August 02 (Bloomberg) — Federal Reserve policy makers may start weighing additional steps to prop up the recovery after growth fell below 1 percent in the first half of this year and economists began cutting second-half growth forecasts.

“At a minimum, the FOMC will have a serious debate about the policy options — what they should do, and what they expect to get from it,” said Roberto Perli, a former associate director in the Fed’s Division of Monetary Affairs, referring to the Federal Open Market Committee. “Growth in the first half was dangerously close to zero,” said Perli, director of policy research at International Strategy & Investment Group.

The FOMC will meet Aug. 9 in Washington after the government marked down its measure of economic growth to annual rates of 0.4 percent in the first quarter and 1.3 percent in the second, casting doubt on the Fed’s June outlook of 2.7 percent to 2.9 percent growth for this year.

[source]

PG View: Expectations of more Fed juice equals higher gold prices (see today’s action). Actual Fed juice equals much higher gold prices.

August 02 (CNNMoney) — U.S. stocks plunged on Tuesday as fears about a weak U.S. economy were enflamed after investors got another disappointing economic report – this time on consumer spending.

The selloff was so broad and so deep it pushed the S&P 500 into negative territory for the year and bond yields to their lowest levels in nine months.

…The Dow Jones industrial average plunged 266 points, or 2.2%, to close at 11,867.

…This was the eighth-straight day of declines for the Dow — a losing streak not seen since October 2008, when the financial system was in the depths of the crisis. The Dow has fallen roughly 6.7% since the sell-off began on July 22.

[source]

PG View: Meanwhile, gold was up more than $40 — nearly 2.6% — establishing a new record high at 1660.55.

August 02 (Financial Times) — The spectre of an imminent US default on its debt disappeared as legislation to increase America’s borrowing authority cleared its last remaining hurdle in the Senate and was signed by President Barack Obama.

The last-minute congressional approval of an increase in the debt ceiling came after weeks of aggressive political rhetoric and fraught negotiations over fiscal policy that carried the country to the brink of a potential economic calamity, threatening its triple A credit rating and the status of Treasury bonds as a safe harbour for global investors.

[source]

PG View: Oh, but the saga is far from over. Far, far from over.

August 02 (Politico) — Treasury won an immediate reprieve of $400 billion in new borrowing authority Tuesday, as the Senate gave final approval to a hotly contested debt and deficit-reduction agreement hammered out with the White House Sunday night.

The bipartisan 74-26 roll call followed a 269-161 vote in the House Monday evening and the bill was quickly signed by President Barack Obama, ending an unprecedented, hard-edged political struggle that pushed the nation to the brink of default.

[source]

August 02 (MarketWatch) — Gold futures traded at a record high Tuesday, gathering steam after U.S. government data showed consumers held on to their wallets in June and investors grew more concerned about a double-dip recession in the U.S.

Gold for December delivery added $21.60, or 1.3%, to $1,643.40 an ounce on the Comex division of the New York Mercantile Exchange.

[source]

August 02 (Bloomberg) — Gold futures surged to a record $1,645.80 an ounce as escalating concern that the global economy is losing momentum spurred demand for the precious metal as an investment haven.

U.S. equities headed for the longest slump since 2008 after a report showed that consumer spending unexpectedly dropped in June for the first time in almost two years. Manufacturing indexes in the U.S., Europe and China declined in July. Gold climbed to all-time highs in euros, pounds and Canadian dollars.

[source]

August 02 (Reuters) — Maybe Washington can start paying invoices with $3 bills — because the “dramatic” agreement to “reduce the national debt” is as phony as a three dollar bill.

Weeks of nearly round-the-clock negotiations among the White House, House and Senate have led to an “historic” debt deal that consists almost entirely of fluff, doublespeak and empty promises.

The politicians involved get to claim victory, and presumably will be rewarded with votes and campaign donations from the special-interest groups that, pretty much across the board, were spared any pain. Young people of the United States once again are hammered. If the deal becomes law, the national debt will rise again dramatically, while there’s no guarantee any cut will materialize — and the bill for this recklessness will be passed along to those under age 30.

[source]

• Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.
• In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at “net present cost.”
• Aside from outright default, there are numerous ways a government can reduce its future liabilities. They include balancing the budget, unexpected inflation, currency depreciation and financial repression.

