If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery.

Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar’s value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar.

Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.

As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term.

U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments.

[source]

By Simon Rabinovitch in Hong Kong
China is running a major risk in holding so many dollars because the US may deliberately devalue its currency, a senior Chinese official has warned.

The comments by Guan Tao, head of the international payments department in the State Administration of Foreign Exchange, knocked the dollar on Tuesday, adding to fears about the struggling US economy. The dollar fell to a one-month low against a basket of six leading currencies.

…“The United States may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home,” he added.

…The article was removed from the Chinese website after financial markets took notice and the dollar fell.

[source]

By Andrew Ackerman
WASHINGTON (Dow Jones)–The federal government was running a budget deficit of $929 billion through eight months of fiscal year 2011, $6 billion less than at the same point in fiscal 2010, the Congressional Budget Office said Tuesday in its monthly analysis of the government’s finances.

CBO projected a May deficit of $59 billion, compared with a deficit of $136 billion in May 2010. It also reported the deficit in April was $40 billion, about $1 billion less than an earlier estimate.

The CBO said May’s decrease in the deficit was mostly attributable to “shifts in the timing of certain payments” and a reduction in the overall estimated cost of the Troubled Asset Relief Program.

[source]

By Martin Wolf
The eurozone, as designed, has failed. It was based on a set of principles that have proved unworkable at the first contact with a financial and fiscal crisis. It has only two options: to go forwards towards a closer union or backwards towards at least partial dissolution. This is what is at stake.

The eurozone was supposed to be an updated version of the classical gold standard. Countries in external deficit receive private financing from abroad. If such financing dries up, economic activity shrinks. Unemployment then drives down wages and prices, causing an “internal devaluation”.

…At last month’s Munich economic summit, Hans-Werner Sinn, president of the Ifo Institute for Economic Research, brilliantly elucidated the implications of the response to this threat of the European System of Central Banks (ESCB). The latter has acted as lender of last resort to troubled banks. But, because these banks belonged to countries with external deficits, the ESCB has been indirectly financing those deficits, too. Moreover, because national central banks have lent against discounted public debt, they have been financing their governments. Let us call a spade a spade: this is central bank finance of the state.

…Debt restructuring looks inevitable. Yet it is also easy to see why it would be a nightmare, particularly if, as Mr Bini Smaghi insists, the ECB would refuse to lend against the debt of defaulting states. In the absence of ECB support, banks would collapse. Governments would surely have to freeze bank accounts and redenominate debt in a new currency. A run from the public and private debts of every other fragile country would ensue. That would drive these countries towards a similar catastrophe. The eurozone would then unravel. The alternative would be a politically explosive operation to recycle fleeing outflows via public sector inflows.

[source]

PG View: As Wolf points out, some national central banks are financing their states and it’s worth noting that the ECB is prohibited by its charter from financing government deficits. Yet the ECB seems to be turning itself inside out these days to find a way to ensure solvency of certain states without violating their charter.

Federal Reserve Chairman Ben S. Bernanke is scheduled to speak today at the International Monetary Conference in Atlanta as the bank’s second round of bond buying, called quantitative easing or QE2, ends this month.

“The market’s still very sensitive to what’s happening in Greece and Europe, and at the same time sensitive to U.S. data,” Darren Heathcote, head of trading at Investec Bank (Australia) Ltd., said by phone. “There doesn’t seem to be many reasons to be selling gold at this present moment.”

China Universal Asset Management Co. received approval from the nation’s financial-market regulator to start a fund that will invest holdings in overseas exchange-traded products backed by precious metals. Liu Ming, a spokesperson for China Universal, didn’t give details of when the fund would start raising money, nor how the extent of the holdings in each metal will be set.

“All the market participants we met with in China last week expect a slowdown in physical demand before buying picks up again in September,” Edel Tully, a London-based analyst at UBS AG said today in a report. While there may be “summer headwinds” for gold, “this would be viewed by most as a short- term correction within a bullish market. It’s very difficult to leave Asia, and in particular China, without feeling bullish about gold.”

[souce]

The federal government’s financial condition deteriorated rapidly last year, far beyond the $1.5 trillion in new debt taken on to finance the budget deficit, a USA TODAY analysis shows.

The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.

…The $61.6 trillion in unfunded obligations amounts to $534,000 per household. That’s more than five times what Americans have borrowed for everything else — mortgages, car loans and other debt. It reflects the challenge as the number of retirees soars over the next 20 years and seniors try to collect on those spending promises.

