06-Feb (The Wall Street Journal) — China should be prepared to sharply stimulate its economy if Europe’s growth falls more than anticipated, the International Monetary Fund said on Monday, adding to expectations that Beijing could turn to spending if conditions significantly worsen.

In its China economic outlook report released on Monday, the IMF urged China to run a federal deficit of 2% of GDP rather than looking to reduce the country’s deficit as planned, given the uncertainty in the global economy.

[source]

PG View: So the IMF would like China to cover for the sins of Europe (and America?)…

06-Feb (MNI) — Taking a fundamentally different view of how the Federal Reserve should be making monetary policy, St. Louis Federal Reserve Bank President James Bullard said Monday that the United States faces a “looming disaster” because the Fed is basing its extended zero interest rate stance on inappropriate calculations of the “output gap.”

The “output gap” — essentially the difference between actual and potential GDP growth — should not be based on extrapolations from late 2007, when the U.S. was at the peak of a housing bubble, argued Bullard. Rather, the Fed should recognize that the economy suffered a “one-time shock to wealth” and base policy on the economy’s performance relative to a lower base of output and asset values.

Bullard warned that, if the Fed continues to use the output gap approach, the nation could be trapped in a zero rate environment for many years with “counterproductive” consequences.

…First, he said “the lengthy near-zero rate policy punishes savers in the economy,” particularly the elderly. And that in turn means that “some of the consumption that would otherwise be enjoyed by the older, asset-holding households has been pared back.”

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06-Feb (USAGOLD) — Gold starts the week under pressure as another weekend passes with no resolution of the Greek crisis, sapping risk appetite and boosting the dollar. It seems like the big sticking point might not be the PSI deal after all, but troika concerns about the pace of Greek reforms. Just so there’s no question about how Greek workers feel about additional austerity, the two largest unions — which account for nearly half of the entire workforce of Greece — have a strike planned for Tuesday.

After meeting with French President Sarkozy today, German Chancellor Merkel warned that time is running out for Greece, saying that she “can’t quite understand why we need a few more days.” A few more days? The deal was reportedly within “hours” of completion more than a week ago…

St. Louis Fed President James Bullard (a moderate) said today before Chicago’s Union League Club that the Fed’s “lengthy near-zero rate policy punishes savers in the economy.” Bullard also warned about getting trapped in a zero rate environment for many years with “counterproductive” consequences. He went so far to call it a “looming disaster.”

Bullard’s comments pretty much echo the sentiments I expressed in last week’s Special Report.

• Canada Ivey PMI rose to 64.1 (sa) in Jan, above market expectations of 60.0, vs 63.5 in Dec.
• UK Halifax House Prices (sa) +0.6% in Jan, vs -0.9% in Dec; -1.8% y/y.
• Germany manufacturing orders +1.7% in Dec, well above market expectations of unch, vs negative revised -4.9% in Nov; unch y/y.
• Russia CPI 4.2% y/y in Jan.
• Australia retail trade -0.1% in Dec.
• Australia TD-MI Inflation Gauge 0.2% in Jan.
• Indonesia 6.5% y/y in Q4.

06-Feb (Reuters) — Greece let yet another deadline slip on Monday for responding to painful terms for a new EU/IMF bailout as patience in Brussels wore thin over drawn-out negotiations among its feuding political leaders.

Failure to strike a deal to secure the 130 billion euro ($170 billion) rescue risks pushing Athens into a chaotic debt default which could threaten its future in the euro zone.

…The slow progress has angered Greece’s European partners. Euro zone officials say finance ministers told Greece on Saturday it could not go ahead with an agreed deal to restructure privately held debt until it guaranteed it would implement reforms.

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03-Feb (CNBC) — Euro zone governments may have to provide up to 145 billion euros ($191 billion) to Athens under a second emergency loan program for Greece, EU sources said on Friday, 15 billion euros more ($19.7 billion) than previously expected.

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03-Feb (USAGOLD) — Gold retreated into the range after establishing a new 11-week high at 1763.15. The retreat is likely associated with profit taking after a nice weekly gain, and the diminished appeal of gold as a safe-haven after better than expected headline nonfarm payrolls numbers.

