Monday, September 19, 2011

U.S. Economy: A Lost Decade Into The Great Middle Class Poverty?

In yet another sign that the Great Recession cuts deep and long--the number of Americans living below the official poverty line reached 46.2 million, the highest in 52 years since the Census Bureau started tracking the figures in 1959.

The overall poverty rate also climbed to a 17-year high at 15.1%, which means 1 in 6 Americans are living below poverty line largely due to the high unemployment and underemployment rate. The official poverty line for 2010 is defined as an annual income of $22,314 for a family of four, and $11,139 for an individual.

Chart Source: The Census Bureau
The Census Bureau's annual report released on Tuesday, Sept. 13 gives a very grim snapshot of American households in 2010. As the U.S. economy expanded 3% in 2010, and corporations reported good profits, the gains are not trickling down to workers. The median household income in 2010 dropped to $49,445, which is virtually unchanged from the level in 1997. Overall, household income has fallen by 6.4% since the recession began in December 2007. (Ok, who was the one declared that the recession "officially" ended in June 2009?)

Chart Source: The Economic Policy Institute
Moreover, income inequality across households also increased between 2009 and 2010. According to CNNMoney, adjusted for inflation, the middle-income family only earned 11% more in 2010 than they did in 1980, while the richest 5% in America saw their incomes surge 42%.

NYT quoted Lawrence Katz, an economics professor at Harvard University that
“This is truly a lost decade. We think of America as a place where every generation is doing better, but we’re looking at a period when the median family is in worse shape than it was in the late 1990s.”
But the worse news is that experts are saying this year is unlikely to get any better. There are quite a few factors and triggering events that could push even more families and individuals over the poverty edge this year.

The Census Bureau estimated that new unemployment benefits passed in 2009, which extended payment-period up to 99 weeks for laid-off workers, helped 3.2 million stay above the poverty line. Social Security kept about 20.3 million, seniors as well as working-age adults receiving disability payments, out of poverty.

But as the government stimulus money largely dried up, the 99-week unemployment benefit is due to run out this year if not extended. Some in Congress have proposed cutting social programs, while state and local governments are cutting jobs and budgets at an accelerated pace.

The nation's unemployment rate has hovered around 9% for more than two years. The total number of unemployed has grown to more than 14 million as of August 2011. Based on the estimate by the Economic Policy Institute, the jobs gap is estimated to be 11.1 million as of July 2011, and the pace of new jobs came to a screeching halt in August, which basically suggests downward income mobility.

All these events partly support a separate analysis by the Brookings Institution that at the current rate, the recession will have added nearly 10 million people to the poor by the middle of the decade (which is only about 4 years away).

As if the U.S. has not had enough problems of its own, the potential Euro Zone sovereign debt crisis, if not contained, could pose as a potential threat of another global Lehman-like financial crisis. U.S. Treasury Secretary Geithner already went for an unprecedented meeting with Euro Zone finance ministers as talk of a potential Greek debt default and pressure on Italy could roil Europe's banking sector as well as its economy.

While President Obama is pressing the bloc's big countries to show leadership, the U.S. actually is in dire need of extraordinary leadership with a sharp strategic focus to turn the country around. That, unfortunately, is something we have witnessed neither in the current Administration, nor in the handful of future presidential candidates.

What to Expect from this Week's FOMC Meeting

By Kerri Shannon

The next Federal Open Market Committee (FOMC) meeting starts tomorrow (Tuesday), and investors expect Fed Chairman Ben Bernanke to announce some form of stimulus measures for the U.S. economy.

Investors anticipate the Fed to announce at Wednesday's conclusion new efforts to reduce long-term interest rates to allow for cheaper borrowing as well as to increase business and household spending.

"I think the Fed has no choice but to act," Krishna Memani, director of fixed income at Oppenheimer Funds, told The New York Times. "If the Fed were not to do anything having built market expectations to a pretty decent level, I think the markets would react quite negatively to that."

The Fed has already attempted to reduce long-term rates through buying more than $2 trillion in government debt and mortgage-backed securities, and has held short-term rates near zero since December 2008.

What the Fed could do next is sell short-term securities and use the money to buy long-term debt, something the government tried in 1961 called "Operation Twist." This tactic aims to flatten out the yield curve, or "twist" it so that companies would have little choice but to begin investing the capital they were hoarding.

But the Fed faces increasing pressure to avoid more stimulus measures, so it could decide to make a small move now and postpone more drastic decisions for its November meeting.

"There is no reason for the Fed to rush," Lou Crandall, chief economist at Wrightson/ICAP, wrote in a note to clients. "It is in the Fed's interest to milk the anticipation effect as long as possible."

There's also internal dissent against making any aggressive steps. Three members of the 10-person FOMC board voted against last month's decision to hold short-term rates near zero for two more years.