​“Over the years we’ve had some fun together – killin some ‘bars,’ drinkin moonshine – some even in these chambers. (Whiskey that is – the ‘bars’ I’ve seen once or twice, but only when I was plum drunk). But the time for funnin is over. They’ll be no jokes from David Crockett today.”
Davy Crockett Speech to Congress, 1830

Figurative coonskin cap on head, I echo the sentiments of Davy Crockett – Indian fighter, Alamo defender and Tennessee Congressman – not necessarily in that chronological order. The debt ceiling may have been raised and the palpable sighs of relief heard across global financial markets, but the fun times are over. They’ll be no jokes from Bill Gross today, nor across this land for years to come I suspect. Even though the U.S. has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet “A” for budgetary “Abuse,” that will not disappear. The whole world was watching, and what they saw was a dysfunctional government taking its country to the financial precipice and backing off at the very last moment. “Shades of a Banana Republic,” as former Reagan budget director David Stockman opined somewhat harshly last week. We may not be Greece just yet, but Mr. Stockman is looking in the right direction.

[source]

PG View: As we’ve said all along — and Mr. Gross confirms in his outlook — there is no easy, pain free out from this morass that we have created over decades.

August 2 (Reuters) — The former chair of President Barack Obama’s Council of Economic Advisers tacitly agreed. “There is no way we can have persistent deficits of the size the Congressional Budget Office is predicting over the next 25 years and hope to remain the world’s preeminent economic superpower,” said Christina Romer, who left the CEA in September 2010. “If we don’t deal with these deficits there is no way we won’t eventually default and become a much weaker country.”

As a result, PIMCO’s El-Erian expected the debt-ceiling compromise to do “very little, if at all” to fix America’s underlying fiscal crisis. “Remember a sovereign debt burden is defined as total liabilities relative to a country’s ability to service them. So it is not just about the debt stock, the maturity profiles and interest rates. It is also critically about the ability to grow. And this crisis has undermined growth, investment and employment.”

Morgan Stanley’s Roach put it bluntly: “Make no mistake, we are not getting a major breakthrough in America’s fiscal dilemma out of this deal. Talk about kicking the can down the road – this is probably the biggest can that’s ever been kicked.”

[Source]

JK Comment: Given the prevailing sentiment of the article linked above, its not surprising to see gold sharply higher…despite many analysts “predictions” (or perhaps “hopes” would be the better word) that a debt compromise would prompt a sell-off in the yellow metal.

August 02 (USAGOLD) — The House passed the debt deal yesterday and the Senate is widely expected to do the same today. Expectations that gold would retreat on relief that a default had been averted seem to have been misplaced as the yellow metal surged to new record highs this morning (currently 1640.87). Investors have grasped that the deal to raise the debt ceiling was merely another kick of the can and that our debt burden will indeed continue to grow. The OMB has acknowledged that the package will reduce deficits by 0.5% at the most. Really? We went through all that for 0.5% at the most? Another $2.4 trillion in debt coming our way. Hurray! Now everyone out of sweltering Washington for a 5-week vacation…’our work is done here.’ Congress should go on vacation and not come back.

The likely passage of the deal, that will allow the US debt ceiling to be raised, has also allowed the market to re-focus on the debt turmoil in Europe; which continues to escalate. Spanish and Italian yield spreads hit euro-era record wides today and their CDS premiums hit record highs, as did those for France. Euro weakness is the only thing keeping the dollar afloat these days, with the USD-CHF and USD-JPY still near record low territory.

As global attention shifts from one crisis to the next, it seems the world is in a constant state of emergency and therefore relief in the relentless gold bull doesn’t quite seem to materialize when the proverbial can is kicked. Through it all, central banks continue to add to their gold reserves, with substantial summer purchases announced by South Korea and Thailand. The motivation of the central banks is primarily to reduce their dollar exposure. The individual investor would be well served to contemplate similar diversification amid all the global uncertainty.

• US personal income +0.1% in Jun, below market expectations of +0.2%; PCE -0.2%, biggest drop in nearly 2-years.
• Eurozone PPI decelerated to 5.9% y/y in Jun, below market expectations, vs 6.2% in May on lower energy prices.
• UK construction PMI eased to 53.5 in Jul, above market expectations, vs 53.6 in Jun.
• BoK bought 25 metric tons of gold between June and July to diversify dollar holdings.
• Thailand bought an additional 17.7 metric tons of gold in June as reserve diversification.
• Singapore Jul PMI 49.3, below market expectations, vs 50.4 in Jun.
• RBA held rates steady at 4.75%, citing financial market uncertainty. AUD drops.

August 02 (The Wall Street Journal) — The Bank of Korea said Tuesday it increased the amount of gold held as part of the country’s foreign exchange reserves for the first time in 13 years, diversifying its portfolio away from the dollar and toward an investment class widely considered a safer bet during crises.

