08-Feb (24hGold) — The interminable extension by the US Federal Reserve on the 0% rate into 2014 represents history in the making. It is the adoption of pure heresy in monetary policy, making it mainstream. Worse, it forces foreign central banks to adopt the same destructive policy in the Competing Currency War. Once upon a time, the highest priests from the central bank would admit in a guiding tone that accommodation on interest rates must be temporary. Nowadays it is engrained in the market mindset and permanent in monetary policy. The chronic 0% means the entire financial and monetary system is totally irreparably broken. The old pendulum where the tilt was toward bonds during recession, then toward stocks during recovery, that is all gone, shattered by the endless financial crisis. One must incorporate a new thinking, that the entire financial and monetary system is totally irreparably broken, then adapt in fierce defense. Larry Fink of Blackrock private equity firm made news today by suggesting that 0% bond yields offer no return on investment. How true! He did not offer any accurate reflection of reality that the financial structures are broken, nor that all attempts at remedy were flimsy and misdirected. He gave the ALL IN signal for buying stocks in 2012, thus putting on the risk trade. The immediate ancillary signal is to back up the truck and load up with GOLD also.

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08-Feb (ABC News) — TAPPER: President Obama is going to be introducing his outline for a budget. Fed Chair Bernanke has said the lack of a budget having been passed by the Senate has had an adverse affect on growth because it’s created uncertainty. Harry Reid has said that he doesn’t think there’s a need to introduce a budget this year. Who do you — who does the president think is right, Harry Reid or Ben Bernanke?

[a lot of dancing around by White House spokesman Jay Carney]

CARNEY: Well, I don’t have an opinion to express on how the Senate does its business with regards to this issue.

…I have no opinion — the White House has no opinion on Chairman Bernanke’s assessment of how the Senate ought to do its business.

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PG View: I’d like Senator Reid to share with us when exactly there might be a need to introduce and pass a budget again. I mean, it’s been more than 1,000 days since the last one…

08-Feb (MNI) — For three years European leaders have battled the debt crisis mostly by imposing ever-greater austerity on their citizens and yielding more and more fiscal control to Brussels.

The strategy has produced important successes. Twenty-five EU members now support a new fiscal compact — clear budget rules backed by quasi-automatic sanctions. Taxes have been raised, cherished social programs cut, and deficits are now in decline almost everywhere across the Eurozone.

But one group has not had much of a role in the process: voters. Although European leaders frequently say that markets don’t appreciate the time it takes for political democracies to work, very little about the Eurozone’s rush to fiscal integration has actually been democratic.

But that is likely to change in the months ahead as voters in France, Greece and possibly Ireland finally get to have their say.

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PG View: There isn’t any unanimity even among eurozone politicians, let alone voters. Which is exactly why allowing the voters a voice has been studiously avoided. As representatives of the people, the politicians would then be obliged (if they want to keep their jobs) to follow the direction of the majority, which would severely limit their options with regard to addressing the European sovereign debt crisis.

06-Feb (USFunds) — After prices fell 10 percent in December, many investors wondered if the bull market in gold was running out of steam. That was before Federal Reserve Chairman Ben Bernanke swooped in with a “red cape” and fired the bulls back up. Since the Fed reassured the world that interest rates will remain at “exceptionally low levels” for another two years, gold has jumped more than three percent.

UBS described the situation simply, “if investors needed a (further) reason why they should be long gold now, they got it yesterday … a more accommodative policy is a very good foundation for gold to build on the next move higher.”

To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.

…One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8 percent year-over-year in December, or about $4 trillion, according to ISI.

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08-Feb (Bloomberg) — The unemployment rate’s unexpected drop to a three-year low has overshadowed a less-positive labor- market development: fewer Americans are looking for work.

Last week’s Labor Department announcement that the jobless rate fell to 8.3 percent in January sent stocks and bond yields higher. The same report showed the share of working-age people in the labor force had declined to the lowest level in 29 years.

