by Jeff Cox
August 11 (CNBC) — So whether this equals, falls short of, or exceeds the financial crisis of 2008 hardly seems to matter—investors are afraid, very afraid, and the question as much as anything in the minds of many market pros will be what soothes that fear.

Analyst Dick Bove at Rochdale Securities says he knows why: More restrictive capital requirements and near-zero interest rates set at the Federal Reserve [cnbc explains] that make lending neither easy nor lucrative, a trend that will make it difficult for the economy to grow.

“If one thinks through these limitations it can be seen that banks must shrink their balance sheets and change their business patterns to maintain their profits. What they are unlikely to do is to expand their lending activities in order to grow the economy,” Bove wrote in a lengthy banking analysis Thursday.

“However, the Federal Reserve is suggesting that the economy is unlikely to grow,” he wrote. “If the Fed is prescient, then banks are facing higher loan losses, lower loan volume, and reduced margins on a wide array of banking products. The outlook is not appealing.”

“Even though the United States is able to both print and borrow money, it is as bankrupt as the Europeans,” Bove wrote. “Covering deficits and paying debt with borrowed funds, some of which is newly printed, does not constitute meeting debt service requirements.”

The worries in the market, then, seem to be as substantive as they are superstitious that a crisis lurks somewhere, even if investors aren’t able to pinpoint exactly where.

Asked whether the market was merely having a knee-jerk reaction to fear or taking a more careful measure of fundamentals, Rick Bensignor, chief market strategist at Dahlman Rose in New York, said, “Can I answer both questions ‘Yes’?”

“There’s paranoia and there are real reasons,” he said. “There’s been a real repricing of risk in the markets.”

[Source]

by Frank Byrt
August 11 (Globe and Mail) — Standard & Poor’s is recommending gold and gold miners as top investment picks only days after downgrading U.S. Treasuries, which sparked a firestorm in financial markets worldwide that boosted the price of the precious metal.

Gold futures (GC-FT1,770.00-14.30-0.80%) tumbled today after CME Group, owner of the world’s biggest futures market, increased margins on gold contracts by 22 per cent. Gold had soared 8 per cent in the previous three days, bringing a one-year gain to 49 per cent, on U.S. and European debt concerns and a slowdown in global economic growth.

“We believe that gold is in a bull market,” writes S&P analyst Leo Larkin in a research note, because demand will outstrip supply “for the foreseeable future.

“Gold’s price still has room to run despite its stellar advance and we believe that the precious metal could also continue to carry the prices of certain gold-related equities right along with it,” he added.

[Source]

By Ambrose Evans-Pritchard
August 11 (The Telegraph) — The franc retreated against the euro in a wild-one day move on Thursday after top officials at the Swiss National Bank (SNB) floated ideas for a temporary euro peg, a once unthinkable move.

“Nothing is excluded,” said Jean-Pierre Danthine, a SNB board member. “The situation is extremely complex and difficult. There is no magic wand.”

The Swiss franc has moved with gold over recent weeks, acting as a magnet for capital flight from the discredited debt currencies of West. The SNB said the franc is “massively overvalued” and has moved into dangerous territory over the past month.

[source]

PG View: So it begs the question; “massively overvalued” against what? That statement would suggest that the euro and the dollar are ‘massively undervalued.’ The franc just happens to be the best looking horse at the glue factory. The swissy remains near record lows versus gold: There’s your true gauge of value.

August 11 (Financial Times) — Food commodities prices surged after the US government slashed its forecast for the country’s crops due to the impact of a heatwave and drought.

The US Department of Agriculture painted a bullish picture in particular for corn prices, saying: “Unusually high temperatures and below average precipitation during July across much of the Corn Belt sharply reduced yield prospects.”

…But it could reduce central banks’ room for manoeuvre as higher corn prices rapidly translate into more expensive beef, lamb, pork and poultry and, thus, higher food inflation. China, India and other developing countries have raised interest rates this year in part due to rising food inflation.

[source]

PG View: If food price inflation is indeed kicking in again, can a rebound in gold be far behind?

August 11 (Bloomberg) — Gold futures fell the most in seven weeks after CME Group Inc. (CME) boosted margins on Comex contracts, prompting investor sales after a three-day rally to a record topping $1,800 an ounce and as equities rebounded.

