August 9 (Reuters) — Measures that gauge the level of European banks’ reluctance to lend to one another are approaching levels unseen since the aftermath of Lehman Brothers Holdings Inc. (LEHMQ)’s collapse.

“We’re going back to a post-Lehman scenario where banks are reliant on the ECB and funding is more expensive,” said Marcello Zanardo, an analyst at Sanford C. Bernstein & Co. in London. “This may lead to a credit crunch” if banks can’t pass on all their costs.

“Banks are beginning lend more cautiously, and increasingly park their money at central banks,” ECB Governing Council member Ewald Nowotny told Austrian state radio ORF today. “Bank deposits at the ECB have risen massively. That’s not a good sign.”

[Source]

August 10 (CNBC) — Fears of a new global banking crisis moved to the foreground Wednesday and are driving investors out of stocks and into safe-haven Treasurys, gold and Swiss francs.

The catalyst was an idea that’s been circling markets for several weeks—that France is next in line to lose its triple-A credit rating now that the U.S. has been downgraded.

Bank stocks, which had recovered some of their steep losses in the afternoon, sold off sharply in another wild ride lower into the closing bell. The S&P financial sector was down 7.1 percent Wednesday, and is now down 9.5 percent for the week and more than 23 percent year-to-date.

Banks were the worst performers in the stock market, which also closed with steep losses. The Dow was down 519 points at 10,719, its second more than 500-point loss in three days. The S&P 500 was down 51 at 1120.

[Source]

August 10 (CNNMoney) — Ding! Gold broke yet another record Wednesday, reaching as high as $1,801 an ounce, as investors keep fleeing from the volatile stock and currency markets.

In midday trading, the precious metal surged $58 to $1,801 per ounce, before retreating slightly to settle at a record high of $1,788.30 on the Chicago Mercantile Exchange.

It marked the first time ever gold has exceeded $1,800 in intra-day trading.

In less than a month, it has surged more than $200 amid worries about the debt ceiling, the S&P downgrade, Europe’s sovereign debt woes and weakness in the U.S. economy.

[source]

August 10 (AP) — The United States’ budget deficit has topped $1 trillion for a third straight year….

But the deal fell short of the $4 trillion in cuts that Standard & Poor’s said was needed to achieve a credible deficit plan. As a result, S&P downgraded the U.S. government’s credit from AAA to AA+.

Before 2009, the deficit had never come close to $1 trillion in a single year. The government last recorded a budget surplus in 2001, when revenues were $127 billion greater than spending. The surpluses were expected to total $5.6 trillion over the next decade.

[Source]

JK Comment: Looking at this, its easy to see why the paltry $2 Trillion in cuts over 10 years in Congress’ budget deal was received as basically meaningless by the market, and S&P in its subsequent downgrade. Trillion dollar deficits are more or less expected for the next decade, so $200 billion in savings per year (though not until 2014) still equals massive contributions to the national debt on an annual basis, and a perpetuation of all of the problems currently dominating markets worldwide.

Gold Nears $1800 on Global Uncertainty

Yesterday the Fed attempted to provide at least some degree of certainty to markets by defining their long standing “extended period” mantra as being “at least through mid-2013.” The Fed also indicated that they had discussed a range of policy tools and suggested they are prepared to “employ these tools as appropriate.” The additional certainty in short-term interest rates and the hint of a possible QE3 sparked a huge rebound in stocks going into Tuesday’s close. One thing was made clear, the stock market is addicted to Fed “juice,” and it now rises and falls — sometimes violently — largely as expectations of Fed accommodations wax and wane. That my friends is not a healthy market and the recent volatility in equities is driving prudent investors to the sidelines.

