30-Sep (ChrisMartenson.com) — David Stockman, former US Representative and Director of the Office of Management and Budget under Reagan, does not mince words. He sees the monetary systems of the world coming apart.

How did we get here? He identifies the root cause as the intentional over-leveraging of world economies by central planners in a misguided effort to enjoy growth without consequence.

Some choice quotes:

“I blame it on the Fed. I blame it on the 1971 decision by Nixon to close the gold window and let the dollar float. Because out of that has evolved — or morphed — a central banking policy in the world that absorbs unlimited amounts of government debt.”

“…we got away for twenty or twenty five years with “deficits without tears.”

“As far as I’m concerned, Bernanke is the monetary Darth Vader.”

“We effectively had, over the last thirty years, a national LBO – a leveraged buyout of the whole economy.”

“Washington thinks you can kick the can down the road, the debt is more or less free, and we’ll get around to solving the problem. But today, let’s not make any tough choices. That’s where we are.”

“The banking system has been saved on the back of the savers of the United States. We have totally destroyed any incentive for thrift, for deferred gratification.”

“Gold is becoming the de facto money. We’re going to be back to a gold standard, one way or another, through the back door in only a matter of time, simply because the central banks are dominated by the ritual incantation of dying Keynesian theory. And therefore, I would say that’s what someone needs to do to protect themselves.”

[source]

PG View: A compelling, if sobering, interview with a true political and policy insider. In that last quote, he very clearly indicates that people need to buy gold to protect themselves. Well worth listening to the entire interview.

By Michael Yoshikami
30-Sep (MarketWatch-TradingDeck) — Gold has dropped in price to around $1,600 per ounce and suddenly some say that gold is no longer a commodity that investors should embrace. I say ridiculous.

In times of panic, investors sell everything, even assets that have medium to long-term growth opportunities. The recent selling of gold was related to panic from hedge funds needing to raise money for redemptions as well as a tightening of margin requirements. This was not selling pressure based on any fundamental change in conditions or outlook.

Gold still makes sense in investors’ portfolios as a hedge against the fear and stagnation that very likely will occur over the next several years in the global economy. Affluence in China and India will continue to drive consumption, and despite the economic travails throughout the world, the desire for gold jewelry will continue to rise.

…It’s our view that sometime in the not-too-distant future, gold will reach $2,000 an ounce.

[source]

30-Sep (MyFiances) — European stocks suffered another day of dramatic falls on the final day of the most tumultuous quarter for the markets since the credit crunch and financial meltdown of 2008.

Indeed, the falls in the value of the European stock markets are even more severe than those suffered in 2008, though the overall effect is not as serious at the moment and the share indexes have not reached the lows they experienced at that time.

However, investors believe the situation could get worse before it improves.

For the third quarter of 2011, the German Dax and the French Cac share indexes have shed more than 25 per cent of their value in the last three months. The FTSE 100 has lost 14 per cent of its value in the same period.

[source]

PG View: Meanwhile, even with the recent retreat, gold is up 7.9% q/q.

30-Sep (The Wall Street Journal) — U.S. stocks are set to close out the worst three-month stretch since the nadir of the financial crisis. The Dow Jones Industrial Average and the Nasdaq each are down more than 10% for the third quarter, as of Thursday’s close. The S&P 500 slipped 12%.

Bank of America is “leading” the third-quarter blue-chip carnage, down 42%, followed by Alcoa’s 37% slide and the 35% stock-price decline for Hewlett-Packard.

[source]

30-Sep (USAGOLD) — Gold remains consolidative in the recent range, with a softer intraday tone. A firmer dollar is weighing on the yellow metal after the euro was knocked by much weaker than expected retail sales in Germany. Despite the indication of weaker consumption, signs of inflation are mounting. Eurozone HICP jumped to 3.0% in Sep, well above the 2.5% the market was expecting. As we noted earlier in the week, rising inflation will give the ECB pause in lower rates again, even as growth risks mount. Additionally, Swiss KOF leading indicators fell more than expected.