CME Group, owner of the world’s largest futures market, raised margins on gold contracts by 22 percent. The minimum amount of cash that speculators must keep on deposit for an initial account increased to $7,425 on a 100-ounce contract from $6,075. The Standard & Poor’s 500 Index rose as much as 3.2 percent after a drop in U.S. jobless claims.

“The strength in equities, coupled with the increase in margins, is pushing gold down,” Matthew Zeman, a strategist at Kingsview Financial in Chicago, said in a telephone interview. “Investors are waiting for a deeper correction before they start buying again.”

[source]

August 11 (Financial Times) — The Swiss National Bank, which has been waging battle to rein in the strength of the currency, has left open the possibility of pegging the Swiss franc to the beleaguered euro.

Thomas Jordan, vice-president of the SNB, said a temporary franc peg with the euro was within the range of options that policymakers might use to stem the Swiss franc’s strength. “Any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability,” he said.

[source]

August 11 (PIMCO) —

• Taxpayers have been hoodwinked into believing the cost from profligate government spending is low relative to the benefits.
• The Keynesian revolution ignited a decades-long abuse of the core principle of Keynesian economics: for government to increase spending when private sector aggregate demand weakens and stymies job growth.
• The central banker is left to shoulder the burden, seeking all the while to pressure the fiscal authority to amend the abuse of Keynesian economics and decades of fiscal folly.

​The reasons are different yet very much related – deficits are big and growth still tepid in the U.S. and U.K., while emerging nations are worried about growth (and therefore demand) from their developed nation partners – but the upshot is the same: Central bankers across the world appear poised to ease.​

[source]

August 11 (Bloomberg) — Consumer confidence dropped last week to the lowest level since mid-May as American high earners, homeowners and those working full time turned more pessimistic.

The Bloomberg Consumer Comfort Index was minus 49.1 in the period to Aug. 7, down from minus 47.6 the prior week and the second-lowest level in a year. The measure was less than five points away from the record low of minus 54 reached in November 2008, during the depths of the last recession.

[source]

August 11 (The New York Times) — A European market regulator is considering recommending a temporary ban on negative bets against stocks across the continent, in an effort to stop the tailspin in the markets, according to two people with knowledge of government discussions.

The European Securities and Markets Authority, a body that coordinates the European Union’s market policies, has been requesting information from member states about such bets against stocks, known as short-sales.

[source]

August 11 (USAGOLD) — Gold is under pressure following CMEGroup margin hikes on the yellow metal late yesterday. This news was initially dismissed and gold extended to a new record high of 1813.84 in Asian trading. However, it seems that official efforts to slow the flight to quality are escalating. The SNB added liquidity again today via swaps. There is also a rumor circulating that the SNB and ECB have been discussing a currency peg. That rumor has been denied by both central banks, but the Swiss franc has fallen dramatically today.

A currency peg seems so ‘un-Swiss’, but if they truly are discussing such an option, I would call that a testament to just how desperate the central banks have become; talking peg just as the Chinese yuan peg is crumbling. Today the PBoC set the yuan reference rate at 6.3991 against the dollar, the lowest since the yuan was quasi-floated 17-years ago. It was also the biggest one-day yuan rise in 9-months.

Meanwhile the yen retested its trend highs amid further BoJ jawboning. If officials are successful in scaring safe-haven investors out of certain assets, it may further heighten the appeal of physical gold. They can’t raise margins on physical gold in your procession and as market analyst James Rickards pointed out this morning: Gold is still rated “AAA.”

• US initial jobless claims 395k in the week ended 30-Jul, below market expectations of 400k, vs upward revised 402k in the previous week.
• US trade deficit widened to -$53.1 bln in Jun on expectations of -$48.0 bln, vs downward revised -$50.8 bln in May.
• Canada trade deficit widened to -C$1.6 bln in Jun on expectations of -C$1.1 bln), vs -C$1.0 bln in May.
• Canada’s new home price index rose 0.3% in Jun, as expected, +2.1% y/y.
• French President Sarkozy and Germany Chancellor Merkel plan to meet in Paris on Tuesday.
• Sweden CPI 3.3% y/y in Jul, vs 3.1% in Jun.
• Japan core machinery orders +7.7% m/m (sa) in Jun, but foreign orders fell 5.9%.
• Bank of Korea held repo rate steady at 3.25%; paused was widely expected amid global uncertainties.
• Australia full time jobs fell 22k in Jul; unemployment +0.2% to 5.1%.

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.