[source]

PG View: While Greece continues to steal the headlines with its debt problems, the US is in a heap of trouble as well. The debt is mounting in large part to surging entitlement spending, made worse by a dramatic shift in the nation’s demographics. Yet those very entitlements have proven to be a political third-rail. While many people are adamantly opposed to entitlement reform, one need look no further than the numbers to see how necessary the conversation is.

Gold remains generally well bid, supported by dollar weakness. The euro extended to a new 5-week high as previous hard-line stances on Greece continue to erode.

The EU’s Olli Rehn has conceded that the eurozone debt crisis has moved into a critical stage, saying that Greece is facing default and that a solution must be found by 20-Jun. As to that solution, the IMF is pushing for rapid asset sales. The ECB on the other hand seems to have warmed further to the idea of coerced rollover of Greek debt.

ECB President Trichet said of such a rollover: “That is not a default.” Ratings agencies however have already warned to the contrary.

Austan Goolsbee, the Chairman of the Council of Economic Advisers to President Obama, has announced that he will resign his post this summer to return to teaching. His tenure has been less than a year, having replaced Christina Romer in September of last year. Romer also left to return to teaching.

Fed chairman Bernanke will speak to a banking conference in Atlanta today. This will be his first opportunity to comment on last week’s grim economic data. While Bernanke is likely to stick to his “transitory” meme, the financial press will be looking for hints about the possibility of QE3 if the current ‘slow patch’ ends up being longer in duration than expected.

Japan’s leading composite index -3.7 m/m in Apr, below expectations, vs -3.9 m/m in Mar as earthquake/tsunami continues to weigh.

Eurozone retail sales better than expected at +0.9% m/m in Apr.

German Apr manufacturing orders beat expectations at +2.8% m/m.

Swiss CPI was in line with expectations at 0.4% y/y in May, vs 0.3% y/y in Apr.

UK BRC retail sales unexpectedly fell 2.1% y/y, market was looking for +2.0%, vs +5.2% in Apr. Apr gain was likely one-off event associated with late Easter and royal wedding.

By Kenneth Rogoff
As many commentators have rightly observed, the euro experiment is at a crossroads. Either the eurozone will deepen into a fiscal union, or the weak members will be forced to break off. But the euro experiment has also brought us to a crossroads in the whole international monetary system. Will our grandchildren inherit a world with a huge number of national currencies, or a very small number of multi-country currencies?

[source]

A deepening budget crisis in Washington has gold sailing high again in some buyers’ dreams. The reason? A budget crisis could trim the currency further. Gold’s strength comes largely from the erosion of the dollar, which has lost 37 percent of its value since its last peak in mid-2001.

And investors haven’t missed the boat.

“Definitely still time and there always will be ‘still time’” to buy gold, says Al Korelin, chairman of AB Korelin and Associates in Semiahmoo, Washington. “You buy gold as insurance and not necessarily as a short term investment.”

“Gold will eventually go up to $2,000 an ounce,” said Mike Frawley, global head of metals at the Newedge Group in New York, though “probably not much before early next year.”

Frawley said the price of the currency now has backing based on supply and demand fundamentals. But the currency factor could swing back into play.

“The value of the dollar vis-a-vis other major world currencies is considerably important,” he said. “Global demand (for gold) is still strong from Asia Pacific, India and China in particular.”

CitiFX Technicals, a note from Citigroup, said gold could test an all-time high in the weeks ahead, top $1,700 this year and rally to more than $2,000.

[source]

But for gold and gold stocks investors, the latest data are good news, according to Swiss precious metals firm MKS.

“Speculations of a generous third quantitative easing (QE3) package will grow” if a string of subsequent depressed data come in, MKS told BullionVault. “Expectations in the market suggest that gold prices will benefit in the short term by the belief that slowing growth in the U.S. will prompt the Federal Reserve to maintain favorable monetary conditions.”

That means some form of QE3 by the Fed could be inevitable by as early as the third quarter some economists speculate, which will result in a further expansion of the U.S. monetary base and put a strong bid under the yellow metal.

“This is gold-friendly data,” said Credit Agricole analyst Robin Bhar. “In the worst case scenario, we could have a double-dip in the U.S. economy and possibly deflation, which would also help gold.”