While the expansion of the ESFS bailout fund cleared a major hurdle yesterday in getting the blessing of the German parliament, other EU member states must still approve. While the approval is likely to be forthcoming, the EU will then have to deal with the reality that the fund is probably still not large enough.

The IMF — perhaps recognizing the weakness of the ESFS — is looking to about double its bailout capabilities to $1.3 trillion. According to The Wall Street Journal, they are also “weighing whether to sell bonds in private markets on short notice, a move that could bolster its safety net beyond $1.3 trillion.” So the IMF will look to issue debt as a means to mitigate debt crises… Brilliant.

More paper is just what the world needs: Paper in the form of debt (bonds) and paper in the form of fiat currency. The proliferation of paper is exactly what has perpetuated the 11-year bull market in gold, which largely solidifies in my mind that the recent pullback is nothing more than another correction in that long-term uptrend.

• Chicago ISM jumped to 60.4 in Sep, well above market expectations of 55.9, vs 56.5 in Aug.
• University of Michigan sentiment (final) revised up to 59.4 in Sep, above market expectations, vs 57.8 preliminary reading.
• US personal income fell 0.1% in Aug, below market expectations of +0.1%; First drop in nearly 2-years. PCE +0.2%.
• Canada GDP +0.3% in Jul, in-line with expectations, vs +0.2% in Jun.
• Swiss KOF leading indicator fell to 1.21 in Sep, well below market expectations of 1.35, vs 1.41 in Aug.
• Eurozone HICP jumped to 3.0% y/y in Sep, above market expectations of 2.5%, vs 2.5% y/y in Aug.
• Eurozone unemployment steady at 10.0% in Aug, in-line with expectations.
• German retail sales tumbled 2.9% m/m in Aug, well below market expectations of -0.4%, vs upward revised 0.3% in Jul.
• France PPI unch in Aug; 6.3% y/y.
• Italy PPI unch in Aug; 4.5% y/y.
• Italy CPI – EU Harmonized (preliminary) +1.9% m/m in Sep; 3.5% y/y.
• China PMI (HSBC/Markit) unch at 49.9 in Sep, but better than Sep “flash” print of 49.4.
• Japan PCE -4.1% y/y in Aug, well below market expectations of -2.8%.

One by one, European parliaments are blessing a $600 billion bailout fund considered an important step in solving the region’s financial crisis.

But there is an unspoken problem: The fund may not be big enough to do a job that involves backing such major countries as Italy and Spain and boosting capital levels in the region’s financial system.

Germany’s parliament delivered an important vote of approval Thursday for the European Financial Stability Facility. But even if other governments follow suit, officials will need to pivot quickly into a contentious debate about how to boost the size of the fund to perhaps several trillion dollars.

[source]

By Ezra Klein
30-Sep (Washington Post) — “Europe is approving a bigger bailout fund.” I feel like Wonkbook has included some version of this headline a hundred times. And here it is again. This time, the bailout fund is the European Financial Stability Facility, which is getting some new powers: it will soon be able to buy government bonds and lend directly to governments and banks. The problem is that it won’t have enough money backing its new powers to actually solve the crisis. This is a bit like empowering firefighters to go into burning buildings, but not giving them sufficient water for their hoses.

Europe is caught in a long bout of something that we’re very used to seeing after financial crises: extend and pretend. The underlying reality of their dilemma is that there are hundreds of billions — or maybe more — in losses for someone to take. If Greece and Ireland and Portugal take them, that means default and likely exit from the Euro. If they default, that means defaulting, in large part, on loans owed to German and French banks, which could cause a banking crisis in those countries. For them not to default, however, means that taxpayers in other European countries have to take those losses.

…The cost of denying the problem is to make the problem worse. But for Europe’s leaders, that is, at least for now, an easier price to pay. Actually fixing the problem might ultimately be cheaper, but it requires a wealth of political capital and continental unity that they simply don’t have.