The rise in payrolls was better than expected at +243k and the unemployment rate dropped to 8.3%. However, looking behind the numbers we see a rather startling 1,252,000 surge in “Persons not in the labor force”. The participation rate actually fell by 0.3%, but showed steady in the report at 63.7% (a 30-year low) due to a change in how the survey is conducted. Additionally, there was a record surge of 699k in the number of part-time workers, while full-time jobs rose by just 80k. Seasonal adjustments seem to be to blame for much of the disparity. While the stock market ran with the positive headline numbers initially, optimism has been tempered as analysts and investors drill a little deeper into the data.

US services ISM for January came in above market expectations, but December factory orders disappointed.

So here it is another Friday and still there is no deal with private holders of Greek bonds. Two weeks ago a deal was “imminent.” Last week a deal was “hours away.” I guess that Greek official was talking 168 hours or more.

There also continue to be a broadening realization that the €130 bln second bailout deal that was agreed to back in October — part of which was the non-existent PSI deal — simply isn’t going to be enough. The latest estimates put Greece’s needs closer to €150 bln.

• US factory orders +1.1% in Dec, below market expectations of 1.5%, vs 2.2% in Nov.
• US ISM services index jumped to 56.8 in Jan, well above market expectations of 53.2, vs 53.0 in Dec.
• US nonfarm payrolls +243k in Jan, well above market expectations of +155k; unemployment rate dips to 8.3%.
• Canada employment +2.3k in Jan, well below market expectations of +25.0k; unemployment rate rose to 7.6%.
• Eurozone retail sales -0.4% in Dec, well below market expectations of +0.3%, vs postive revised -0.4% in Nov; -1.6% y/y.
• Eurozone Markit PMI – Composite confirmed at 50.4 in Jan; services ticked lower to 50.4, vs 50.5 preliminary read.
• UK CIPS Services PMI rose to 56.0 in Jan, above expectations of 54.2, vs 54.0 in Dec.

03-Feb (Le Café Américain) — In Stalinist Russia there was a special department that used to go back and rewrite and revise their documents to reflect the new realities as defined by the Party, to maintain consistency.

It was so thorough that when a particular Party member ‘fell out of favor’ they would go back and airbrush them out of important historical photos. Unless a photo was kept in private hands, no one would even know that the disfavored person had existed.

In looking over the surprisingly good Jobs Numbers from the US today, I was surprised to see that there had been a very thorough airbrushing of history. They even went back and revised the Birth Death Model which is an imaginary set of Jobs assumptions in the first place!

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02-Feb (BusinessInsider) — In a new note, Spyros Andreopoulos at Morgan Stanley takes a big picture look at central bank balance sheets, and what he calls the “coming of age” of QE.

Whereas at first, central banks use their balance sheets surgically — e.g. unthawing specific markets — it’s not the dominant strategy for the Fed, the Bank of Japan, the Bank of England, and the ECB to expand their balance sheets broadly at any sign of trouble or deflation.

It’s now to the point where there collective balance sheets are nearing 36% of GDP.

…Central bank balance sheets are likely to remain bloated for a long period of time – indeed, the balance sheet expansions might even end up being quasi-permanent.

[source]

03-Feb (HousingWire) — The economy added 243,000 jobs in January and the unemployment rate fell to 8.3%, its lowest level since February 2009.

The Labor Department said large gains in professional and business services, leisure and hospitality, and manufacturing jobs drove the gains, which came in well above most analysts’ estimates. The rate in December was 8.5%.

[source]

PG View: “Persons not in the labor force” surges 1,252,000. Participation rate fell by 0.3%, but showed steady at 63.7% due to a methodology change in the surveys. That sure helped the headline unemployment rate.

02-Feb (CNNMoney) — A growing number of states are seeking shiny new currencies made of silver and gold.

Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

“In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System … the State’s governmental finances and private economy will be thrown into chaos,” said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.

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02-Feb (The New York Times) — As it was in 1980, could it be again in 2012?

The 1980 presidential election was fought by a Democratic incumbent weakened by a poor economy amid worries that the United States had lost its ability to compete in the world. Gold prices had risen to unprecedented levels as the election approached, and the Republican nominee hinted he might propose a return to a gold standard.