While Fed intervention can give markets a short boost, the stimulus measures have done little so far to help the struggling U.S. economy, leaving many Fed-watchers and analysts pessimistic.

"Well, I do think the Fed will intervene, but I don't believe for a second that the central bank's intervention will help the U.S. economy," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "As a result, we're likely to see stocks enter into a bear market and retest their March 2009 lows."


by Cullen Roche

There’s much anticipation over this Wednesday’s FOMC decision. As we all know by now, this is supposed to be the big unveiling of the Fed’s much anticipated third round of QE – now being dubbed “operation twist part deux”. In a piece this morning, the Fed’s megaphone to the world, Jon Hilsenrath, discussed some of the likely actions:
“One issue high on the agenda: Detail what changes in unemployment and inflation it would take to make the central bank veer from its low interest-rate policy, according to people familiar with the matter.
…Fed officials are likely to consider other steps they might take to boost the ailing economy in the short-run when they meet Tuesday and Wednesday, including altering the composition of the Fed’s portfolio of securities so that it holds more long-term debt. The idea would be to push down long-term interest rates to stimulate more investment and spending. They also could try to encourage lending by cutting the 0.25% interest rate currently paid to private banks when they park money at the central bank.”
It sounds like Ben Bernanke is picking up President Obama’s strategy of speaking loudly and carrying a small stick. The Fed can talk about the economy all they want. They can set specific dates for specific policies, etc, but these are marginal policy changes that really have little to no impact on the real economy. This is truly a sign that the Fed is desperate. It’s like the husband who cheats on his wife repeatedly and pleads endlessly that she take him back. Actions speak louder than words is an appropriate ending to that story in most cases. The same can be said here. And that’s been one of my primary gripes with monetary policy in recent years. There has been no real transmission mechanism through which it works. I was one of a handful of people who explained in great detail why QE2 would fail to revive the economy, but we continue to see faith and mythology surrounding the Fed’s new campaign efforts. I won’t rehash these arguments today. The bottom line is, these languages are refreshing in that it’s nice to see the Fed trying to be more transparent, but they’re not going to push a $15T economy in any sustained direction for more than a few minutes on Wednesday as the Wall Street trading desks go berserk over some minor statement change….

The second option Hilsenrath mentions is operation twist. This involves pushing the long end of the curve lower in an attempt to flatten the curve and induce some borrowing/lending. I’ve covered this thoroughly in the past. It flat out won’t work unless the Fed is very specific in its execution. They must target a specific long rate and be a willing buyer at that rate in any size. I don’t think they’re willing to go that far as it would be seen as explicit money printing and debt monetization (more myths that we constantly read about these days – admittedly though, mythology was one of my favorite subjects in grade school – I’ve since grown out of that though).

There’s a substantial risk associated with this approach in that it could cause a seismic shift in the portfolio reblancing effect whereby investors are forced into hard assets and other higher risk assets which create market imbalances and potentially induce more of the cost push inflation we saw during QE2. Besides, with long rates already at 2% on the 10 year bond, the Fed has to be wondering whether rates are really the problem (of course they’re not, aggregate debt is the problem, but let’s not include rational discussion in a conversation about Fed policy!).

In addition, recent CPI data has pushed the upper bounds of the Fed’s target rate of 2%. That means they have to be increasingly concerned about stagflation. Bernanke has been rather clear that he would only implement more QE if the deflation risks rose. Last week’s core CPI of 2% has him thinking long and hard about more QE. The bottom line is, even if they implement this program it’s unlikely to do much if anything. And it has the potential to do more harm than good. It will all depend on the implementation though. If you hear explicit rates on long bonds, you might as well pile into every inflation trade you can find and wait for it to induce a further margin squeeze on the economy that essentially torpedoes our own ship.