The central bank bought 25 metric tons of gold from the global market between June and July, bringing its total gold reserves to 39.4 tons as of the end of July, the BOK said in a statement.
More

“The gold purchase, as a safety net, will help us cope with volatile global financial markets and enhance investor confidence in Korea in times of crises,” Hong Taeg-ki, chief of the BOK’s reserve management group, told Dow Jones Newswires.

[source]

PG View: The strategy of exchanging dollars for gold, in order to build a “safety net,” is one that serves the individual investor/saver just as well.

August 01 (The Wall Street Journal) — Even arguably the world’s most powerful man seems unable to dampen gold’s shine.

U.S. President Barack Obama said Sunday that the country’s sparring political parties have reached a tentative deal to raise the country’s debt ceiling, cut the federal deficit and avoid a credit default. The news has taken the wind out of gold’s sails, pushing prices some $25 a troy ounce down from their recent high, but the market’s longer-term prospects don’t appear to be significantly dented.

Gold has been widely viewed as a safe place to put money as an alternative to U.S. Treasuries and the dollar, which have suffered as the potential for systemic financial risk has increased. The market peaked at an all-time high of $1,632.74/oz Friday, aided by deteriorating confidence in the U.S. dollar and a euro zone ricocheting from one economic disaster to another.

[source]

Relief? What Relief?

Late last night when party leaders and the President announced that they had reached a bipartisan deal that would allow the debt ceiling to be raised, gold dropped about 1%. Global stocks rallied in relief and briefly, ever so briefly, gold was out of favor. However, as the details were revealed, doubts were reignited: Doubts as to whether such legislation could actually make it to the President’s desk. Doubts that the deal would avert a downgrade of US sovereign debt.

While the CBO scores the package as accomplishing $2.1 trillion in spending cuts over the next 10-years, the CBO baseline also has the deficit rising $6.7 trillion over the same period. The premise apparently being that we’re working our way to actual cutting by cutting to slow the pace of the nation’s proliferate spending. In actuality — and as evidenced below — that CBO baseline may prove to be way too optimistic.

What really lit an intraday fire under gold today was the big miss on US July ISM, which plunged to 50.9. The market was expecting a modest downtick to 55.0 from 55.3 in June. On the heals of last week’s much weaker than expected quarterly GDP data, it has become abundantly apparent that the US economy has slowed to just above stall-speed. David Rosenberg, chief economist at Gluskin Sheff and Associates, noted last week that once the economy slows to a growth rate of 1.6% it has proven historically to be a “point of no return” and recession follows. With Q1 downgraded to just 0.36% and Q2 an anemic 1.3% — and likely subject to future negative revision as well — the writing may well be on the wall.

The debt deal is a short-term kick of the can that at least initially focuses on spending cuts. However, with no mitigation of the uncertainties that have kept private capital sidelined for the past two-years of the so-called recovery, there is little reason to think that a more robust economy is just around the corner. In fact, the opposite may be true. That realization, tipped in by the ISM data, has further escalated the QE3 talk, which prompted gold to retest the record high set Friday at 1632.39. Relief? What relief?

If we get another negative surprise on Friday when July nonfarm payrolls comes out, as the ISM employment index suggests we might, the QE3 talk will intensify ever more in the weeks ahead of the Fed’s Jackson Hole summit. Consensus on July payrolls are running around +100k, although we could see some tempering of those expectations in light of the ISM data.

Even with the announcement of the debt ceiling deal, the dollar remains on the ropes, falling to new record lows against the Swiss franc and the yen. If this deal makes it through both Houses of Congress and is signed by the President, it is just another kick of the can — and a very short one at that — down the road. And with the specter of yet another round of quantitative easing hanging over the market, there is little incentive to buy dollars. Now the BoJ is once again contemplating direct intervention in the market, as I suspect the SNB is. If there are concerted efforts to slow the rise of these currencies, it may make gold an even more alluring option.

August 01 (MarketWatch) — Debt deal? Check. America’s AAA debt rating intact? We’ll see.

The agreement reached by President Barack Obama and congressional leaders late Sunday would raise the government’s debt limit and cut spending by around $2.4 trillion. Read about the debt-ceiling agreement.

If the measure passes the House and Senate, the U.S. government will avoid a potentially disastrous default that the Treasury says could otherwise occur as early as Tuesday.

But economists said it remains uncertain that the major ratings firms — Standard & Poor’s Ratings Service, Moody’s Investors Service and Fitch Ratings — will see the deficit-reduction plans as sufficient to avoid downgrading the country’s AAA rating.

So far, the agencies have remained mostly quiet. But Standard & Poor’s had previously taken the hardest line and remains the most unlikely to give Washington a pass, economists said.