[source]

The Summer of Discontent

Temperatures and the euro are rising as the summer solstice approaches, amid rising expectations that a new bailout for Greece is at hand. Tempers are rising as well, with Greeks taking to the street en mass over the weekend to protest the additional austerity measures that are part of that proposed bailout deal. However, the fact that Greece even requires further aid, just about a year after its initial €110 bln bailout, has resulted in a growing political backlash in core-Europe (particularly in Germany) as well.

The Germans are already starting to view Greece as the Continent’s persistently down on his luck uncle, constantly returning for just one more hand-out. As a Der Spiegel article pointed out today, the Greek version of “consolidation” doesn’t exactly mesh with what the Germans were thinking. Yet in forcing further concessions from labor; well, you can only squeeze them so much before the inevitable civil unrest.

There is no easy solution for the Greeks. As the economy contracts under increasingly severe austerity measures, tax revenues decline, reducing the countries ability to repay its debts. Then again, attaching fewer conditions to a bailout doesn’t really improve the odds of repayment either. Somebody needs to pay the price for years of fiscal irresponsibility, either the Greeks or core-Europe…and I wouldn’t necessarily rule out US participation if our government (or the Fed) deems there is a broader contagion risk.

The ECB/IMF/EU troika has been desperately searching for a resolution that doesn’t result in a credit event for Greece. There has been much talk of a soft-restructure, a voluntary elongation in the terms of Greek debt. However, the credit rating agencies have been thwarting those efforts. Even if the troika manages to orchestrate a voluntary rollover of debt by bondholders, Fitch said today that it would consider that a technical default.

In Portugal, the government was ousted in the weekend snap-election. The Social Democrat winners are expected to form a coalition government with the Conservatives, but Portugal’s position hasn’t fundamentally changed. The new government is going to have to sell further austerity to the Portuguese people, that clearly have no appetite for more austerity.

With a contentious debate over the debt ceiling ongoing right here in America, the implications of a potential default on US bonds can not be discounted. Recent activity in the CDS market and warnings from the credit agencies are reflective of this uncomfortable reality. The one monumental difference between Greece and the US: We have the ability to print as many dollars as necessary to meet any obligation…the Greeks do not.

Meanwhile, across the Middle East and North Africa, unrest prevails. The war in Libya is escalating, with the West committing further resources to the battle. Yemen is a mess. Protests in Bahrain continue. Tensions on the Syrian/Israel border are heating up.

There is potential that this ends up being a long, hot summer indeed, conceivably squelching the seasonal lull in the gold price that tends to occur in June/July. That may also end up amplifying the seasonal gains in gold that have historically occurred between August and the end of the year.

Demonstrations over Greece’s plans to increase austerity measures to get new EU and IMF loans brought 80,000 people into the streets of Athens over the weekend. Prime Minister George Papandreou may get the money his nation desperately needs–a figure which has been put as high as 100 billion euro. Greece’s labor force may be the biggest threat to the plan.

Germany in particular believes that Greece may not be able to meet its financial obligations. And, the rescheduling of the southern European country’s sovereign debt may also need private bondholders to bear some of the financial burden. Obtaining that support will not be simple

The bailouts of Greece, Portugal, and Ireland have all lacked support from public unions. Large unions and other worker groups have effectively shut the public transportation system in Greece more than once. These actions are a sort of financial suicide. Greece cannot make its debt obligations if the central government’s revenue falls sharply. Greece relies on tourism for much of its GDP. Travelers are understandably reluctant to visit countries where their ability to travel is made nearly impossible.

[source]

PG View: Selling working people on further austerity is not going to be easy. The deal is, they make most of the sacrifices to ensure that bond-holders remain whole and the banking system doesn’t collapse. One might argue that workers benefit in the long-run if the country remains solvent, but demands from elsewhere in Europe for lower pay, higher taxes and a higher retirement age in exchange for the next bailout is understandably being met with considerable objection.

Greece needs even more money — EU officials estimate that a new bailout will cost over 100 billion euros rather than the previously assumed 60 billion. It will get the aid, even though the rescue strategy adopted so far seems doomed. The economy is shrinking, and ambitious privatization plans are illusory.

…Greece’s partners in the euro zone are gradually losing patience with Prime Minister Papandreou and his team. A year after receiving €110 billion in international financial aid commitments, Greece has hopelessly failed to reach the agreed austerity goals. Its lenders are now questioning the government’s ability to reform, the economy has declined even further than feared, and important tax revenues have failed to materialize.

