September 08 (WSJ Blogs) — The U.S. Senate, in an unusual procedure, cleared the way Thursday for the U.S. to lift its borrowing authority by $500 billion to $15.19 trillion, enough to keep the support federal government borrowing through late January or early February.

The action came under an unusual legislative procedure spelled out under the August agreement to raise the U.S. debt ceiling and avoid a U.S. credit default. In a 52-45 vote, the Senate blocked an attempt by Republicans to slow down the process that will result in the $500 billion debt-ceiling increase.

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PG View: Shhhhh. Don’t tell anyone, but we blew through that initial $400 bln debt ceiling hike in about a month.

By Barry Eichengreen
September 09 (Project Syndicate) — Europe is again on the precipice. The most recent Greek rescue, put in place barely six weeks ago, is on the brink of collapse. The crisis of confidence has infected the eurozone’s big countries. The euro’s survival and, indeed, that of the European Union hang in the balance.

European leaders have responded with a cacophony of proposals for restoring confidence. Jean-Claude Trichet, the president of the European Central Bank, has called for stricter budgetary rules. Mario Draghi, head of the Bank of Italy and Trichet’s anointed successor at the ECB, has called for binding limits not on just budgets but also on a host of other national economic policies. Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Europe in the European Parliament, is only one in a growing chorus of voices calling for the creation of Eurobonds. Germany’s finance minister, Wolfgang Schäuble, has suggested that Europe needs to move to full fiscal union.

If these proposals have one thing in common, it is that they all fail to address the eurozone’s immediate problems. Some, like stronger fiscal rules and closer surveillance of policies affecting competitiveness, might help to head off some future crisis, but they will do nothing to resolve this one.

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September 09 (Bloomberg) — Treasuries rallied, pushing 10-year note yields to a record low, as concern Greece may default this weekend stoked demand for a refuge from Europe’s deepening sovereign-debt crisis.

Benchmark 10-year government securities headed for a second weekly gain as German Chancellor Angela Merkel’s government prepared plans to shore up the nation’s banks in the event that Greece fails to meet the terms of its aid package and misses a payment on its debt.

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PG View: Everybody out of Europe and into the dollar and Treasuries! However, given the sub-2% yield on 10-year notes, America’s own massive debt problems and rather substantial currency risk, its hard to believe these new allocations to the US will prove ‘sticky.’ Where to next? Undoubtedly some of these safe-haven flows will ultimately find their way to the gold market.

JK Comment: In this video, Faber makes a prediction that gold could achieve highs of $6000-$10000/oz. While extremely bullish, I liked this video for the macro-economic context Faber offers on the gold market. Well worth the watch…

September 09 (Bloomberg) — Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro.

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September 09 (Financial Times) — The European Central Bank has been dealt a serious blow by the unexpected resignation of its German board member in a conflict over the bank’s controversial bond-buying programme.

Jürgen Stark said he would quit the ECB’s six-man executive board for “personal reasons”, without giving further details. His departure reveals the extent of the conflict within the ECB over its purchases of government debt, which last month were ramped up to include Italian and Spanish bonds.

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September 09 (USAGOLD) — Gold has been quite choppy thus far today. As the yellow metal neared $1900 once again in Europe, rumors of yet another CME margin hike surfaced, sparking a precipitous $60 sell-off. There has also been more widespread acknowledgement of possible “official” gold selling this week, although if there were any indication of an official offer earlier in Europe, I haven’t heard it yet.

While the CMEGroup did announce a margin increase on the very thinly traded London gold forwards yesterday, they have already denied the rumor that another margin hike on gold futures is in the offing. Gold is on the mend, and has already retraced more than half of today’s intraday losses.

The dollar has firmed as the euro tumbled to new 6-month lows. Ongoing concerns about the impending default of Greece, mounting growth risks and the resignation of the ECB’s chief economist Jürgen Stark over periphery bond purchases, have all weighed on the single currency.