Despite last week’s downgrade of US debt, Treasuries have actually benefited from the quest for a safe-haven. So too have other safe-haven assets like the yen, Swiss franc and of course gold. The yellow metal moved within striking distance of 1800.00 this morning as yesterday’s late stock market gains were violently erased. Adding to safe-haven demands were reports that France was about to be downgraded and that the French banking sector was in dire straights. With the EU (and perhaps specifically Germany) worried that they don’t have the means to bailout the Continent’s third largest economy, Italy; the thought of potentially having to bailout the second largest economy is understandably weighing heavily on investor sentiment and the single currency.

It seems that global markets are simply stumbling from one crisis to the next. Each crisis incites some form of government reaction, which seemingly have a diminished impact at restoring market calm. Is this our future? If governments the world over are constantly expending time, energy and treasure mitigating crises, it seems increasingly likely that we are locked into a cycle of slow growth, high unemployment and a moribund housing market for years to come. Possibly decades.

August 10 (MarketWatch) — U.S. stocks fell hard again Wednesday, threatening the prior day’s sharp gains, on worries the European sovereign debt crisis is escalating.

Treasurys climbed for a third day; bank stocks were slammed in the U.S. and Europe; the U.S. dollar gained and the euro lost ground. Gold hit $1,800 an ounce.

[source]

August 10 (USAGOLD) — Gold is generally well bid in the wake of Tuesday’s volatile session on talk of a French sovereign downgrade. French bank shares are taking a drubbing amid rumors that a bank is on the verge of collapse. French President Sarkozy has reportedly been in an emergency meeting all day, discussing France’s debt problem.

The volatility in the stock market this week has been nothing short of astonishing. Following yesterday’s FOMC indication that they will maintain essentially 0% interest rates at least until mid-2013, the DJIA rose dramatically into the close, retracing a good chunk of Monday’s sharp drop. This morning stocks are once again down sharply, perhaps on the concerns over France; perhaps on the realization that despite the attempt by the Fed to provide some degree of certainty with respect to monetary policy, there is nothing remotely certain about anything anymore. We are going from one crisis immediately into the next and global markets are becoming increasingly unnerved.

In times of uncertainty, the safe-haven appeal of gold is stronger than ever.

• US wholesale sales +0.6% in Jun, just below market expectations of +0.7%; inventories +0.6%.
• SNB expands measures to counter CHF strength. Minimal impact thus far.
• Norges Bank holds steady on rates siting the “flare-up in market turbulance.”
• Norway CPI +1.6%, above market expectations.
• France industrial production eases to +2.1% y/y in Jun, vs 2.6% in May.
• German final Jul HICP confirmed at 0.5% m/m and 2.6% y/y.
• China Jul exports +20.4% y/y, above market expectations.

August 10 (Financial Times) — French banks dropped sharply in afternoon trading amid fears of a French downgrade, dragging down European shares.

Societe Generale plunged 19 per cent to €21.10, hitting a 2 ½ year low. Other french banks also tumbled, BNP Paribas falling 10.9 per cent to €35.80 and Credit Agricole dropping 12.9 per cent to €6.

“The market is quite jittery and France seems to be the next one on everyone’s radar” said a London trader.

[source]

August 9 (CNBC) — “You’ve got a company which is losing about $1.4 trillion this year, probably will lose somewhere around a trillion dollars over the next couple of years. It owes $14.4 trillion (and) over the next five years that will get up to $20 trillion,” the Rochdale Securities analyst said.

“So there’s no likelihood whatsoever that this particular company is able to pay down from its own resources the amount of debt that it has, nor is there any likelihood that it’s going to get rid of its deficit,” he added. “If that was a real company, of course, that would be a junk bond.”

“I still would expect to see a thousand-point down day at some point in this market as people come to realize there has been a complete change in the financial structure of the world,” he said

[Source]

August 09 (Financial Times) — The US Federal Reserve attempted to tackle a rapidly weakening economy on Tuesday by freezing short-term interest rates for two years and opening the door to more quantitative easing, in a move that sent the dollar and Treasury yields sharply lower.

The rate-setting Federal open market committee said: “The committee currently anticipates that economic conditions – including low rates of resource utilisation 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 mid-2013.”