…The only certainty is that Greece needs more money than it was provided with last year. The goals stipulated in the bailout package can only be reached under highly unrealistic assumptions, the envoys of the EU, IMF and ECB concluded after analyzing the situation in Greece in recent weeks.

[source]

Portugal’s governing Socialist Party has admitted defeat in the general election.

Socialist leader Jose Socrates said he accepted responsibility for the defeat and resigned as head of his party.

The victorious centre-right Social Democrats (PSD) led by Pedro Passos Coelho are expected to form a majority with the conservative CDS.

The new government must implement a demanding austerity programme as a condition for an EU bail-out.

[source]

PG View: I find it doubtful that a new coalition government will be any more successful than the socialist party was in selling further austerity to the Portuguese people. It’s a losing proposition even for the winners because the options are so limited…and they’re all painful.

Gold remains generally well bid, despite a modest uptick in the dollar. The euro remains underpinned amid expectations that a second rescue of Greece is at hand, suggesting the upside for the dollar — and therefore the downside for gold — remains limited.

However, more than 100,000 protesters took the streets of Athens on Sunday in objection to further austerity measures that would be attached to a new deal for Greece. Meanwhile the Portuguese government was ousted in the snap-election over the weekend. Yet another glaring indication of the growing discontent in Europe.

Eurozone PPI eased to +6.7% y/y in Apr, in line with consensus. Mar revised up to +6.8% y/y.

Canadian building permits plunged 21.1% in Apr, way below market expectations of -5.0%, vs +16.8% in Mar.

Terrible Payrolls Print Caps a Grim Week of US Data, Buoying Gold

Gold jumped and equities tumbled in reaction to nonfarm payrolls, which showed the economy added a mere 54k jobs in May. That was dramatically below even the significantly scaled back forecasts that emerged in the wake of Wednesday’s way-below expectations ADP report. The unemployment rate ticked higher to 9.1%. This came on the heels of troubling news earlier in the week on home prices, business activity, manufacturing, factory orders and consumer confidence. I think only April construction spending and May ISM-NMI beat market expectations this week.

Given the general tenor of data this week, further downgrades to growth forecasts for the US economy can be reasonably expected. That of course has sparked heightened debate about the likelihood of additional quantitative easing by the Fed. Clearly über-easy monetary policy on top of various forms of stimulus have done little to truly reinvigorate the flagging US economy, perhaps giving credence to those that have suggested the government and the central bank simply haven’t done enough. While chairman Bernanke has expressed worries about the detrimental impact of further accommodations relative to benefits, growth and deflation risks unquestionably remain the Fed’s biggest concerns. In an FT op-ed this week, former Labor Secretary Robert Reich said pretty definitively, “The recovery has stalled.”

With our Representatives in Washington embroiled in a contentious partisan battle surrounding the terms of a debt ceiling hike, there is little political appetite for further deficit spending to provide fiscal stimulus, particularly with an election year looming. Consequently, the onus will likely remain on the Fed to provide stimulus from the monetary side. With interest rates stuck at essentially 0%, there isn’t much left in the toolbox other than more QE. The stock market appears poised for a 5th consecutive weekly decline, which hasn’t happened since 2004. Many Americans continue to use the DJIA as their measure of the economy’s health, providing further impetus for more Fed action. Barring some miraculous surge in economic activity, I’m expecting the Fed’s respite from new asset purchases to be a brief one.

The realization that we won’t be seeing a rate hike any time soon, along with rising expectations of further monetary accommodations, has kept downside pressure on the dollar and buoyed gold. Meanwhile, the political game of chicken on the debt ceiling risks further undermining of our nation’s currency and our bond market. Moody’s warned on Thursday that it would put the US government’s Aaa credit rating under review for a downgrade unless there was progress on a deal to raise the debt limit in the next several weeks. S&P has already put US sovereign debt on negative watch for a potential downgrade. The market will become increasingly nervous about a potential US default the closer we get to 02-Aug — the date that Treasury has deemed the point where they can no-longer fund the government — without some sort of deal to raise the debt ceiling.

In Europe, the ECB/IMF/EU troika appears to have issued another stay for Greece, saying that negotiations have concluded “positively.” Reportedly, a new plan that includes more asset sales and structural reforms will be presented to the Greek cabinet and Parliament in the days ahead. This is certainly not a resolution of the Greek debt crisis, merely another kick of the can down the road. Nonetheless, the euro loves it, surging to new 4-week highs above 1.4600 versus the dollar. The new Greek deal is lipstick on a pig, making the single currency look marginally more attractive than the greenback for the time being.