Cutting the rate on excess reserves is another weak policy response. Some advocates of this policy claim that the Fed can punish the banks by charging them to hold reserves. This will supposedly force banks to use these reserves to lend and lead to economic expansion. The Fed knows this is nonsense as banks are never reserve constrained. So paying negative rates makes no sense. The Fed could cut the rate on reserves to zero, but that serves little to no purpose as the effective Fed Funds Rate is currently 0.09% – already at the lower end of their current target range of 0-0.25%. And as the NY Fed previously explained, there’s a simple logic behind paying interest on reserves – it serves as a de facto Fed Funds Rate in the current environment where the Fed’s balance sheet has expanded:
“Recently the Desk has encountered difficulty achieving the operating target for the federal funds rate set by the FOMC, because the expansion of the Federal Reserve’s various liquidity facilities has caused a large increase in excess balances. The expansion of excess reserves in turn has placed extraordinary downward pressure on the overnight federal funds rate. Paying interest on excess reserves will better enable the Desk to achieve the target for the federal funds rate, even if further use of Federal Reserve liquidity facilities, such as the recently announced increases in the amounts being offered through the Term Auction Facility, results in higher levels of excess balances.”
In addition, there could be negative effects here. Izabella Kaminska at the FT has done some excellent work on the possible downsides of a cut in IOER (see here). I highly recommend having a read. It’s a bit dense, but it touches on some of the difficulties that could present themselves if the Fed is not explicit in its attempts to monitor the payments system. She further notes that the current siren call for cutting the rate on reserves appears to be the last ditch efforts of the monetarist regime who has seen their precious theory essentially smashed to bits and pieces in the last three years:
“Finally, we think the driving force behind the call for lower IOER comes from monetarists who are frustrated that the reserve multiplier theory has been blown out of the water in recent years.”
In sum, it looks like the Fed is increasingly becoming the truly naked emperor. As Warren Mosler likes to say, they’re like the child in the backseat of a car with the toy steering wheel. Except this baby is crying all the way to the market and making a big fuss over nothing. Unfortunately, everyone else in the car is being forced to listen to this endless bantering as we drive full speed into a wall. Welcome to monetary policy in the 21st century.

See the original article >>

Market Snapshot: Market Anxiety Palpable

While there was no news from the Greek-Troika discussions, 'deal' chatter was enough to juice S&P futures to day/night session highs (above 1200) on a significant rise in volume. All day we had 5-10pts swings in ES hinging on every headline from Europe and it was very clear that underlying equities themselves were being dragged in a very macro-manner (no surprise at the intraday correlation) with financials lagging most of the moves and ending down 2.7%.

The rally in stocks in the last hour was mirrored in EUR strength but not as much in credit markets (IG and HY spreads were far less excited). Notably front-end spreads underperformed - curves flattened in HY as single-names and indices did converge as we head into the roll tomorrow. IG still seems quite rich and HY modestly cheap to their respective fair-values - suggesting the market positioning is more biased to macro decompression and a flight-to-safety.

TSYs gave back some gains as ES rallied but were unable to get close to the same 'high' levels of the day ES managed. More critically, 2s10s30s, which had fallen all day, hardly budged as stocks rallied. ES average trade size picked up also as we reached 1200 suggesting (once again) that the professionals were selling into this strength.

So once again we see stocks acting on their own cognitive dissonance while general risk assets were far less impressed with the chatter. As the close approached, ES fell back from its greater-than-two-standard-deviation-above-VWAP level, converging back towards credit and TSY curve expectations.

It appeared a significantly algo-driven day (once again) in equity indices with VWAP playing a very significant role post European close.

Gold outperformed relative to the other PMs/commodities from Friday's close but still lost almost 2%. Copper -3.6% and Oil/Silver around -2.4% as the dollar gained 0.7% on the day. The EUR recovered half of its losses by the close ending at 1.368 (-0.8%) while JPY was the winner, strengthening 0.27% vs the USD on the day as carry trades were modestly unwound.

It seems to us that the Europeans are waiting on Bernanke by delaying this decision. Time is running out for the Greeks on their interest payments. We assume Bernanke knows he is being 'gamed' to some extent here and we also found it fascinating that Geithner chose to comment specifically that "U.S. in Good Position to Handle ‘Shocks’ From Europe" suggesting we should not panic if we see something scary from across the pond. Given the lack of movement in 2s10s30s, which remains our preferred measure of the market's expectation of a 'Twist' style solution from Bernanke, it would appear that the bond market is becoming less confident that it will occur. Perhaps this is a reflection of Bernanke calling the European's bluff with no global stick-save tomorrow? or perhaps it is simply business-as-usual and we will ease our way into oblivion.

See the original article >>

Global Systemic Crisis: Implosive Fusion of Global Financial Assets, Worst Ahead


As anticipated by LEAP/E2020 since November 2010, and often repeated up to June 2011, the second half of 2011 has started with a sudden and major relapse of the crisis. Nearly USD 10 trillion of the USD 15 trillion in ghost assets announced in GEAB N°56 have already gone up in smoke. The rest (and probably much more) will vanish in the fourth quarter of 2011, which will be marked by what our team calls "the implosive fusion of global financial assets". It’s the two major global financial centers, Wall Street in New York and the City of London, which will be the "preferred reactors" of this fusion. And, as predicted by LEAP/E2020 for several months, it’s the solution to the public debt problems in some Euroland countries which will enable this reaction to reach critical mass, after which nothing is controllable; but the bulk of the fuel that will drive the reaction and turn it into a real global shock (1) is found in the United States. Since July 2011 we have only started on the process that led to this situation: the worst is ahead of us and very close!