• US wholesale sales unch in Jul, below market expectations of +0.8%, vs +0.6% in Jun; inventories +0.8%.
• ECB chief economist Jürgen Stark may resign from ECB over bond purchases conflict.
• France industrial production +1.5% m/m in Jul, well above market expectations of +0.4%, vs upward revised -1.5% in Jun; 3.7% y/y.
• France manufacturing production +1.4% m/m in Jul, vs upward revised -1.8% in Jun; 4.2% y/y.
• Italy Q2 GDP – Final (sa & wda) as expected at 0.3% q/q; 0.8% y/y.
• German Aug CPI – Final unexpectedly revised up to 2.4% y/y, vs 2.3% previously; HICP revised higher as well to 2.5% y/y, vs 2.4% previously.
• Malaysia industrial production falls to -0.6% y/y in Jul, vs +1.3% y/y in Jun.
• Japan consumer confidence index (sa) steady in Aug at 37.0.

Washington Post columnist Ezra Klein summed up the American Jobs Act, pitched by the President last night, thusly: “The plan, taken as a whole, attempts to include every single theory of how to address the jobs crisis. If you believe we need more direct spending, you’ve got the infrastructure component. More tax cuts? The plan has $250 billion in tax cuts. More help for the unemployed? Yep. More deficit reduction? Next week, the White House will release a package that offsets this plan and reduces the deficit by more than $1.5 trillion on top of that.

“Of course, in much the same way that everyone can find something to like in this plan, everyone can find something to dislike.”

[Fact Sheet: The American Jobs Act]

PG View: We won’t find out how the Administration plans to pay for this package until next week, but again I imagine everyone will be able to find something to like and something to dislike in those proposals.

September 08 (MarketWatch) — U.S. stocks declines accelerated into the close Thursday, resulting in a triple-digit loss for the Dow average, after Federal Reserve Chairman Ben Bernanke revealed no plan for additional monetary easing.

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John Mauldin is a renowned financial expert and a New York Times best selling author. His latest book “Endgame” details the Debt Supercycle and the sovereign debt crisis, and shows that, while there are no good choices, the worst choice would be to ignore the deleveraging resulting from the credit crisis.

The following are his thoughts on gold, from this week’s Thoughts from the Frontline e-newsletter:

The question I am asked the most is some variant on “What do you think about gold?” So, let me deal with that question here, as it has been a while.

First, I do not think of gold as an investment. It is insurance for me. I buy a rather fixed amount of gold nearly every month, no matter the price. I hope the price of gold goes down, because that means I get more coins in the mail to go into the vault. Yes, I take delivery of my gold, and it is near me if I need it.

My fondest dream is that I will give my gold coins to my great-great grandkids some 70-80 years from now, and they will be rather embarrassed that their “Papa John” bought all that much of that barbarous yellow metal instead of more biotech stocks. But as I live in the real world, I buy gold, even though I am optimistic we’ll get through this rough patch; because I simply don’t trust the bas*%*ds who are driving this ship with 100% of my money in dollars, or any fiat currency, for that matter.

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PG View: I post this excerpt because Mr. Mauldin’s take on gold very closely reflects my own personal view, as well as the philosophy of gold ownership espoused by our firm.

By Allen Sykora
September 07 (CommodityOnline) — Newsletter writer Dennis Gartman says he suspects the heavy selling in Gold overnight may have been “governmental in nature,” but he is still viewing retreats as a buying opportunity. He cited “massive, relentless offerings of gold” during Asian hours.

“It is far too early to know who the seller was and continues to be, but if our intuition serves us…it shall almost certainly be a government of some sort. Time only shall tell,” he says in The Gartman Letter.

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PG View: This is a story that we picked up on early yesterday as well, when gold was under heavy selling pressure.

The China Cables and Gold

Much was made earlier in the week about the ‘Wikileaked’ US Embassy cable out of Beijing that referenced China’s gold reserves. The cable was originally sent around the same time in 2009 when China surprised the world in revealing that it had nearly doubled its gold reserves to 1,054 tonnes, from just 600 tonnes in 2003. A couple of months later, China indicated that it was interested in securing an additional $80 bln worth of the yellow metal for its Dragon’s Hoard; about 2,600 tonnes based on sub-$1,000 gold at the time (June 2009 close: $929.15).