The so-called participation rate was cited by Federal Reserve Chairman Ben S. Bernanke yesterday to support his assessment that the rate of unemployment obscures vulnerabilities in the job market. Bernanke, speaking to the Senate Budget Committee, confirmed the Fed’s stance that interest rates will stay low at least through late 2014, and repeated his view that the job market is a “long way” from returning to normal.

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08-Feb (USAGOLD) — Gold has been rather choppy today as hopes for a Greek deal continue to rise and ebb. Initial indications from the ECB that they might be willing to “not make a profit” on their holdings of Greek bonds (Does that mean take a loss?) were received enthusiastically, but subsequent comments indicated that this was far from being a ‘done-deal.’ That pushed the yellow metal back down into the range.

The market has since found some support as San Fransisco Fed’s Williams said that QE3 would be warranted if the recovery falters, or if inflation falls significantly below 2%. If you’re still using the Dow as your barometer of the overall health of the US economy (a NYT article suggests what we’ve been saying for years…you shouldn’t be), another good dose of asset purchases just might push the DJIA the final 10% back to its all-time high. Such a move would also likely push gold to new all-time highs as well.

• Canada housing starts fell to 197.9k in Jan, above market expectations of 195k, vs 199.9k in Dec.
• Switzerland unemployment rate (sa) steady in Jan at 3.1%.
• Germany current account €19.3 bln in Dec, vs upward revised €14.7 bln in Nov.
• Germany trade surplus narrowed to €13.9 bln in Dec, vs negative revised €14.9 bln in Nov.
• Germany exports (sa) -4.3% m/m in Dec, well below market expectations of -1.3%, vs 2.6% in Nov; imports -3.9% m/m.

08-Feb (NYT Magazine) — Why do we still care so much about the Dow? It remains not only a rough measure of stock performance but also the most frequently checked, and cited, proxy of U.S. economic health.

…It would be extremely convenient if there were still one number or index we could check to make sense of our economy, especially during times of chaos. But the stock market might actually be our worst option. Rather than being a useful indicator, it’s an anxiety-amplification device.

…The Dow doesn’t adjust for inflation either. Passing 12,000 points, as it did in early 2011, is incorrectly considered the equivalent to that supposedly magical moment in 2006, especially because we were in a bubble then and are coming out of a recession now.

…Yet the Dow’s biggest flaw, perhaps, is that it doesn’t help us to make sense of an increasingly interconnected global economy…

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PG View: This is a position we’ve espoused for years. While the author says “The Dow is also reluctant to add or subtract new companies”, the complexion of the Dow has in-fact changed dramatically over the years. Pitching weak components and replacing them with better performing shares results in positive distortions in my humble opinion.

See our VideoBrief entitled Is the DJIA a viable economic indicator? from 2009.

08-Feb (MarketWatch) — Gold futures veered between gains and losses Wednesday after a strong performance a day earlier and as the euro pared gains, pushing the U.S. dollar marginally higher against major currencies.

Gold for April delivery fell 50 cents to $1,747.90 an ounce on the Comex division of New York Mercantile Exchange.

The metal surged 1.4% on Tuesday on news Greece was close to a deal on austerity measures thought to be key for a second bailout package.

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07-Feb (WSJBlogs) — Investors on both sides of the Atlantic are nervously vacillating between worrying about rampant inflation and Japanese-style deflation.

What they want is some way to protect themselves against both extremes. The question is: how?

The latest Credit Suisse Global Investment Returns Yearbook, produced by London Business School academics Elroy Dimson, Paul Marsh and Mike Staunton offers some useful insights from history. Much of their work is based on an analysis of investment returns from 19 major developed countries, stretching back to 1900, though they also offer some shorter-run insights from a broader range of countries that include many emerging markets.

They offer up a few surprising conclusions, not least that equities don’t fare particularly well in periods of high inflation.

…On average, gold performed positively during periods of inflation and modest deflation and performed well in severe deflations.

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08-Feb (BBC) — It seems the European Central Bank has bowed to the reality that it could not expect to make a profit on the Greek bonds it has been buying at knock-down prices, while private sector bondholders were being asked to take such a big hit.

