27-Jan (Chart of the Day) — Severely depressed real estate prices continue to be a concern for investors. For some perspective on the magnitude of the decline in home prices, today’s chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes a relatively low 105 ounces of gold to buy the median single-family home. This is dramatically less than the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down over 80% from its 2001 peak, remains well within the confines of a six-year accelerated downtrend and remains very near its 1980 trough.

PG View: Makes me wish I had rented and plowed all the money that went into my house into gold…

26-Jan (MarketWatch) — Greece and its private-sector creditors were set to resume negotiations in Athens later Thursday to restructure the country’s towering debt load, a process accompanied by concerns that Greece’s funding needs might be bigger than originally thought.

Euro-zone officials in October agreed to provide Greece with debt relief with a planned package to ensure that its debt equals to no more than 120% of its gross domestic product in 2020. Since then, further deterioration in the Greek economy and a budget deficit that has widened to nearly 10% of GDP could put those projections in doubt. The new debt-sustainability study, due for release by the European Union and the International Monetary Fund once talks with the private creditors are completed, might require a rethink on the funding Greece will need to be able to service its debt for the rest of the decade.

Greece’s debt restructuring is planned to take the form of a bond exchange in which creditors holding some EUR200 billion in Greek bonds swap their securities for new instruments with half the face value. The key sticking point is how much interest new bonds should pay. Germany and the IMF have led calls for private-sector bondholders to accept a coupon of well under 4%, while investors so far have insisted on 4% on the new bonds as a minimum.

[source]

PG View: Bet you didn’t see that one coming… Okay, all you private bondholders, your 50% haircut, that turned into a 68% haircut is now 90%. And you can forget about that 4% coupon. You’ll be lucky to get 2%…

26-Jan (ZeroHedge) — Below we present the indexed return of ES (or stocks) and of gold over the past 24 hours since the Bernanke announcement of virtually infinite ZIRP, and the latent threat of QE3 any time the Russell 2000 has a downtick. It is unnecessary to point out just when Bernanke made it all too clear that the Fed has nothing left up its sleeve, expect to directly compete with the ECB over “whose (balance sheet) is bigger,” as it is quite obvious. What is not so obvious, is that for all intents and purposes, Bernanke may have unwillingly, become a gold bug’s best friend, as gold (and implicitly silver) has benefited substantially more that general risk. Much more. So for the sake of all gold bugs out there, could the Fed perhaps add a few more FOMC statements and press conferences? At this rate gold should be at well over $2000 by the June 20 FOMC meeting.

[source]

26-Jan (Politico) — Despite Republican opposition, the Senate on Thursday voted to allow President Barack Obama to increase the debt ceiling by $1.2 trillion, an amount large enough to ensure the federal government can pay its bills through the November elections.

On a mostly party-line 44-52 vote, the Democratic-controlled Senate rejected a measure that would have set up a vote to block hiking the debt limit to $16.39 trillion.

[source]

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Negative Real Interest Rates for Years to Come

26-Jan (USAGOLD) — The message from the Fed yesterday was quite clear; they are expecting the economy to continue limping along for at least another 3-years. As part of their new communications strategy, the Fed extended their ZIRP guidance from mid-2013 until late-2014. Even if the Fed does start raising rates at that point, they are likely to be small incremental hikes, which would likely keep real rates (factored for inflation) in negative territory for some-time after 2014.

The Fed first cut the Fed funds rate to 0-0.25% in December 2008: That would mean somewhere around 6-years of zero interest rate policy is now anticipated. We’ll be more than half-way through our own lost-decade. I’m sure the Bank of Japan thought they could extract themselves from the ZIRP trap within a decade too. They’re now into their third lost decade.

Going further, the Fed is now targeting inflation — core-PCE to be specific — at 2%. So, we have a moribund economy, that the Fed itself expects to persist for at least 2+ more years. We have a high rate of unemployment, that the Fed also expects to remain elevated for at least a couple more years. We have households attempting to de-lever, to pay down debt by scaling back consumption. And we have the ‘sword of Damocles’ that is Europe, hanging over all of that.

How exactly is the Fed going to generate 2% inflation — excluding food and energy — in such an environment? They’re going to expand the money supply of course. They’re going to print with abandon. The not so subtle message is: Spend your dollars now, because they will buy less tomorrow. This is as much a 2% dollar devaluation target as an inflation target. It is truly an attack on savers.

One has to wonder what the other measures of inflation might look like if they do achieve 2% core-PCE. What will food and energy prices do? What will gold do?

The $80 rally in the yellow metal off of Wednesday’s intraday low is a good initial indication of what gold is likely to do. There’s now a more compelling case than ever to buy gold as a means of wealth preservation — a hedge against the inflation the Fed is now obligated to manufacture.