China is indisputably buying gold, and speculation about their motives notwithstanding, the salient excerpt from the cable in my opinion is as follows: “China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.” In other words, if China is buying gold, other countries are likely to buy gold as well.

It does indeed appear that China was a trendsetter. The WGC projects that global central banks will be net gold buyers this year, for the first time in a generation. Besides China, recent notable sovereign gold buyers include Russia, India, Mexico, Bangladesh, South Korea and Columbia. The recent Venezuelan demand that their gold reserves be repatriated and the nationalization of their gold mining and processing industries plays into this theme as well. Just this week, Romania and Bolivia indicated that they wanted to build their gold reserves, likely by buying up their domestic production.

I also don’t think there is any question that the Chinese would like to advance the status of the yuan as it continues to solidify its position as an economic powerhouse in the world. In fact, Commerce Minister Deming said just today that China is not only exploring ways to diversify their FX reserves (which likely translates into further gold reserves), but it also plans to make it easier for Chinese firms to use the yuan to invest abroad. Recent currency pacts with Russia and Brazil are just two examples of progress in this direction. China’s participation in the EU bailouts, via periphery debt purchases, have also been viewed as the Middle Kingdom trying to make inroads into the eurozone.

Some have suggested that the Wikileak cables are proof that China is attempting to destroy the dollar’s reserve status, but given China’s still massive holdings of dollars and US Treasuries, that seems like a pretty ill-advised strategy. I certainly understand China’s desire to diversify out of a currency that is being systematically devalued with purpose, but China is smart enough to know that they shouldn’t destroy the biggest customer for their manufactured goods. The yuan’s ascension (albeit a tightly controlled ascension) will — as a byproduct — have a negative impact on the status quo, but it’s certainly not just China that’s driving this global shift. In fact, we may be our own worst enemy, as evidenced by last month’s S&P downgrade of US sovereign debt due to what has become a terribly partisan political process.

But again, the main take away here is that China and others are buying gold…and in a big way.

Do you have any gold yet? If not, you should.

If you do own gold already; do you have enough?

September 08 (MarketWatch) — Gold futures bounced higher Thursday, taking another stab at $1,900 an ounce, after the European Central Bank cut growth forecasts and U.S. jobless claims edged higher.

Gold for December delivery gained $33.50, or 1.8%, to $1,851.20 an ounce on the Comex division of the New York Mercantile Exchange, extending advances in Asian and European trading hours after a rush of ECB remarks and U.S. data.

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September 08 (ZeroHedge) — Yesterday we documented that the by now widely bashed Operation Twist has been a failure before it was even launched as confirmed by recent trends in mortgage refinancing, or more specifically, lack thereof. Today, none other than market (and alleged bar) veteran Art Cashin confirms precisely what we said: that the one goal of the Twist – to get mortgage rates lower and refinancing higher – is and will be a failure. Again, it is very unfortunate that what is by now glaringly obvious to all will never become clear to the Fed until after the economy has finally been pushed over the precipice.

…So “Operation Twist” would reduce the yield on the 10-year Note and likely even cause mortgage rates to decline a little. But it would do nothing to help the housing market or the economy. It would not stem the tide of foreclosures…it may even cause more frustrated homeowners to stop paying their mortgage as the only way out. The same individuals who refinanced these past few months would refinance again…saving a few more dollars, but not making any significant improvements in the economy.

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PG View: This one of the better summaries of Operation Twist; how it would work, what the Fed would be looking to accomplish and why, if implemented, it may ultimately prove unsuccessful. As Art Cashin sums up, “Mr. Bernanke may be working with wet tinder.”

September 08 (Bloomberg) — U.S. mortgage rates tumbled to the lowest in at least four decades as stagnant job growth and concern that Europe’s debt crisis is deepening drove investors to the relative safety of government bonds.