Historically, the early part of the summer is a time when gold prices experience a seasonal lull, generally followed by renewed gains in the last 5-months of the year. Given all the uncertainty in the world, and in particular the likelihood that the US government takes these debt ceiling negotiations right down to the August wire, the negative seasonal influence may be muted — perhaps even negated — this year.

Our latest special report details why June and July offer gold owners some of the best buying opportunities of the year.

Click image to access article.

Gold prices popped on a much weaker than expected US nonfarm payrolls report for May. The US economy added just 54k jobs in May and the unemployment rate rose to 9.1%. Equities came under additional selling pressure on this latest indication that an already tepid economic recovery is faltering. All-in-all, it’s been a pretty grim week data-wise.

Most analysts had tempered expectations for NFP in the wake of Wednesday’s weak ADP report, but today’s actual number was well below even the deepest revisions. April and March payrolls data were revised lower as well. Those 39k in back-month revisions negate all-but 15k of the paltry 54k jobs added in May.

Further flows out of equities may have a short term positive impact on the dollar and Treasuries, but the country’s debt woes and rising expectations of QE3 suggest cash and debt investments might not prove terribly sticky. Gold will likely be increasingly seen as a safe-haven amid rising economic uncertainty.

Nonfarm payroll employment changed little (+54,000) in May, and the unemployment
rate was essentially unchanged at 9.1 percent, the U.S. Bureau of Labor Statistics
reported today. Job gains continued in professional and business services, health
care, and mining. Employment levels in other major private-sector industries were
little changed, and local government employment continued to decline.

…In May, average hourly earnings for all employees on private nonfarm payrolls increased
by 6 cents, or 0.3 percent, to $22.98.

…The change in total nonfarm payroll employment for March was revised from +221,000 to
+194,000, and the change for April was revised from +244,000 to +232,000.

[source]

PG View: Expectations for the May payrolls report had been revised lower in the wake of Wednesday’s weak ADP report, but NFP came in well below even the deepest revisions.

Kick the Can

Further weakness in the stock market sparked a bout of deleveraging in the gold market today, pushing the yellow metal to new lows for the week. The retreat was almost exactly on queue, given today’s release of our annual summer doldums piece. The special report clearly illustrates that over the past 10-years, more than ⅔ of all annual gains came in the last 5-months of the year, usually following a seasonal price slump in June/July.

Gold dipped briefly below 1520.00, but quickly rebounded more than $10 intraday following further indications that a new bailout deal for Greece is at hand. Reuters reported that senior Eurozone officials had agreed “in principle on new 3-year adjustment plan for Greece.” That news pushed the EUR-USD back to new 4-week highs and the corresponding slump in the dollar helped gold find support. The EU commission subsequently denied that a deal had been struck.

If there is a new plan, details probably wont be revealed until tomorrow, but it would seem that the eurozone is destine to kick the Greece problem another 3-years down the road. I would however point out that the initial €110 bln Greek bailout was expected to be a much further kick that 13-months. If the latest maneuvering by the ECB/IMF/EU and Greece succeeds in back-burnering the Greek problem, the market can turn its attention back to the ongoing debt woes elsewhere in the eurozone. The bottom-line here is that the sovereign debt crises remain, only meaningful reduction of said debt will mitigate those crises. More debt, or elongated terms are not a solution, they are merely a delaying action.

Here in the States, the debate over whether there will be a QE3 or not seems to be ramping-up. Recent bleak economic data suggests that the tepid economic recovery is faltering. A bad May payrolls number tomorrow is only going to increase the calls for more QE. The perception of heightened growth risks has resulted in an uptick in expectations that the Fed’s hiatus from new asset purchases once QE2 terminates at the end of the month may be a short one. Noted Fed watcher Jon Hilsenrath suggested today that the Fed is in no immediate hurry to react to the recent data. However, the Fed has made it quite clearly throughout the financial crisis that growth risks, and the risk of resulting deflation, are its biggest fears. If the economy — and in particular if employment — takes a nasty turn for the worse, the Fed would likely react.

By STEVEN RUSSOLILLO
NEW YORK—Stocks plunged Wednesday, suffering their biggest drop in almost a year, as a slew of downbeat reports prompted fears the economic recovery was running out of steam.