[source]

August 01 (MarketWatch) — The central bank of Greece added further to its gold reserves in June, lifting its holdings by 1,000 troy ounces for a second consecutive month.

According to the International Monetary Fund, the country increased its reserves to 3.585 million ounces in June, from 3.584 million ounces in May and 3.583 million ounces in April.

The debt crisis in Greece and other euro-zone nations like Portugal had led to speculation among market participants and observers over whether Europe’s debt-laden countries may move to liquidate their gold holdings in order to raise cash.

[source]

PG View: So where does the money come from to buy gold in a country that is broke? Take your bailout money and buy gold seems to be a pretty good strategy, unless your the one providing the bailout.

August 01 (Bloomberg) — Rui Lola says gold sales at his foreign exchange and coin store in downtown Lisbon almost doubled this year, draining inventories faster than he can replace them.

What’s happening at the Mundial Agencia de Cambios in the historic center of the capital underscores the global rush from investors seeking refuge from debt and banking crises.

…“I would expect it to be a very popular asset at its peak, and I don’t think we’re anywhere near that. We think it’s a bull market and we’re on it.”

[source]

August 1 (USAGOLD) — Gold fell in Asian trading on news that US lawmakers had reached an accord that would allow for the debt ceiling to be raised. This latest kick of the can signaled “risk on,” reducing the appeal of gold as a safe-haven. However, seemingly you can’t keep a good asset down, and the yellow metal has already retraced about half of the losses seen since the 1632.39 record high that was set on Friday.

Stocks are loving the news and Treasuries have corrected on the revived risk appetite. The dollar however remains on the ropes, on the expectations that the status quo of big deficits and low interest rates is going to be with us for a long, long time. That would suggest that the long-term uptrend in gold is going to be with us for a long time as well.

• Eurozone unemployment rate unchanged at 9.9% in Jun, in-line with expectations.
• UK manufacturing PMI fell to 49.1 in Jul, well below market expectations, vs 51.3 in Jun.
• Eurozone manufacturing PMI confirmed at 50.4 in Jul, in-line with expectations.
• China PMI 50.7 in Jul, above expectations, but a 2-yr low, vs 50.8 in Jun.
• India trade balance -$7.7 bln in Jun, vs -$15.0 bln in May.
• Hong Kong retail sales +28.8% y/y in Jun, above market expectations, vs 27.8% y/y in May.
• South Korea trade balance $7.2 bln in Jul, well above expectations, vs $3.3 bln in Jun.
• South Korea CPI 4.7% y/y, above market expectations, vs 4.4% y/y in Jun.

August 1 (CNBC) — Sunday night’s deal that will see the US debt ceiling raised if it passes a vote in the House is merely a “band aid” and certainly not a game changer, according to an assessment from Barclays Capital.

The deal “is certainly not a game-changing breakthrough, and will keep the possibility of a near-term rating downgrade alive; it represents, in our view, just a band-aid approach on the way to more sustainable public finances,” said Julian Callow, the chief European economist at Barclays Capital in a research note on Monday.

The big problem for Callow is the slowdown in the US economy, which could mean any savings are offset by significantly lower revenue.

[source]

July 31 (New York Times) — Democratic and Republican leaders in Congress announced Sunday night that they have reached a deal to raise the nation’s debt ceiling and avert a default.

President Obama spoke moments later at the White House, telling reporters that “the leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid a default.”

[source]

By Ben Feller
July 30 (Associated Press) — “Even if a bitterly divided Congress and President Barack Obama avoid a U.S. debt default by striking a last-second deal, as all sides expect, plenty of damage has been done. People are disgusted. Confidence in the political system is tanking. Nothing else is getting done in Washington. The markets are spooked. The global reputation of the United States has slipped.”

Link

MK View: That about sums it up: . . .plenty of damage has been done.

The word, “dysfunctional,” doesn’t cover it. When these discussions started we were talking about reducing the budget by $4 trillion over a ten-year period, which in itself fell woefully short of the mark. Now we are down to $900 billion. It’s a joke. All of this has happened essentially for no reason. My guess is that unless the politicians opt for default, the markets will react as if nothing happened. If they do default, it is likely to be as terrible as Timothy Geithner suggested, but no worse than it might have been at some point along this tortuous road anyway.

The ratings agencies are likely to continue on the road to downgrading U.S. debt, and the credit rating of the United States, no matter which way the Potomac rabbit jumps. Underscoring the level of confusion about how all of this is affecting the markets, one Wall Street Journal article this morning cited a run to the safety of ten-year Treasuries as the reason for yields buckling, while another cited the flight from 30-day Treasuries, and rising yields, as a direct result of the bungling in Washington. Who/What are we supposed to believe?