[source]

First decline in income in nearly 2-years.

30-Sep (MineWeb) — Gold fell over $100 last Friday, Monday continued the carnage and, while the precious metal has regained some ground since, it is still on track for an 11% decline for the week.

The question now on analysts’ minds is, where to from here?

For some, this fall is nothing more than a buying opportunity. As currencies race to the bottom and Greece edges ever closer to default, so gold remains the only safe port in a rapidly approaching storm. And, if it was attractive at 1,800 an ounce, it is even more attractive now.

[source]

29-Sep (Yahoo Finance) — The increasing demand for silver bullion coins and bar in top retail markets comprising of North America, Western Europe, China and India, is outpacing supply, according to Dillon Gage Metals president Terry Hanlon.

Hanlon said a change of pattern was also emerging, with Indian investors who traditionally bought jewelry and silverware beginning to include small bars into their silver investment, while China investors were moving into small bars since the liberalisation of its silver market over the past two years.

…This year, US Mint sales of silver increased 26% compared to 2010, but the shortages of blanks still impede further growth.

[source]

30-Sep (The Wall Street Journal) — The International Monetary Fund, looking to assure markets that it has the financial firepower to deal with deepening problems in Europe and also crises elsewhere, is exploring how it can have at least $1.3 trillion in lending power, according to officials involved with the discussions.

The IMF currently has about $630 billion in usable resources; about two-thirds of that could be lent under IMF rules.

Under the plan be considered, the fund would need to make permanent a $590 billion temporary lending facility that was put in place in response to the 2008 financial crisis.

…In addition, say officials involved in the discussions, the IMF is also weighing whether to sell bonds in private markets on short notice, a move that could bolster its safety net beyond $1.3 trillion.

[source]

29-Sep (USAGOLD) — Gold has rebounded from yesterday’s soft close below $1600. While the tone remains generally defensive in the wake of recent sharp losses, the market has been buoyed by passage of the EFSF expansion by the German parliament. I think even many of the conservative mavericks in the Bundestag looked over the precipice and realized that rejection of the proposal would have precipitated a disorderly Greek default, sending all of Europe — and possibly the world — into economic turmoil.

While politicians have acknowledged the graveness of the situation in Greece and the rest of the EU periphery, make no mistake, endless can-kicking does not solve the underlying problem. German taxpayers are on the hook for an additional €91 bln in guarantees; and even so, Greece is still likely to default. Nonetheless, risk appetite has been somewhat revived as at least the immediate crisis seems to have been averted by today’s “ja” vote.

• US NAR pending home sales index -1.2% to 88.6 in Aug, vs 89.7 in Jul; +7.7% y/y.
• US BLS preliminary benchmark revisions +192k total nonfarm, 140k of which were private sector jobs.
• US initial jobless claims -37k to 391k for the week ended 24-Sep, well below market expectations, vs upward revised 428k in previous week.
• Canada IPPI +0.4% in Aug, above market expectations of -0.2%; +5.2% y/y. Strong rises in motor vehicle and chemical product prices noted.
• UK GfK consumer confidence fell to -35 in Sep, below market expectations of -34, vs -31 in Aug.
• Germany unemployment change (sa) -26K in Sep, a bigger drop than the market expected. Unemployment rate ticks lower to 6.9%.
• Eurozone economic confidence fell to 95.0 in Sep, below market expectations of 95.8, vs 98.3 in Aug; industrial confidence falls to -5.9.
• Eurozone consumer confidence fell to -19.1 in Sep, below market expectations of -18.9, vs -18.9 previously.

29-Sep (Der Spiegel) — Chancellor Angela Merkel got the majority she needed on Thursday as German parliament passed the expansion of the euro backstop fund, the EFSF. With fewer conservative renegades than feared, Merkel can breathe a sigh of relief. But with more difficult decisions approaching, the respite may not last.
Info

German parliamentarians on Thursday approved the planned expansion of the European Financial Stability Facility (EFSF) with 523 voting in favor, 85 against and three abstentions.