If you are a saver, your best defense against an uber-dovish Fed seeking to spur consumption by eroding the value of your dollars…is to choose to save in gold.

26-Jan (USAGOLD) — Gold is adding to yesterday’s solid gains, setting new 7-week highs near 1730.00. The yellow metal was boosted by yesterday’s revised Fed guidance, which now projects that zero interest rate policy will continue into late-2014. The Fed has also embarked on inflation targeting: In other words they are looking to devalue the dollar by at least 2% a year.

The Fed also provided a weaker assessment of the US economy and chairman Bernanke indicated that additional asset purchases are an option that is “certainly on the table.” The takeaway from all this is that the Fed remains very worried: Worried about sluggish domestic growth. Worried about high unemployment. Worried about Europe…

In a moribund economy with a high jobless rate that is further saddled by endless uncertainty across the pond; how exactly to you manufacture 2% inflation? You print like mad of course. And that explains why gold is up more than $80 from yesterday’s intraday low.

• US new home sales and LEI at 15:00GMT.
• US durable goods orders +3.0% in Dec, well above market expectations of +1.8% on SouthWest aircraft order; ex-trans +2.1%.
• US initial jobless claims +21k to 377k in the week ended 21-Jan, above market expectations of 370k, vs upward revised 356k in previous week.
• Germany GfK Consumer Confidence rose to 5.9 in Feb, above market expectations of 5.6, vs upward revised 5.7 in Jan.
• Italy Consumer Confidence (sa) steady in Jan at 91.6, below market expectations of 91.8.
• South Korea Q4 GDP (advance) 3.4% y/y, vs 3.5% y/y in Q3.
• Singapore Manufacturing Production +12.6% y/y in Dec, vs upward revised -8.0% y/y in Nov.
• RBNZ holds official cash rate steady at 2.5%, in-line with expectations.

26-Jan (Bloomberg) — Ben S. Bernanke laid the groundwork for a third round of large-scale asset purchases should unemployment remain higher than the Federal Reserve would like while inflation falls below a newly-established target.

The Federal Open Market Committee “recognizes the hardships imposed by high and persistent unemployment in an underperforming economy, and it is prepared to provide further monetary accommodation,” Bernanke said yesterday at a press conference in Washington.

Stocks and Treasuries rallied after policy makers said the benchmark interest rate would stay low until at least late 2014, pushing back a previous date of mid-2013. Fed officials also lowered their projections for economic expansion and inflation for this year and next.

…The U.S. central bank’s “two main tools” to boost growth are asset purchases and communications, and bond buying is “an option that is certainly on the table,” Bernanke said. “The unemployment level is elevated and the inflation outlook is subdued.”

[source]

Jan 25 (The Street) — Gold prices reversed directions Wednesday and popped higher after the Fed said it would maintain low interest rates until late 2014, a year longer than previously stated. The Fed also promised to stay accommodative. “That’s really really dovish and you are seeing a lot of people running into gold,” says Phil Streible, senior commodities broker at RJO Futures.

The Fed said that inflation remains subdued, which Streible said was a good thing for gold. “Inflation will be created … [the Fed is] artificially creating inflation for the next couple of years.” The U.S. dollar index sold off on the news as more easy money means a devalued dollar. When paper currencies lose value, gold becomes appealing as a safe haven asset.

“The Fed telling us no rate increase to at least 2014 is a sharp rally promoter for gold,” says George Gero, senior vice president at RBC Capital Markets, “as low interest rates to continue will make gold a good alternative hold and not expensive to maintain” The rise in gold also triggered short covering where investors who had been betting against gold bought back positions.

[source]

25-Jan (FRB) — Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants’ estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC’s Summary of Economic Projections. For example, in the most recent projections, FOMC participants’ estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

25-Jan (MarketWatch) — Gold prices rallied Wednesday, reversing course as the Federal Reserve’s monetary policy committee extended its pledge to keep interest rates at exceptionally low levels to late 2014, which will help boost demand for the precious metal.

“The Fed telling us no rate increase to at least 2014 is a sharp rally promoter for gold as low interest rates to continue will make gold a good alternative hold and not expensive to maintain,” said George Gero, a vice president with RBC Capital Markets, said in emailed note.

[source]

Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee’s dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

[source]

25-Jan (USAGOLD) — Gold fell lower overseas as fresh concerns about Portugal were heaped upon the continuing Greek impasse. The latest suggestion that Portugal will need additional bailout funds sent yields and CDS premiums soaring. The ECB apparently has failed to enter the secondary market to support Portuguese bonds and one trader suggested in the WSJ that they may be holding out until they can determine what they’re liabilities are with Greece.

