debt crisis, which is likely to dominate the event.

Obama is to meet with French President Nicolas Sarkozy and German Chancellor Angela Merkel, White House officials said Monday.

…“We have shared back and forth some of the experiences we had during the crisis, and in particular, the need to move with overwhelming force,” Lael Brainard, the Treasury Department’s undersecretary for international affairs, said during a White House briefing for reporters.

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PG View: “Overwhelming force” means liquidity. Lots and lots of liquidity. That’s bad for the euro, and if the US is to maintain a weaker dollar in relation to the euro, policymakers here will have to respond to weaken the greenback. QE3 should do nicely…

01-Nov (Bloomberg) — Greece’s plan to hold a referendum on Europe’s bailout for the nation poses a threat to financial stability in the region, Fitch Ratings said.

The vote “dramatically raises the stakes for Greece and the euro zone as a whole,” Fitch said in a statement today, adding that it increases the risk of a “disorderly” default.

Greek Prime Minister George Papandreou late yesterday called for a referendum on Europe’s plan to contain the country’s debt turmoil. Austerity measures by the government to reduce the deficit have eroded Papandreou’s popularity and sparked a wave of social unrest, while a poll published Oct. 29 showed most Greeks believe the new bailout package is negative.

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01-Nov (USAGOLD) — Gold has tumbled back below 1700.00 as the grand bailout deal for Europe agreed to last week is already falling apart. Greek PM George Papandreou has pledged to submit the new plan to the voters. This not only delays implementation, but passage of the referendum is anything but a sure thing. The Greeks are already rioting over oppressive austerity measures imposed by the EU. If the referendum is rejected, it would arguably be a Greek rejection of the EU. The rest of the policymakers that have been working furiously in recent months to craft an acceptable deal are probably mad enough at Papandreou today to just let Greece go…

The palpable relief that ensued last week after the announcement of the deal is gone and risk aversion has resurfaced with a vengeance amid widespread uncertainty. The EUR-USD rate has collapsed to a three week low and global stocks are under heavy pressure as well. The dollar and US Treasuries have surged, pushing gold lower.

• US FOMC begins 2-day meeting.
• Switzerland retail sales -0.9% y/y in Sep, well below market expectations, vs upward revised -0.8% y/y in Aug.
• Switzerland SVME manufacturing PMI falls to 46.9 in Oct, below market expectations, vs 48.2 in Sep.
• UK CIPS Manufacturing PMI falls to 47.4 in Oct, below market expectations of 50.1, vs negative revised 50.8 in Sep.
• UK Q3 GDP (first release) 0.5% q/q, above market expectations of 0.3%, vs 0.1% in Q2; 0.5% y/y, down from 0.6% y/y in Q2.
• Thailand CPI rises to 4.2% y/y in Oct, vs 4.0% y/y in Sep.
• South Korea CPI moderates to 3.9% y/y in Oct, vs 4.3% in Sep.
• China manufacturing PMI (CFLP) falls to 50.4 in Oct, vs 51.2 in Sep; HSBC/Markit manufacturing PMI improves to 51.0 in Oct, vs 49.9 in Sep.
• RBA cut the cash rate 25 bps to 4.50% on deteriorating global growth picture and signs of domestic caution. Move was widely expected.

01-Nov (Reuters) — The leaders of France and Germany scrambled on Tuesday to limit damage after Prime Minister George Papandreou decided to let Greeks vote on a bailout package — a move that stunned markets and threw Greece’s euro zone membership into question.

European politicians complained Athens was trying to wriggle out of the 130 billion-euro rescue deal agreed at a summit only last week, concerned not so much about the fate of Greece as the possibly dire consequences for the entire currency union of the referendum.

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PG View: The size of recent anti-austerity protests and riots, as well as the polls, show that the bailout deal is widely unpopular amongst Greek citizens. If the deal is voted down, it may in fact be a referendum on continued Greek membership in the EU. Out of the frying pan and into the fire George…

31-Oct (Bloomberg) — The elderly will likely be the most vulnerable Americans in Washington’s future budget fights. Right now, their grandchildren may be among the biggest casualties.