That Republican, Ronald Reagan, won the election and soon appointed a commission to study the role of gold in monetary systems. To gold bugs, it appeared to be the best chance in decades to move the country toward gold and away from what they like to call “fiat money,” a currency anchored by nothing more than government dictates.

…To supporters, gold has been money for thousands of years, and a return to it is the only way to keep politicians from debasing currencies.

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02-Feb (USAGOLD) — Gold extended to new 9-week highs, putting important chart/Fibonacci resistance at 1762.70/1768.43 to the test amid persistent uncertainty emanating from Europe and more dire assessments about the US economy from Fed chairman Ben Bernanke.

There is still no deal with Greece’s private bondholders, despite assurance yesterday that an agreement was expected with hours. Whether there is ultimately a deal or not, Greece will be in default and everyone knows it. The whole charade with private bondholders “voluntarily” swapping debt is to provide a pretense to not trigger credit default swaps. That begs the question: What’s the point of having insurance against a sovereign default if policymakers are going to go through such wild gyrations to ensure that they never get triggered?

Fed chairman Bernanke spoke before the House Budget Committee this morning, making note of the “frustratingly slow” pace of the US recovery. He went on to express his concerns about current fiscal policies that he said, “based on plausible assumptions” could lead to “the structural budget gap increasing significantly further over time and the ratio of outstanding federal debt to GDP rising rapidly.” He called that dynamic “clearly unsustainable.”

The Bernanke Fed has directly contributed more than $110 to the gold price in the last week, with the FOMC statement that extended ZIRP guidance into late-2014 and initiated inflation targeting, through today’s testimony. With the door open for further asset purchases and projections of persistent weakness in the economy to provide the cover for such actions, the long-term uptrend in gold seems to be re-exerting itself.

• US initial jobless claims -12k to 367k for the week ended 28-Jan, just below expectations of 370k, vs upward revised 379k in previous week.
• US Q4 productivity +0.7%, below market expectations of +0.9%, vs +2.3% in Q3.
• Eurozone PPI-0.2% in Dec, below market expectations of -0.1%, vs +0.2% in Nov; 4.3% y/y.
• UK CIPS Construction PMI fell to 51.4 in Jan, below market expectations of 53.5, vs 53.2 in Dec.

02-Feb (FRB) — Over the past two and a half years, the U.S. economy has been gradually recovering from the recent deep recession. While conditions have certainly improved over this period, the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed. Moreover, the sluggish expansion has left the economy vulnerable to shocks. Indeed, last year, supply chain disruptions stemming from the earthquake in Japan, a surge in the prices of oil and other commodities, and spillovers from the European debt crisis risked derailing the recovery.

…Globally, economic activity appears to be slowing, restrained in part by spillovers from fiscal and financial developments in Europe.

…Unfortunately, even after economic conditions have returned to normal, the nation will still face a sizable structural budget gap if current budget policies continue. Using information from the recent budget outlook by the Congressional Budget Office, one can construct a projection for the federal deficit assuming that most expiring tax provisions are extended and that Medicare’s physician payment rates are held at their current level. Under these assumptions, the budget deficit would be more than 4 percent of GDP in fiscal year 2017, assuming that the economy is then close to full employment. Of even greater concern is that longer-run projections, based on plausible assumptions about the evolution of the economy and budget under current policies, show the structural budget gap increasing significantly further over time and the ratio of outstanding federal debt to GDP rising rapidly. This dynamic is clearly unsustainable.

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Our latest Newsletter, entitled, “Gold Surges 13.9% in January”, is now available.

Excerpt: Gold had a rather stellar January, posting a 13.9% monthly gain based on the LBMA PM fixings of 1531.00 on 31-Dec-11 and 1744.00 on 31-Jan-12. That’s a bigger gain than the yellow metal achieved for the entirety of last year!

Last week — when gold was up less than 10% for the month — Bloomberg came out with a story noting that this was the best start to a year since 1980. Indeed gold did rally smartly in January 1980, but it also put in a nominal 27-year high that month. Should today’s investors be worried that a similar fate awaits them? I think not.

by Peter A. Grant

To receive our free newsletters, and continue reading this month’s issue, click here.