The Dow Jones Industrial Average closed down 279.65 points, or 2.2%, to 12290.14, the biggest point drop since June 4, 2010. All 30 of the blue-chip components finished in negative territory.

…Investors kicked off June on a negative note after several economic data points weighed on sentiment. Concerns about unemployment arose after a reading on private-sector job growth came in well below economists’ expectations, fueling anxiety on Wall Street about the government’s monthly jobs report Friday.

…Pessimism continued to mount after the Institute for Supply Management said the manufacturing sector slowed sharply in May. U.S. auto sales also dropped in May from a month earlier, the auto industry’s first significant setback in more than 18 months.

…The selling accelerated in the late afternoon after Moody’s Investors Service again cut the rating of Greek government debt.

[source]

(Reuters) – Moody’s on Wednesday cut Greece’s credit rating by three notches to an extremely speculative level on debt restructuring worries and warned that more downgrades could come.

Citing a growing risk that the government will fail to stabilize its debt position without a debt restructuring, Moody’s cut Greece’s rating to Caa1 from the previous level of B1, bringing it seven notches into junk territory.

The outlook on the new rating is negative, in a sign that another downgrade is likely in the short- to medium-term.

[source]

PG View: Seems like at least one credit rating company is viewing the possibility of a Greek restructuring as a “credit event,” despite what Olli Rehn says.

June 1 (Bloomberg) — The European Central Bank may back a plan encouraging investors to buy new Greek bonds to replace maturing securities, said two officials familiar with the situation, softening the ECB’s opposition to any restructuring to fix the country’s debt crisis.

The ECB is examining that step because it could ease Greece’s funding squeeze without technically constituting a default, the officials said on condition of anonymity. The Frankfurt-based Executive Board is still opposed to any extension of maturities, said one of the officials.

…European Union Economic and Monetary Commissioner Olli Rehn said yesterday that the rollover plan was being examined, as it “would not create a credit event” and ECB Executive Board member Juergen Stark told Il Sole 24 Ore newspaper in an interview published today that such an arrangement would not constitute a default.

[source]

Wall Street is having a hard time figuring out what to do now that the U.S. economy appears to be sputtering and yields are so low, Peter Yastrow, market strategist for Yastrow Origer, told CNBC.

“What we’ve got right now is almost near panic going on with money managers and people who are responsible for money,” he said. “They can not find a yield and you just don’t want to be putting your money into commodities or things that are punts that might work out or they might not depending on what happens with the economy.

…”Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything,” Yastrow said. “We’re on the verge of a great, great depression. The [Federal Reserve] knows it.

[source]

Today’s data releases confirm that the US economy has undoubtedly hit another soft patch.

It is not the only one.

Other economies are also slowing or contracting—some as a result of budget austerity (such as the UK and the struggling European peripheral economies) and others because they are tapping their monetary policy brakes to counter mounting inflationary pressures (China and other emerging economies).

With such broad-based economic slowing, and with unemployment stuck at very high levels and becoming more structural (and therefore protracted) in nature, market participants are asking whether the US authorities will again try to turbo-charge the economy. And with additional fiscal stimulus off the table due to deficit and debt concerns, the spotlight is fully on the Fed’s reaction function.

…As Chairman Bernanke noted in his August Jackson Hole speech, and reiterated in his first press conference a few weeks ago, policy measures should be judged in terms of the expected balance of benefits, costs and risks.

…I suspect that there is now broad agreement that, in the case of QE, this balance has shifted: lowering the potential gains and increasing the probability of collateral damage and adverse unintended consequences.

[source]

Investors should prepare themselves for a third round of quantitative easing, Simon Maughn, co-head of European equities at MF Global, told CNBC Wednesday.

“The bond market is going in one direction which is up-falling yields which is telling you quite clearly the direction of economic travel is downwards. Downgrades. QE3 (a third round of quantitative easing) is coming,” said Maughn. “The bond markets are all smarter than us, and that’s exactly what the bond markets are telling me.”

“What’s interesting in the bond markets over the last couple of sessions is, you’ve seen human traders trying to step in and call this turn in the market the same way that equities have done … and they have just been mowed down by the quant funds which are all about leverage, all about momentum and are betting on bond prices going up,” added Maughn.

Once again, the United States will step up as the marginal buyer of bonds, said Maughn.

[source]

President Barack Obama invited U.S. House Republicans to the White House today to resume talks on a political compromise to raise the nation’s debt ceiling in exchange for reductions in spending.