With Democrats and the 37 million-member AARP seniors’ lobby working to protect Medicare and Social Security, and Republicans opposing tax increases to curb the deficit, programs for young people may be disproportionate targets if negotiators can’t reach a budget deal and automatic spending cuts kick in.

That’s sparking concern that lawmakers are sacrificing the U.S.’s future investment in children, education, infrastructure and other programs.

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31-Oct (Financial Times) — Bankers have warned that the eurozone rescue fund might face lacklustre demand this week for a planned bond issue designed to finance Ireland’s bail-out.

The bond from the European financial stability facility will seek to raise €3bn ($4bn) and will be in 10-year bonds rather than a 15-year maturity because of worries over demand, say bankers.

…Bankers familiar with the issue said the EFSF had been considering a €5bn issue. However, the EFSF has denied this, saying it had always sought a €3bn issue.

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31-Oct (CNBC) — The German government tried to deflect responsibility on Monday for a 55-billion euro accounting blunder that has exposed it to charges of ridicule for being inept and hypocritical after its steady criticism of Greek bookkeeping practices.

Finance Minister Wolfgang Schaeuble has summoned executives from the nationalized mortgage bank Hypo Real Estate (HRE) to explain how they made a simple accounting error that ended up raising Germany’s total debt load by 55 billion euros.

…Schaeuble’s spokesman Martin Kotthaus tried to deflect any blame, saying the ministry received a certified statement from auditors that the balance sheets had been checked and approved. He said it was too early to tell exactly who messed up.

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PG View: Sort of makes one wonder what other landmines might be out there, when a €55 bln error can get overlooked.

31-Oct (BBC) — Bank shares and the euro fell on Monday as fears over the eurozone persisted.

European stock markets slumped about 3%, as the value of the big banks retraced much of the gains they had made since a new rescue deal was agreed by eurozone leaders last Wednesday.

The euro fell 1.5% against both the dollar and the pound.

Worry over the Italian government’s ability to finance itself remains at the heart of the crisis, as Rome’s cost of borrowing rose to new highs.

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31-Oct (CNNMoney) — The besieged housing market has even further to fall before home prices really hit rock bottom.

According to Fiserv (FISV), a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices.

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31-Oct (The Economist) — EUROPE’S long-awaited crack at a bold euro-crisis solution calmed markets for all of two days. After digesting the plan, and observing a dismal Italian bond auction, equities are dropping today and the sovereign bond yields around the euro-zone periphery are rising. This development comes as little surprise. The euro zone needed to put together a credible, suitably large backstop for government debt. Instead, leaders cobbled together a plan to provide a guarantee against some losses on government debt and to leverage up the European Financial Stability Facility’s paltry €440 billion in capital. But even a leveraged up fund looks small against the scale of maturing debt, and the enterprise is weakened by reliance on the backing of peripheral sovereigns which are themselves under threat.

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PG View: Policymakers keep throwing bigger and bigger numbers around, even as the gap between initial relief and new-found worries narrows.

31-Oct (Bloomberg) — The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War.

Fixed-income investments advanced 6.25 percent this year, almost triple the 2.18 percent rise in the Standard & Poor’s 500 Index through last week, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63 percent this year, the most since 2002, the data show. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.

…“The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform,” he said. “If you missed the rally in bonds, well, then that’s it.”

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PG View: Yep, over the past three decades, 30-year US Treasuries have gained 11.5% annually compared with a 10.8% increase in the S&P 500. That’s rather startling, but as the article points out, it’s something that is unlikely to be repeated for any 30-year period beginning any time soon, given that the Fed has manipulated yields to lows that are not even remotely reflective of current risks.

31-Oct (BusinessInsider) — John Paulson gave a speech last night to the Chinese Finance Association, where he discussed gold, inflation, the outlook for the economy, and what he’s investing in.

A key point: He’s still a big believer in gold, and he thinks talk fo a bubble is ludicrous.

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