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.

August 08 (Reuters) — Gold and platinum prices approached parity on Monday for the first time since Dec. 2008 as a downgrade of the U.S. credit rating and deepening fears over euro zone debt prompted investors to buy so-called safe havens at the expense of assets seen as higher risk.

Spot gold prices held within $10 of those of spot platinum for much of the morning, with the two metals bid at $1,705.80 and $1,723.69 respectively at 1112 GMT. Its average ratio over the last 20 years has been around 0.7.

“At the moment we are in an environment where people are adopting more deflation trades, pricing in recession risk,” said Deutsche Bank analyst Michael Lewis. “The U.S. equity market has dropped more than 10 percent since its peak, which is the correction that normally occurs when you move into recession.”

[source]

August 8 (HousingWire) —Standard & Poor’s lowered the ratings on Fannie Mae and Freddie Mac Monday after downgrading the U.S. government’s sovereign debt rating to double-A late last week.

Analysts also lowered the ratings on 10 of the 12 Federal Home Loan Banks and on senior debt held by FHLB banks as well. The outlook on all effected institutions is negative.

[source]

August 8 (AP) — The price of gold streaked past $1,700 an ounce for the first time Monday. Investors, beset by worries about the U.S. debt downgrade, Europe’s financial crisis and slowing global growth, sought safety in the metal as stocks tumbled around the world.

Gold’s allure stems in part from fears that the world’s major economies are dangerously indebted. Its value, unlike that of a currency, doesn’t hinge on whether countries can make their bond payments.

Standard & Poor’s on Friday cut the long-term credit rating for the U.S. by one notch to AA+ from AAA, deepening investor fears about a weakening U.S. economy.

[Source]

August 08 (Reuters) — The credit ratings for the Depository Trust Co., National Securities Clearing Corp., Fixed Income Clearing Corp and the Options Clearing Corp. were cut one notch to AA-plus from AAA by Standard & Poor’s Ratings Services on Monday.

These institutions are the backbone of the U.S. financial systems.

S&P said the downgrades were due to its lowering of the U.S. sovereign credit rating.

[source]

August 08 (Bloomberg) — European Central Bank President Jean- Claude Trichet started buying Italian and Spanish assets today in his riskiest attempt yet to tame the sovereign debt crisis.

Italian and Spanish bonds surged as the ECB entered the market, sending 10-year yields down more than 70 basis points. The euro rose to $1.4355 at 10:30 a.m. in Frankfurt from $1.4277 at the close of European trading on Friday.

With governments failing to act swiftly enough to stop contagion from Greece’s fiscal meltdown, it has fallen to the ECB to battle a crisis that’s now threatening the survival of the euro.

[source]

August 08 (The Wall Street Journal) — The Obama administration and ratings firm Standard & Poor’s have embarked on a battle for credibility that could shape the ultimate impact of the U.S. debt downgrade—as well as their own reputations.

Within minutes of Friday’s bombshell announcement, both sides launched public fusillades against the other, which continued through the weekend.

…Neither side can easily claim the high ground. The downgrade laid bare a distrust of both the Washington political system and the independent firms tasked with standing in judgment of it. Ultimately, investors are likely to be responsible for deciding who has more credibility.

[source]

PG View: If the Obama administration really wants to solidify the case that “the reliability of the United States debt is undiminished,” they should remind everyone in no uncertain terms that the US will never default because we maintain the ability to create as many dollars as is necessary to meet all of our obligations. Ahhh, but there is a price to be paid for unrestrained fiat currency creation, which will likely continue to drive the price of gold higher.

August 07 (USAGOLD) — The S&P downgrade puts the United States on a slippery slope. From here on out, the possibility of further downgrades will hang over global stock and bond markets like the sword of Damocles. We have entered uncharted waters.

Though this first downgrade may have been factored into the market, what about the next one?

Alan Greenspan noted this morning on Meet the Press that the downgrade is likely to have a negative effect on markets tomorrow. Asia opens in a few hours and we will get a sense of what Monday might bring.