The bill’s passage is a vital step in euro-zone efforts to increase the fund’s lending capacity from its current €250 billion ($338 billion) to €440 billion. Germany’s share of guarantees for the fund will rise from €120 billion to €211 billion, though several other euro-zone parliaments must still vote on the expansion.

[source]

28-Sep (The Wall Street Journal) — Emerging-market countries continued to top up their gold reserves in August, with Russia, Thailand and Bolivia among those to add to their holdings.

Central banks have bought gold as some seek to diversify foreign-exchange reserves that have grown along with emerging market export industries. The purchases have helped drive the price of gold higher, because they absorb supply and boost market sentiment.

This year, central-bank officials also began buying in earnest in reaction to the government debt woes affecting the U.S. dollar and the euro.

While central-bank officials are careful not to skew the market with huge purchases or disposals, metals consultancy GFMS Ltd. said “further large official-sector purchases should help sustain prices.”

[source]

28-Sep (Bloomberg) — The Federal Reserve, chastised by Congress for lending money to foreign institutions including a Libyan-owned bank, is once again the lender of last resort for banks around the world it knows little about.

Three years after the collapse of Lehman Brothers Holdings Inc., money-market borrowing rates for dollars are rising, leading the Fed and European Central Bank to make the currency available to Europe’s institutions for as many as three months. U.S. prime money-market funds cut their exposure to euro-zone bank deposits and commercial paper, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. data.

The failure of regulators worldwide to address European banks’ fragile dependence on short-term funding is “putting the Fed in a really awkward position,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm whose clients include the biggest U.S. banks. The swaps with Europe “are an extremely advantageous political football” for critics of the Fed, she said.

[source]

28-Sep (BBC) — The 620 members of Germany’s parliament, the Bundestag, will shoulder a great weight when they enter the chamber in the old Reichstag building in Berlin on Thursday morning.

They must decide whether to block the expansion of the rescue fund for Greece.

Were they to say “no”, the whole effort to keep the eurozone intact would bump up sharp against a block.

…All the arithmetic indicates that Chancellor Angela Merkel will get the overall majority she needs. The main opposition parties, the SPD and the Greens, have indicated that they will support the expansion of the fund.

But, if the majority is untidy, with the chancellor having to rely on the votes of opponents, that might be interpreted as political weakness at the top – and, moreover, at the top of one of the countries that really matters, as the world tries to avoid a return to recession.

[source]

Sept 29 (Breakout) – Interview with Rob Lutts, president of Cabot Money Management

“I say two or three thousand very easy in the next two to four years. Most important thing to remember is that gold is in a bull market and its likely the conditions we just went through aren’t going to change. Investment demand is going to build, supply is going to be limited and we’re getting close to that love affair stage, and that’s the most exciting and interesting….”

Markets Remain Tentative Amid Greek Uncertainty

28-Sep (USAGOLD) — Gold is higher this morning, but still in the lower-third of this month’s range, as ongoing uncertainty about the fate of Greece continues to have global markets on edge. The troika returns to Greece today to resume their audit. You may recall that the troika abruptly departed Athens early in the month over disagreements with the Greek government about their massive budget deficits and how best to make up for the funding shortfalls.

If they were disenchanted then, certainly they are going to be less than thrilled now. Due to the slow implementation of austerity measures and economic downturn — which is being largely driven by those very same austerity measures — Greece’s funding needs have continued to grow. The €109 bln bailout2.0 that was agreed to just 2-months ago simply isn’t going to suffice any more. According to the FT, “Athens’ funding needs over the next three years have grown beyond the €172bn forecast this summer.”