The Fed added that it would “continue to assess the economic outlook” and was prepared to employ its policy tools “as appropriate” – a clear hint that it would consider further action.

[source]

August 9 (Reuters) — “The statement was extremely negative in its outlook on the economy. By pegging the extraordinarily low interest rates to a date in the distant future, the Fed has essentially said that they see the current level of weakness lasting far longer than previously expected. Across the board, it was a pretty depressing view of the economy.”

“This shows that they’re willing to take action if necessary. They certainly didn’t close the close the door on QE3. As expected, they talked about the muted economy, which everyone knows about. This is more about the Fed saying, ‘we’re still here and are ready to take action if warranted.’ This shouldn’t be a surprise to the market.”

More expert views on the Fed statement: [Source]

The following is the full text of the statement following the Fed’s August meeting:

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee 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 mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.

August 9 (CNBC Video)
6 minutes

[Source]

JK Comment: Interesting commentary on potential Fed action. As you look at the possibilities, its hard to find how any one of them could be bad for gold. In fact, most look akin to adding gasoline to the fire.

August 09 (MarketWatch) — Gold prices traded at a record Tuesday, slicing through the $1,750-an-ounce milestone as a massive sell-off in global stock markets drew safety-seeking investors to the metal.

Gold futures for delivery in December added $20.40, or 1.2%, to $1,733.40 an ounce on the Comex division of the New York Mercantile Exchange.

…“There may also be an element of concern among investors that the [Federal Reserve] may monetize the debt. The inflationary consequences of such action are supportive of gold. Even if this is not policy, the fear among some investors that this might occur should keep gold well bid,” he said.

[source]

August 09 (Forbes) — Why did Obama speak yesterday if he had nothing but pap to say? The value of common stocks sank 25%– yes, 25%– in just the few minutes Obama was trying to reassure America it was really a Triple A– even if it wasn’t.

That tax reform(reform, not hikes) and a modest adjustment in Medicare would solve the debt balloon is absurd on the face of it. One Wall St. mogul took solace that at least our leader was willing to reduce Medicare. When it is mandatory to make seriuous cuts in Medicare, maybe a means test, probably a higher tax to fince it, a host of changes.

It was a “fairy tale” and public opinion is no longer wiling to accept “fairy tales”– certainly not investors, who know that low growth is coming, austerity is on the drawing board, and by the way their 401ks are back down 20-30%.

[source]

August 09 (Gallup) — Americans’ economic confidence plunged to -53 in the week ending Aug. 7, a level not seen since the recession days of March 2009. This deterioration coincided with the final wrangling over the U.S. debt ceiling and Standard and Poor’s downgrade of the United States’ debt rating. Economic confidence is now far worse than the -43 of two weeks ago and the -34 of a month ago.

[source]

August 09 (USAGOLD) — Gold extended sharply higher in overseas trading as the global rout of equities continued. The yellow metal set a new all-time high at 1779.15, before adopting an intraday corrective tone into the New York open. The firmer open in US stocks and the retreat in gold seems to spring from hopes of some kind of action from the G7 and/or Fed in reaction to the latest broad-based uncertainty and crisis of confidence.

The Fed obviously will hold steady on rates after today’s 1-day FOMC meeting. The statement will have to address the recent turmoil, and perhaps there will be a more forceful indication that ZIRP is here to stay for the foreseeable future. There will be no press conference today, which is too bad as it would have been really interesting. Harvard economist Kenneth Rogoff believes the Fed will embark on QE3 and believes they should “do something right away.”

The quest for safe-havens is not only lifting gold; the Swiss franc surged to new record highs against the both dollar and euro, despite the threat of further SNB intervention. Additionally, the yen has retraced nearly all of the losses that were generated by recent BoJ intervention.