The average rate for a 30-year fixed loan dropped to 4.12 percent in the week ended today from 4.22 percent, Freddie Mac said in a statement today. That’s the lowest in the McLean, Virginia-based company’s records dating back to 1971. The average 15-year rate fell to 3.33 percent from 3.39 percent.

…“The housing market remains challenging primarily due to uncertainty caused by general domestic economic and political concerns, stock market volatility and turbulent international economic conditions,” Ara K. Hovnanian, chairman and chief executive officer of homebuilder Hovnanian Enterprises Inc., said in a statement yesterday. “We see very few indicators that any recovery in the housing market has begun.”

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PG View: Too bad very few can actually get those low rates.

September 08 (Bloomberg) — Credit-default swaps on Greek government debt surged to a record, signaling a 91 percent chance the nation will fail to meet debt commitments, after its economy shrank more than previously reported.

Five-year contracts on the country’s sovereign bonds jumped 196 basis points to 3,001 basis points, at 3:45 p.m. in London, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

…Greek two-year note yields jumped as much as 85 basis points to a euro-era record 55.76 percent today. The nation’s 10-year yield climbed to an all-time high 20.13 percent.

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PG View: Greek 1-year money has been trading near 100% this week.

In the next few weeks, Angela Merkel will face her toughest challenges as Germany’s chancellor. She will have to push the latest euro rescue plan through parliament, but she faces resistance from within her own government, where parties lack a common position.

September 08 (Der Spiegel) — For German Chancellor Angela Merkel, the next few weeks could prove to be the most challenging of her term in office. Her task: to push ahead with the deeper integration of the European Union in order to save its ailing common currency. Not known for her use of impassioned words, she made an strongly worded speech on Wednesday when she told the federal parliament, the Bundestag, she wanted to address the euro crisis in a “controlled process.”

In the coming weeks, however, her coalition government of the conservative Christian Democratic Union (CDU), its Bavarian sister party the Christian Social Union (CSU) and the business-friendly Free Democratic Party (FDP) will be put to the test. The Bundestag is slated to vote on the latest euro rescue measures at the end of September.

Meanwhile, the situation in Greece remains tense following the decision by the troika, a special commission comprised of officials from the European Union, the International Monetary Fund (IMF) and the European Central Bank (ECB), to depart Athens last week without any results.

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September 08 (Bloomberg) — European Central Bank President Jean-Claude Trichet said threats to the euro region have worsened and inflation risks have eased, giving officials the option to take further action should the debt crisis worsen.

The economy faces “particularly high uncertainty and intensified downside risks,” Trichet said at a press conference in Frankfurt today after the ECB left its benchmark rate at 1.5 percent. While monetary policy is still “accommodative,” financing conditions have worsened in parts of the euro region and the ECB stands ready to pump more cash into markets should that be required, he said.

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September 08 (CNBC) — Both the United States and Europe are on recession watch, and investors should not be fooled by the occasional piece of positive economic data, according to two leading economists.

“For the U.S, we now expect GDP growth in the second half of 2011 to average just 1.3 percent at an annual rate, down from 2.8 percent,” said HSBC Chief US Economist Kevin Logan in a research note.

“Don’t be fooled by an autos recovery in the third quarter,” said Logan Jonathan Loynes, the chief European economist at Capital Economics, feels similarly about Europe.

“The latest activity indicators suggest that the euro-zone economy might soon slip back into recession. In the second quarter, the economy expanded by just 0.2 percent, compared to 0.8 percent in the first quarter of 2011,” said Loynes.

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September 08 (MarketWatch) — UBS AG has hiked its gold forecast for next year by 50% to $2,075 a troy ounce, citing expectations that further global macroeconomic disappointments, European sovereign debt troubles, and low business, consumer and investor confidence will bolster demand for the precious metal as a “line of defense” against fresh market turmoil.

The Swiss bank has also revised its expected average gold price for this year up to $1,665/oz, from $1,500/oz previously, ahead of a likely “strong fourth quarter price environment,” it said.