German Chancellor Angela Merkel has already hinted today that the terms of the July bailout may have to be renegotiated, saying, “We have to wait and see what the troika … finds and what it will tell us (whether) we will have to renegotiate or not.” Well, if she really wants to prevent an disorderly Greek default and contagion to other EU member states, she better plan on coming up with some more money (or authorize more leverage). Merkel faces a critical vote in the German parliament tomorrow, where she is hoping that expansion of the EFSF will be authorized.

Fragmentation within her own party makes such authorization anything but a sure thing, but markets seem to be holding out hope that German policymakers recognize how dire the situation really is. If the Bundestag blocks expansion of the EFSF, all-hell would likely break loose. Since the German constitutional court made it clear that parliament would have the final say about German participation in future bailouts several weeks ago, vested parties have been scrambling to put contingency plans in place in case of a possible “nein” from the Bundestag. The plans primarily would result in a massive flood of liquidity into the European banking system, but whether that would actually prevent broader contagion to other already vulnerable PIIGS is dubious at best.

The massive deleveraging seen across global markets in recent sessions is reflective of the markets unease at the realization that Europe may well be running out of time. While further delevereging can not be ruled out, if Europe leads the world back into financial crisis, gold is a critical hedge against the systemic risks that will result.

While the recent rise in growth risks and resulting worries of possible deflation may have contributed to the sell-off in metals, German CPI unexpectedly accelerated to 2.6% y/y in September, its highest level in 3-years. Meanwhile, German HICP inflation rose to 2.8%. The ECB gave themselves a little maneuvering room with some controversial rate hikes earlier in the year, but these data out of Germany may have effectively hamstrung the central bank.

The defining moment in German economic history is the nightmare hyperinflation of the Weimar Republic. German’s are understandably extremely sensitive to price risks. As the ECB is for all intents and purposes an extension of the German Bundesbank, one can expect monetary policy to be generally reflective of the best interest of Germany…particularly when it comes to inflation.

If a rate cut is off the table, that leaves more unconventional measures as the only real options. While such measures may also prove inflationary, the ECB has been somewhat successful in end-running any potential German objections (and perhaps the intent of their mandate) by executing quantitative easing in the secondary market. The Bundesbank has expressed displeasure at these bond purchases in the past and has vehemently objected to both broader ECB bond buying authority, as well as eurobonds; the two measures that many economists agree have the best chance of staving-off periphery defaults.

28-Sep (Reuters) — Greece’s lenders are sending a team to Athens to inspect a government austerity plan they want implemented in exchange for aid, while Germany suggested a new bailout may have to be renegotiated.

Facing a wave of strikes and protests, Greece’s Socialist government is accelerating its debt strategy to meet the terms of an International Monetary Fund and European Union rescue deal so it can receive a new loan next month and avoid bankruptcy.

The “troika” team of inspectors, which had threatened to cut off aid if Athens did not move faster, will begin talks on Thursday on a plan demanded by lenders to deepen budget cuts and raise taxes, which has set off protests not seen since June when riot police fought running battles with activists.

[source]

27-Sep (Financial Times) — A split has opened in the eurozone over the terms of Greece’s second €109bn bail-out with as many as seven of the bloc’s 17 members arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, according to senior European officials.

The divisions have emerged amid mounting concerns that Athens’ funding needs are much bigger than estimated just two months ago. They threaten to unpick a painfully negotiated deal reached with private sector bond holders in July.

…Because of the recent economic downturn and Greece’s slow implementation of austerity measures, officials estimate Athens’ funding needs over the next three years have grown beyond the €172bn forecast this summer.

[source]

PG View: Missed numbers out of Greece? Say it isn’t so. How far beyond €172 bln are we talking here? Does any number they give have any meaning? The funding needs when the last deal was cut back 0n 21-Jul where €109 bln, since then Greece’s needs have exploded about 60%…or more! No sane investor would throw more money into this sinkhole of unknowns.

by Martin Feldstein
27-Sep (ProSyn) — The Greek government needs to escape from an otherwise impossible situation. It has an unmanageable level of government debt (150% of GDP, rising this year by ten percentage points), a collapsing economy (with GDP down by more than 7% this year, pushing the unemployment rate up to 16%), a chronic balance-of-payments deficit (now at 8% of GDP), and insolvent banks that are rapidly losing deposits.