• US Q2 productivity fell 0.3%, above market expectations of -0.8%, vs big negative revision in Q1 from +1.8% to -0.6%.
• Canadian housing starts better than expected at 205k in Jul, vs 197k in Jun.
• ECB’s committment to bond purchases; yields ease further. Stocks recover somewhat on talk of shorting ban.
• German trade balance €12.7 bln (nsa) in Jun, vs €14.8 bln in May.
• UK industrial production UNCH in Jun, vs 0.8% in May; -0.3% y/y. Manufacturing unexpectedly drop 0.4% m/m.
• China Jul CPI +6.5% y/y; PPI +7.5% y/y. Adds to mounting pressure on PBoC to raise rates further.

By JON HILSENRATH
August 08 (The Wall Street Journal) — Since the onset of the financial crisis in August 2007, Federal Reserve Chairman Ben Bernanke has been pulling rabbits out of his hat. He cut interest rates to near zero, printed $2.3 trillion to buy Treasury bonds and mortgage debt, and, with a posse of sleepless economists, devised an alphabet soup of rescue programs for commercial-paper markets, money-market funds, dollar-starved European banks and other strained players in the vast global financial system.

The objective: to keep the damaged postbubble economy from drifting into zombie-land. Now, stock markets are gyrating and the economic outlook is growing dimmer. S&P’s downgrade of U.S. debt is a reminder that the financial system is one shock away from more instability. As Mr. Bernanke prepares to lead a meeting of the Fed’s policy committee Tuesday, he must be asking himself: Are there any rabbits left?

The answer: Yes. But some of them are very small. Some might bite. And he’s reluctant to pull them out until he is sure the audience is ready.

[source]

August 08 (Reuters) — Gold surged more than 3 percent on Monday, surpassing $1,700 an ounce for the first time after Standard & Poor’s cut the top-notch AAA credit rating of the United States, setting off an investor stampede for safety.

In a rout reminiscent of the 2008 financial crisis, Wall Street plunged nearly 7 percent and other commodities collapsed as panicky investors sought refuge in bullion and U.S. Treasuries.

Analysts scrambled to revise up gold forecasts and gold volatility spiked as options traders put on bullish bets.

[source]

August 08 (Financial Times) — The US Federal Reserve’s meeting on Tuesday is likely to be one of its most difficult and divisive since, well, last August.

Sharply weaker economic data in recent weeks, a new peak in the eurozone debt crisis, and a downgrade to the triple A credit rating of the US have shaken confidence in a way that could spiral towards a new recession. The Fed will be forced to consider fresh stimulus in response.

[source]

August 08 (The Wall Street Journal) — JP Morgan (JPM) has become the latest bank to up its forecast for spot gold prices, hiking its estimates by a whopping 39% and predicting the precious metal to reach at least $2,500 a troy ounce by the end of the year.

[source]

August 04 (BusinessWeek) — “Inauguration Day was cloudy, grim,” wrote Arthur Burns in his diary on Jan. 20, 1969. As he watched President-elect Richard Nixon, Burns—an immigrant from Galicia, the son of a housepainter who had risen to become the foremost expert on U.S. economic cycles and chief economist to Dwight Eisenhower—saw a man with “a look of exaltation about him.” It was not a feeling Burns shared. “I would have felt better if his head were bowed and his body trembled some.”

…By the time Nixon took office, officials knew they were sitting on a powder keg.

…First, America would stop converting dollars to gold. Second, to combat the potential inflationary effects, wages and prices would be frozen for 90 days. And third, the U.S. would impose an import surcharge of 10 percent. Connally’s idea was to use the surcharge as a cudgel, to pressure other countries to renegotiate their exchange rates.

…Connally brilliantly packaged the program not as America abandoning its commitment to the gold standard but as America taking charge. He turned the dollar’s collapse, which could have appeared shameful, into a moment of hubris.

[source]

PG View: This article provides important historical context, as arguably it was the “hubris” of ending the dollar’s convertibility to gold that ultimately led to Friday’s downgrade of US sovereign debt.