01-Feb (BUSINESS WIRE) — Despite last year’s decline in US bank failures, at least 758 lending institutions are at risk of failure over the next two years, according to an analysis by Invictus Consulting Group, which conducts stress and sustainability tests on all FDIC-insured banks for regulators, banks and investors.

Based on all publicly available data on banks for the third quarter ended September 30, 2011, Invictus said that absent corrective action to raise capital or merge, the 758 banks are unlikely to remain viable. This is primarily due to the weak recovery, which could trigger a new wave of loan defaults. Approximately 200 of these banks are subsidiaries of publicly-traded bank holding companies.

Invictus arrives at these conclusions after stress testing all FDIC-insured banks, using its proprietary ICAMTM (Invictus Capital Assessment Model). The model produces an Invictus Sustainability Rating for the banks it stresses, rating them from 1 (strongest) to 5 (most vulnerable). There are 758 banks rated 5. These banks have total assets of around $440 billion, or roughly $580 million on average. Over the past three years, 389 banks and thrifts failed, including 90 in 2011, according to FDIC figures.

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01-Feb (USAGOLD) — Gold tacked on additional 6-week highs above 1750.00 after posting an impressive 13.9% gain in January. That’s more than the yellow metal gained in the entirety of 2011! Keeping a close eye on chart/Fibonacci resistance at 1762.70/1768.43.

There were more assurances today that a Greek PSI deal was close at hand and the euro dutifully rose, pressuring the dollar. There will come a point, where these cries of “wolf” will simply be ignored. In the interim, most market watchers will continue to be amused by them. The latest proposal centers on the addition of a GDP warrant, which would pay bondholders more if the Greek economy rebounds. So bondholders concede the lower coupon that’s being demanded, but make an additional (arguably ridiculous) bet on a Greek recovery.

Reportedly the additional payout based on an economic rebound could range from 0.5 – 3.0%. I wonder what fantasy gets the bondholders the 3%?

So let me get this straight… Private bondholders “voluntarily” take a 70% haircut (or more), they take a ridiculously low coupon that doesn’t remotely reflect the true risk, and their bone is an additional bet on some likely unattainable GDP fantasy. Sure. Sign me up.

• US construction spending +1.5% in Dec, more than double market expectations of +0.7%, vs 0.4% in Nov.
• US ISM rose to 54.1 in Jan, below market expectations of 54.5, vs 53.1 in Dec.
• US ADP employment survey +170k in Jan, below market expectations of +180k, vs negative revised+292k in Dec from +325k previously.
• Germany CPI – EU Harmonized (preliminary) -0.5% in Jan, below market expectations of -0.4%, vs +0.7% in Dec; 2.3% y/y.
• Eurozone Markit PMI – Manufacturing revised to 48.8 in Jan, vs 48.7 preliminary read; Germany revised up to 51.0.
• Eurozone CPI- Flash Estimate 2.7% y/y in Jan, in-line with expectations, vs 2.7% in Dec.
• Switzerland Retail Sales 0.6% y/y in Dec, below market expectations of 0.9%, vs 1.8% in Nov.
• Switzerland SVME Manufacturing PMI fell to 47.3 in Jan, well below market expectations of 51.5, vs negative revised 49.1 in Dec.
• UK CIPS Manufacturing PMI 52.1 in Jan, above market expectations of 50.3, vs upward revised 49.7 in Dec.

by William H. Gross

• ​Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside.

• Most short to intermediate Treasury yields are dangerously close to the zero-bound which imply limited potential room, if any, for price appreciation.

• We can’t put $100 trillion of credit in a system-wide mattress, but we can move in that direction by delevering and refusing to extend maturities and duration.

…The transition from a levering, asset-inflating secular economy to a post bubble delevering era may be as difficult for one to imagine as our departure into the hereafter. A multitude of liability structures dependent on a certain level of nominal GDP growth require just that – nominal GDP growth with a little bit of inflation, a little bit of growth which in combination justify embedded costs of debt or liability structures that minimize the haircutting of or defaulting on prior debt commitments. Global central bank monetary policy – whether explicitly communicated or not – is now geared to keeping nominal GDP close to historical levels as is fiscal deficit spending that substitutes for a delevering private sector.

Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.

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