In the absence of a voluntary deal with private Greek bondholders, the public sector is under increasing pressure to bridge the gap. Basically, the ECB will take a drubbing on the Greek bonds it is holding, so why add insult to injury by loading up on more Portuguese debt, if there is little hope they will be able to repay either…

As the euro extended losses, the firmer dollar weighed on gold. While gold is now off its intraday low, it’s probably unlikely to move too much ahead of the FOMC statement at 17:30GMT today.

The FOMC is expected to hold steady on rates, but give a much clearer indication of its future intentions on Fed funds. They will likely extend ZIRP expectations beyond mid-2013 into 2014. While there seems to be a definitive move toward inflation targeting, I wouldn’t expect anything very overt this time around. While recent hints of a recovery in housing will probably leave further MBS purchases on hold for now, today’s pending home sales data suggests that the optimism may have been premature. The same can perhaps be said about Europe…

• US NAR pending home sales index -3.5% to 96.6 in Dec, below market expectations, vs 100.1 Nov.
• US FHFA home price index +1.0% in Nov to 183.8, above market expectations, vs 182.1 in Nov.
• Germany Ifo Business Climate rose to 108.3 in Jan, above market expectations of 107.6, vs 107.2 in Dec; Expectations 100.0, Current Assessment 116.3.
• Italy retail sales -0.3% in Nov; -1.8% y/y.
• UK Q4 GDP – 1st Release -0.2% q/q, below expectations of -0.1%, vs 0.6% in Q3; 0.8% y/y.
• Japan exports -8.0% y/y in Dec, vs -4.5% y/y in Nov; imports +8.1%.
• Japan trade deficit narrowed to -¥205.1 bln in Dec, vs -¥684.7 bln in Nov.
• Singapore CPI moderates to 5.5% y/y in Dec. vs 5.7% y/y in Nov.
• Australia Q4 CPI unch q/q, vs +0.6% in Q3.
• Bank of Thailand cut overnight repo rate by 25 bp to 3.00%.

25-Jan (Reuters) — The Federal Reserve looks set to keep monetary policy on hold on Wednesday, even as it releases forecasts expected to show interest rates will be near zero for at least two more years.

Given recent improvement in the U.S. economy, the central bank will probably remain non-committal regarding the prospect for additional bond purchases, but will leave the door open to further action if Europe’s banking problems spill over into the United States.

As part of an effort to provide more insight on its thinking to financial markets and the public, the Fed will begin publishing individual policymakers’ projections for the appropriate path of the benchmark federal funds rate.

In so doing, the Federal Open Market Committee, the central bank’s policy-setting arm, will probably reveal that it does not expect to begin raising rates until at least early 2014.

[source]

25-Jan (Dow Jones) — Portugal’s default insurance costs continued marching to record highs Wednesday as the yield on its 10-year bond rose toward record levels from July 2011 on concerns about the implications of the Greek debt restructuring talks.

Portuguese five-year credit default swaps–derivatives that function like a default insurance contract for debt–were trading near levels where Greece’s CDS were trading last April.

Around 1050 GMT, Portugal’s five-year CDS were 31 basis points wider at 1,310 basis points, reversing from a tighter open, according to Markit. This means it now costs an average of $1.31 million a year to insure $10 million of debt issued by the country.

[source]

PG View: Portuguese yields are surging in search of the ECB bid, but one trader thinks the central bank is waiting to see what its Greek liability is first.

25-Jan (BusinessReport) — Portugal needs an additional 30 billion euros in EU/IMF rescue funds to solve a credit crunch in the recession-hit economy and may have to negotiate an extension for its bailout, the head of the country’s industry confederation said on Wednesday.

Antonio Saraiva, the leader of the influential lobby group with vast collective bargaining powers, told Reuters the 78-billion-euro bailout that runs through 2013 did not take into account massive debts by inefficient, loss-making public companies, especially in the transport sector.

[source]

24-Jan (TheHill) — Senate Republicans slammed their Democratic colleagues on Tuesday for not passing a budget in exactly 1,000 days, accusing Democrats of shirking their duty in a period of soaring deficits.

Four senators at a Tuesday news conference said President Obama should be more of a leader on reining in deficits. GOP lawmakers have for months pointed out the time elapsed since the Senate last passed a budget.

“It is imperative that we get our federal budget under control and the first step – the minimum thing that Congress should do – is follow the law that it passed to put discipline on itself,” said Sen. Ron Johnson (R-Wis.), who also called the lack of a Senate budget “a national scandal.”

[source]

24-Jan (Financial Times) — The European Central Bank and other public sector holders of Greek sovereign debt must participate in the same voluntary restructuring as private sector bondholders, the Institute of International Finance has demanded.

The IIF, which represents banks and other private sector Greek sovereign bondholders, said a failure to do so would be a betrayal of principles agreed at an October 26 summit of policymakers which thrashed out the broad terms of a deal centred on a 50 per cent haircut of the bonds’ value.

[source]