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September 08 (USAGOLD) — Gold is in the process of retracing this week’s corrective losses. The yellow metal has already regained more than half of the drop from Tuesday’s record high of 1920.50 to Wednesday’s low at 1793.20. The underlying uptrend seems to be re-exerting itself in the face of ongoing uncertainty in Europe, a surprise rise in US initial claims last week and little hope that President Obama will offer anything tonight in his jobs speech that has a chance of making it through Congress.

The BoE held steady on rates today, which was widely expected. There were some expectations that the BoE would raise its asset purchase target, but they held-off for now. The ECB also held steady on rates, but reduced both their growth and inflation forecasts. ECB president Trichet noted the Q2 deceleration in economic growth, but still expects the eurozone economy to “grow moderately, subject to particularly high uncertainty and intensified downside risks.” Well that’s reassuring. In reality, Europe, along with the US, seem to be edging back toward recession.

• US initial jobless claims +2k to 414k for the week ended 03-Sep, above market expectations, vs upward revised 412k in the previous week.
• US trade deficit narrowed more than expected to -$44.8 bln in Jul, vs $51.57 bln in Jun.
• Canada trade deficit narrowed to -C$0.75 bln in Jul, on expectations of -C$1.1 bln; exports +2.2%.
• ECB hold steady on refi rate at 1.50%; reduces growth and inflation forecasts.
• BoE holds steady on repo rate at 0.50%, as well as asset purchase target.
• German trade balance narrowed to €10.4 bln in Jul, vs €12.7 bln in Jun.
• France trade balance widened to -€6.5 bln in Jul, vs -€5.4 bln in Jun.
• Switzerland unemployment rate (sa) steady at 3.0%, just above market expectations.
• BoK holds steady on repo rate at 3.25%, in-line with expectations.
• Japan core machine orders plunged 8.2% m/m in Jul, well below market expectations, vs +7.7% in Jun.
• Australia employment -9.7K in Aug; unemployment rate rises to 5.3%.

Beige Book

September 07 (The Federal Reserve Board) — Reports from the twelve Federal Reserve Districts indicated that economic activity continued to expand at a modest pace, though some Districts noted mixed or weakening activity. The St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts all reported either modest or slight expansion. Atlanta said activity continued to expand at a very subdued pace, while Cleveland reported slow growth and New York indicated growth remained sluggish. Economic activity expanded more slowly in the Chicago District and slowed in the Richmond District. Business activity in the Boston and Philadelphia Districts was characterized as mixed, with Philadelphia adding that activity was somewhat weaker overall. Several Districts also indicated that recent stock market volatility and increased economic uncertainty had led many contacts to downgrade or become more cautious about their near-term outlooks.

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Germany’s highest court has rejected three lawsuits against euro bailout measures, but its ruling also strengthens the role of the German parliament in determining aid for heavily indebted euro-zone countries. The new procedures are more democratic, but they could also lead to fresh turbulence on the finance markets.

September 07 (Der Spiegel) — Both the plaintiff and the defendant seemed in good spirits. Shortly before the start of proceedings, economics professor Wilhelm Nölling and German State Secretary of Finance Steffen Kampeter stood in the provisional courtroom in Karlsruhe talking shop. The were speaking about the appreciation of the franc , which Switzerland is now trying to stop by placing a ceiling on the exchange rate. Kampeter let his opponent know that he was well informed on the issue. “I want to take vacation in Switzerland,” he said.

Shortly thereafter, the fun came to a halt. Germany’s highest judicial authority, the Federal Constitutional Court, issued its anxiously awaited ruling on the euro rescue package on Wednesday morning. Although their cases were rejected, the decision still represented a partial victory for Nölling and the remaining plaintiffs. The justices declared that the billions in guarantees for Greece and other highly indebted euro-zone countries were fundamentally constitutional, but they also demanded a greater say and participation in future bailouts by Germany’s parliament, the Bundestag.

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Über-dovish speech from Chicago Fed’s Evans.

This excerpt says it all: “…given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation.”

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September 07 (USAGOLD) — Market rumblings I’ve heard this morning suggest it may be SNB or IMF.

*Update* — A well connected market source discounts the market chatter that it’s the SNB selling gold.