…For weeks, there has been a clear gap between the amount of debt relief for Greece that the private sector would “voluntarily” sign up to, and the amount needed for the IMF or anyone else to be able to say, with a straight face, that Greek sovereign debt was on a sustainable path.

This complicated climb-down by the ECB will do something to bridge that gap. But, as usual, this is only one piece of the horrendously complicated puzzle that is the Greek “bailout”.

[source]

PG View: So why wouldn’t the writers of all the other periphery debt on the ECB’s balance sheet also demand similar concessions?

08-Feb (The New York Times) — Greek political leaders continued to struggle Wednesday to secure agreement on new austerity measures to be presented to the country’s financial backers in the coming days.

Driving the talks has been a clear recognition that the ever-worsening collapse of the Greek economy will require another increase in bailout funds — money that will not be forthcoming until the rest of Europe is persuaded that Greece is serious about taking such steps as firing more public-sector workers and cutting private-sector wages.

The Prime Minister Lucas Papademos was to meet leaders of the three parties supporting his interim government later Wednesday to go over a draft agreement reached with the country’s international creditors.

…A surprise plunge in government revenues for January of this year — spurred by an 18 percent fall in value-added tax receipts, Greece’s primary revenue source — is the latest sign that the deep recession will cause Greece to once again miss its budget deficit target.

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PG View: Greek budget revenues fell 7% y/y in Jan, on expectations of +8.9%. That’s a huge miss that reportedly amounts to €1 bln. Meanwhile VAT revenues plunged 18.7% y/y in Jan. This pretty much confirms that the €130 bln bailout that they’ve been struggling to hash-out for the last 5-months isn’t going to be enough…

06-Feb (The Wall Street Journal) — Robert Marcotte can’t afford to play it safe anymore. With interest rates likely stuck near zero for nearly three more years, the 61-year-old retired telephone-company manager is about to ramp up his holdings of stocks and municipal bonds, using money now at the bank in certificates of deposit.

“It gets me a little uneasy,” says Mr. Marcotte. “Since I’m not working, I am very risk-averse, but still need to generate income.”

The Federal Reserve is presenting a broad swath of conservative investors, from retirees and college savers to banks and insurance companies, with a tough choice: move into riskier investments or continue coming up short from low-risk investments that aren’t even keeping pace with inflation.

[source]

PG View: Too much risk — and mispriced risk at that — was arguably a significant factor that led to the global financial crisis. In driving investors — both institutional and individual — further out on the risk curve with perpetual ZIRP, the Fed may also be driving us back to the brink…

07-Feb (USAGOLD) — Renewed hope that a Greek deal is imminent has heightened risk appetite once again, lifting both the euro and gold. The yellow metal has rebounded more than $30 off the intraday low. More than half — and nearly 61.8% — of this week’s correction has already been retraced.

Rumors are circulating once again that Greek policymakers are finalizing details — which are reported to include additional harsh austerity measures — to clear the way for a second bailout. This second bailout was actually agreed to back in October with a price-tag of €130 bln. So here we are 5-months later and the details are still being hashed out, but one thing seems to be certain; €130 bln is no longer enough. Interesting too that the politicians are allegedly striking a deal for more austerity on a day when the two largest labor unions struck in protest of austerity.

There are already rumblings that the German parliament will have to approve any deal struck between Greece and the troika. If this is true, it seems unlikely that any deal will be finalized this week. Nonetheless, the market seems quick to latch onto anything remotely positive.

• German industrial production -2.9% in Dec, well below market expectations of -0.3%, vs positive revised unch in Nov; +0.9% y/y.
• UK BRC retail sales (same store) -0.3% y/y in Jan, second worst Jan on record.
• Japan Leading Index (prelim) +0.6% m/m in Dec, vs 0.9% in Nov.
• Japan Coincident Index (prelim) 2.9% m/m in Dec, vs -1.1% in Nov.
• RBA holds official cash rate steady at 4.25%.

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.

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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.

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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%.

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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.