I’ve read quite a bit about the effects of the debt ceiling mess in Washington over the past few days, the article linked above captures best the likely result in terms of America’s longer-term image. “In the biggest sense, ” says Ben Feller, AP’s White House reporter, “everyone has lost.” The best thing America (and the dollar) has going for it is that it is the best of a bad lot — “the healthiest horse in glue factory,” as former Wyoming senator Alan Simpson put it.

All of which unerringly leads the searching eye to the glint of gold.

___________

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July 29 (Financial Times) — You go to the cinema or the theatre to see the stars perform. What happened on Thursday in the US House of Representatives was that hardly any of them turned up, the real drama was all offstage and the play never got to the final act. No wonder the national audience wants its money back.

Rarely has Washington’s theatre of the absurd been seen in such sharp relief as in the “debate” over Speaker John Boehner’s bill to cut spending enough to raise the debt ceiling for a few miserly months. The probability is that this bill, whatever its ultimate fate, has not a prayer of passage in the Senate. But posturing in Washington, sometimes known as the “optics”, is now a minor art form.

[source]

Fed Audit Confirms US Central Bank is Lender of Last Resort to the World

The market is understandably largely focused on the contentious debt ceiling wranglings this week, but somewhat behind the scenes, the market is also rejecting last week’s agreement to provide a second bailout for Greece. The alleged support in the House for the Boehner debt proposal evaporated late on Thursday, forcing the speaker to withdraw plans for a vote and return to the drawing board for further tweaks. Of course there was little hope that the House plan would pass the Senate anyway, and the tweaks are likely to make the proposal even less palatable to the Senate and the President.

Meanwhile, yield spreads in Europe have been retracing the narrowing that occurred in the wake of the EU summit, as the respite is contagion risks is proving brief indeed. Andrew Balls of PIMCO worried this week that the efforts by eurozones leaders to fight contagion are “too little” and “too late.”

Auctions this week in Italy and Spain didn’t go so well, with both experiencing higher than expected refinancing costs. Moody’s placed Spain’s Aa2 sovereign debt rating on review for a possible downgrade on Friday. Belgian 10-year yield spreads hit a record wide 179bp; Greek 2-year yields surged to 33.05%; and even Denmark CDSs jumped by nearly 20% overnight. We’ve noted in past commentaries that the span between relief associated with official attempts to mitigate the EU debt crisis and a return to crisis mode is getting shorter and shorter, but less than a week is wholly unprecedented. Faith in the ability of governments and international agencies to resolve these crises, both in Europe and here in the US is eroding rapidly and a global crisis of confidence appears to be at hand.

Through all of this — and largely unnoticed — the GAO released the details of their audit of the Fed. What little coverage it did get focused on conflicts of interest centered on the discovery that employees and contractors of the Fed were allowed to own stock in companies receiving aid from the central bank. However, the bigger deal in my opinion was that the Fed authorized more than $16 trillion in largely secret lending during the financial crisis without one bit of Congressional oversight.

The report is entitled GAO-11-696 FEDERAL RESERVE SYSTEM: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance. It’s a long title and a long report, but the recommendations of the GAO are summed up in a single paragraph:

While creating control systems at the same time that the emergency programs were being designed and implemented posed unique challenges, the recent crisis provided invaluable experience that the Federal Reserve System can apply in the future should the use of these authorities again become warranted. Going forward, to further strengthen policies for selecting vendors, ensuring the transparency and consistency of decision making involving the implementation of any future emergency programs, and managing risks related to these programs, the Chairman of the Federal Reserve Board should direct Federal Reserve Board and Reserve Bank staff to revise Reserve Banks’ formal acquisition policies and procedures to provide additional guidance on the steps staff should follow in exigent circumstances, specifically to address soliciting as much competition as possible, limiting the duration of noncompetitive contracts to the period of the exigency, and documenting efforts to promote competition.

The GAO seems generally nonplussed by the extraordinary size and scope of the Fed measures, the lack of any oversight, and the fact that a large percentage of US funds went to foreign banks and businesses. I suspect it was simply the GAOs responsibility to compile the facts, not to pass judgement. I would hope that once there is ultimately a deal on the debt-ceiling, lawmakers in Washington would have something to say about that astounding $16 trillion figure.

One thing is abundantly clear though — as both the US and Europe unravel under the weight of oppressive debt burdens — the US Federal Reserve is the lender of last resort to the world. That is a reality that should not be discounted by neither the individual investors, nor our Representatives in Washington as we continue our march toward the precipice that is another global financial crisis.

I posted this graph of the US monetary base earlier in the week because it is so terribly telling. My fear is that we haven’t seen anything yet.