The private meeting in the East Room followed the House’s 97-318 vote yesterday defeating a measure that would have raised the $14.3 trillion debt limit by $2.4 trillion without spending reductions.

“I think it was important to clear the air that we cannot have an unconditional increase in the debt without any sort of spending cuts or budget reforms,” Representative David Camp, chairman of the tax-writing Ways and Means Committee, said today on CNBC. “That was important to send that signal.”

[source]

By Robert Reich
The US economy was supposed to be in bloom by late spring, but it is hardly growing at all. Expectations for second-quarter growth are not much better than the measly 1.8 per cent annualised rate of the first quarter. That is not nearly fast enough to reduce America’s ferociously high level of unemployment. The labour department will tell us on Friday whether the jobs situation improved in May, but there has been no sign of a surge in hiring. Nor in wages. Average hourly earnings of production and non-supervisory employees – who make up 80 per cent of non-government workers – dropped to $8.76 in April. Adjusted for inflation, that’s lower than they were in the depths of the recession.

Meanwhile, housing prices continue to fall. They are now 33 per cent below their 2006 peak. That is a bigger drop than recorded in the Great Depression. Homes are the largest single asset of the American middle class, so as housing prices drop many Americans feel poorer. All of this is contributing to a general gloominess. Not surprisingly, consumer confidence is also down.

The recovery has stalled.

[source]

Swiss Franc and Gold Supported by EU and US Debt Woes

Gold pushed to a new 4-week high above 1540.00 as the dollar remains defensive on weak economic data and persistent concerns over the massive US debt. US ADP private payrolls for May came in much weaker than expectations today at just +38k. The market had been looking for a number closer to +180k. Not surprisingly this has prompted a bunch of negative revisions to forecasts for Friday’s release of May nonfarm payrolls. US May ISM missed expectations too, coming in at 53.5. The market was expecting a modest dip to 57.8 from 60.4 in Apr.

On the heels of yesterday’s raft of grim economic data, there will undoubtedly be more defectors from the ‘no QE3′ camp. Those that still maintain there will not be a QE3 are probably at least tempering their Fed tightening expectation. That should add further weight to the dollar, and offer further support to gold.

In an FT op-ed today, former US Secretary of Labor Robert Reich states definitively: “The recovery has stalled.” He goes on to warn that the “possibility of a double dip cannot be dismissed” and that the current anemic economic growth “is not nearly fast enough to reduce America’s ferociously high level of unemployment.”

The euro remains supported by ongoing speculation about a new deal for Greece. The FT Deutschland, reported that the ECB is warming to the notion of a “soft-restructuring” of Greek debt, even though the central bank has been consistently opposed to restructuring, soft or otherwise. The ECB’s Christian Noyer said just last week, “If we restructure Greek debt, that means Greece defaults.” That in turn would make Greek debt unacceptable to the ECB as collateral. Sort of makes one wonder why there would be this sudden change of heart. The obvious answer is; there simply are no other options. Noyer had suggested that more austerity and asset sales were the only available path, but such measures would likely result in resurrection of talk about a Greek exit from the EMU.

While the euro is relatively firm against the dollar, it has fallen to new all-time lows against the Swiss franc. Similarly, the USD-CHF has set new all-time lows, as the swissy continues to benefit from safe-haven interest. Safe-haven flows are expected to continue supporting gold as well.

Yesterday the House resoundingly defeated a bill that would have raised the debt ceiling by $2.4 trillion, an amount that was said to sufficient to cover additional government borrowing through the end of 2012. The so called “clean vote,” with no spending cuts attached, was seen as largely symbolic and was rejected by all the Republicans and nearly half of the Democrats in the house.

Today, House Republicans will troop to the White House in the hope of hashing out a deal with President Obama on spending cuts in exchange for a debt ceiling hike. The Republican position is that if you want a $2.4 trillion hike to the debt ceiling, there needs to be a corresponding $2.4 trillion in spending cuts. The President is likely to push for a mix of spending cuts and tax hikes, but Republicans have stated that tax hikes are a non-starter.

Treasury Secretary Geithner has pegged the drop-dead date for a debt ceiling hike as 02-Aug, just about 2-months away. Markets are likely to become increasingly skittish the closer we get to that date without some kind of deal. The CDS market is already showing signs of unease with the current contentious tone of negotiations.

Nice overview of the current drivers in the gold market. Video

http://finance.yahoo.com/video/cnbc-22844419/gold-a-currency-not-commodity-25396652