Via Voice of America:

The Tel Aviv Stock Exchange delayed its open by 45 minutes to avoid panic but it did not help. The market plunged by seven percent in response to the downgrade of the debt rating in the United States.

“It is a powerful shock,” economist Yaakov Sheinin told Israel Radio. He said U.S. President Barack Obama and the Federal Reserve should do something to calm world markets.

August 5 (CNBC) — U.S. government officials are bracing for the rating agency Standard & Poor’s to downgrade the country’s credit as early as this evening or take other possible action, according to someone familiar with the matter.

Throughout Friday, markets were rife with speculation that S&P, which has had a negative outlook on the U.S. since April 18, would downgrade the country’s credit from its current triple-A level.

[source]

August 05 (Bloomberg) — American voters’ calls for deficit reduction are colliding with their demand for job creation.

As governments at all levels face pressure to cut spending, thousands of public-sector workers are joining the ranks of the 13.9 million unemployed. In July, 37,000 government jobs were eliminated, marking the ninth straight month of reduction, a Labor Department report showed today.

[source]

Same As It Ever Was

August 05 (USAGOLD) — Early in the week, US lawmakers reached an agreement on a deal that allowed for the US debt ceiling to be raised, averting a default (for now). On the day that legislation was signed into law by President Obama, US debt surged $239 bln, the biggest one day rise ever recorded. Quite suddenly, 60% of the new clearance in the debt ceiling has already been used up. And what truly was accomplished after months of partisan bickering? Not much.

The graph above is the latest available from the St. Louis Fed and only goes through the end of last year, so let me fill in the blank for you. We quickly rose to the $14.34 trillion debt ceiling early this year, where we paused for several months as Congress hashed out their compromise, waiting of course until the 11th hour and the verge of default. Then, on Tuesday, there was a parabolic jump of $238 bln. The debt as of this writing now stands at $14.58 trillion, according to usdebtclock.org.

That compromise reportedly includes $2.1 trillion in spending cuts over the next decade, but the CBO concedes that the national debt is expected to rise $6.7 trillion over that same 10-year period. The Office of Management and Budget (OMB) says, at best deficits will be pared by 0.5%. Both projections seem perhaps wildly optimistic as they are based on at least 3% or better economic growth over the next several years. One displeased Representative called the compromise a “Satan sandwich.” If nothing else, I would concur that the deal was certainly yet another in a long line of deals with devil; as it again does nothing to meaningfully alter the disastrous fiscal path we’re on.

Global stocks took a beating in the past week as Europe continued to unravel, and even the US debt ceiling deal failed to allay mounting concerns about systemic and growth risks. This led to an orgy of central bank interventions: The Swiss National Bank intervened (to no avail) to stem the rise of the safe-haven Swiss franc. The Bank of Japan threw a record setting ¥4.46-¥4.66 tln ($56.6-$59.2 bln) at the FX market to try and staunch safe-haven demand for the yen. The ECB began buying Portuguese and Irish debt this week and hinted on Friday that it was prepared to do the same for Italian and Spanish bonds. The not so subtle underlying message is that the major Western central banks are prepared to buy anything from anybody in an effort to maintain market calm. One has to wonder if the Fed can be far behind with further accommodations of its own.

Certainly central banks — and perhaps specifically the Fed — has the ability to create an endless amount of currency and then use it to artificially buoy foundering asset prices. However, there is a cost in such currency devaluations. A cost largely born by average citizens, that because of lack of knowledge of lack of means, can’t protect themselves from a devalued currency and the inflation that results. Some certainly are seeking shelter, and that is reflected in new record highs in gold against most major currencies this week.

As investors — both individual and institutional — become increasingly skeptical of asset valuations distorted by artificial central bank buying, they will increasingly look for alternatives to the more traditional asset classes. That too will continue to have a positive influence on hard assets such as gold.