The only way out is for Greece to default on its sovereign debt. When it does, it must write down the principal value of that debt by at least 50%. The current plan to reduce the present value of privately held bonds by 20% is just a first small step toward this outcome.

[source]

27-Sep (BusinessInsider) — The July numbers for the most widely followed measure of house prices, the S&P/Case-Shiller Index, were released this morning.

The numbers weren’t terrible–on a seasonally adjusted basis, July was basically the same as June–but one of the creators of the index, Professor Robert Shiller of Yale University, isn’t taking much solace in them.

The economy has deteriorated significantly since July, Professor Shiller observes, and he suspects that the housing market has followed suit.

[source]

27-Sep (Bloomberg) — Most advanced economies are lapsing back into recession while the U.S. is already in the throes of an economic contraction, according to Nouriel Roubini, co- founder and chairman of Roubini Global Economics LLC.

“The way I see the global economy, I think we’re entering into a recession again in most advanced economies,” Roubini said in a panel discussion today at the Bloomberg Dealmakers Summit in New York. “I think we’re already into one in the U.S. based on the hard and soft data — same with most of the euro zone, same with the United Kingdom.”

[source]

27-Sep (Financial Times) — George Papandreou, the Greek prime minister, has called on German industrialists to stop sniping at Greece and recognise the “superhuman effort” being made by his country to impose drastic austerity measures in a deepening recession.

Against a background of growing speculation in financial markets that his government may be forced to default on its borrowing, in spite of rescue efforts of its eurozone partners, he said: “I can guarantee that Greece will live up to all its commitments.”

[source]

Hope Springs Eternal

Global asset prices are on the mend on the latest expectations of a resolution to the Greek crisis. Greek Prime Minister George Papandreou took his show on the road to Berlin, hoping to convince policymakers in the heart of Europe that with just a little more money, Greece is ready to reform its profligate ways. Papandreou assured German business leaders that further bailout funds wouldn’t be an investment in the failures of the past, but in the future successes of Greece. Given the magnitude of those past failures, core-Europe remains understandably skeptical; worried they’d be throwing good money after bad.

The latest scheme calls for the €440 bln ESFS to be levered up to 8-times, to give the bailout fund more punch. This way, policymakers avoid having to ask EU member states to contribute more money outright to broadly unpopular bailouts of the periphery. Yet in employing leverage, they expose those member states to vastly greater risk. Leverage is very much a double-edged sword. Imagine the populist outrage if further bailouts — like the initial bailouts before them — fail to prevent an eventual default and the fiscal situations in core-Europe are decimated as a result. At that point, you have an even greater problem on your hands…or you gear-up to 32X and try again.

The German’s seem keenly aware of the risk with recent polls showing nearly 75% oppose pledging more money to debt ridden EU members. German Chancellor Merkel is walking the tight-rope in between her conviction that the euro must be saved and the political reality of the aforementioned polls.

Merkel said that Germany would provide “any support possible” to rebuild confidence in Greece, knowing full-well that there are indeed limits to what Germany is willing to do — or can do for that matter — as support within her own coalition continues to crumble. With a critical parliamentary vote slated for Thursday, there have already been reports from officials within Germany today that leveraging of the EFSF is off the table…if it was ever really on the table.

While the daily proclamation that “we have a plan” is growing tiresome, the charade has succeeded in buying time. Greece has yet to default even as CDS premiums have screamed for months that such an outcome is all-but assured. The troika will reportedly return to Greece tomorrow to resume their audit, but the market is getting increasingly impatient. In continuing to drag-out the Greek drama, the vested parties risk completely losing the confidence of the market, precipitating the very disorderly default that they are so desperately seeking to avoid.