In this issue N°57, we have chosen to address, very directly, the great manipulation organized around the Greek crisis and the Euro (2), whilst describing its direct link with the implosive fusion process of financial assets worldwide. Also in this issue, LEAP/E2020 presents its anticipations for the gold market for the period 2012-2014 as well as its analyses on neo-protectionism which will be introduced from the end of 2012. In addition to our monthly recommendations on Switzerland and the Swiss Franc, currencies, real estate and financial markets, we also present our strategic advice to the G20 leaders less than two months from the G20 summit to be held in Cannes.

US economic output index (1974-2011) (grey shading: recessions; broken blue line: recession warning; blue: economic output index and in red, forecast for the 3rd and 4th quarters 2011) - Source: Streetalk/Mauldin, 08/2011

Greek crisis and the Euro: Itemizing the huge manipulation in progress

But let’s come back to Greece and what is beginning to be a "very repetitive old story (3)" which, as we have already explained, returns to the front of the media stage every time Washington and London are in serious difficulties (4). Moreover, coincidentally, the summer has been disastrous for the United States which is now in recession (5), which has seen their credit rating cut (an event deemed unthinkable by all the "experts" only six months ago) and exposed their political system’s state of widespread paralysis (6) to an astonished world, all whilst being incapable of putting any serious measure in place to reduce their deficits (7). At the same time, the United Kingdom is sinking into depression (8) with riots of uncommon violence, an austerity policy that fails to control budget deficits (9) whilst plunging the country into an unprecedented social crisis (10), and a ruling coalition that doesn’t even know why it governs together against the backdrop of the scandal of collusion between political leaders and the Murdoch empire. No doubt, in such a context, everything was ripe for a media relaunch of the Greek crisis and its corollary, the end of the Euro!

If LEAP/E2020 had to summarize the "Hollywood style" or "Fox News" (11) scenario, we would have the following synopsis: "While the US iceberg is ramming the Titanic, the crew leads the passengers in search of dangerous Greek terrorists who may have planted bombs on board!" In propaganda terms, it’s a known recipe: it’s a diversion to allow, first of all, the rescue of the passengers one wants to save (the informed elite who know very well that there are no Greek terrorists on board) since everyone can’t be saved; and then, hide the problem’s true nature for as long as possible to avoid a revolt on board (including some of the crew who sincerely believe that there really are bombs on board).

Focusing on the background, we must emphasize that the "promoters" of a Greek crisis presented as a fatal crisis for the Euro have spent their time repeating it for almost two years without any of their forecasts coming to pass in any shape or form (12) (except to continue talking about it). Facts are stubborn: despite the media outcry that should have seen off many economies or currencies (13), the Euro is stable, Euroland has come on in leaps and bounds in terms of integration (14) and is about to break even more spectacular new ground (15), the emerging countries continue to diversify out of US Treasury Bonds and buy Euroland debt, and Greece’s exit from the Euro zone is still completely beyond consideration except in the Anglo-Saxon media articles whose writers generally have no idea of how the EU functions and even less of the strong trends that drive it.

Comparison of economic data Euroland-USA (2010) (State debt, unemployment, GDP growth, current account balance) - Source: Spiegel, 07/2011

Now our team can do nothing for those who want to continue to lose money by betting on a Euro collapse (16), Euro-Dollar parity, or Greece’s Euroland exit (17). These same people spent lot of money to protect themselves against the so-called "H1N1global epidemic" that experts, politicians and the media of all kinds "sold" for months to people worldwide and proved to be a huge farce fueled in part by pharmaceutical companies and cliques of experts under their orders (18). The rest, as always, is self-propelled by the lack of thought (19), sensationalism and mainstream media conformity. In the case of Euro-Greek crisis, the scenario is similar, with Wall Street and the City in the role of the pharmaceutical companies (20).

When Wall Street and the City panic before the solutions in the course of forging Euroland

In fact we recall that what terrifies Wall Street and the City are the lessons that Euroland’s leaders and its people have been in the process of learning from these three years of crisis and the ineffective solutions that have been applied. The nature of Euroland creates a unique forum for discussion among the elite and American and British public opinion. And this is what disturbs Wall Street and the City, which is systematically trying to kill this forum, either by trying to plunge it into a panic by announcing the end of the Euro for example; or by reducing it to a waste of time and evidencing Euroland’s ineffectiveness, an inability to resolve the crisis. Which is the limit given the complete paralysis prevailing in Washington!

However, it’s really this discussion forum that allows Eurolanders to move forward on the path to a lasting solution to the current crisis. This discussion forum is an integral part of European construction where opposing views of the methods and solutions confront each other before ultimately agreeing on a compromise (and it’s still the case as the very important decisions taken since May 2010 prove). Thus it broadens the debate to a whole raft of participants, coming from 17 different countries (21), several common institutions, and it roots itself in the discussions of seventeen public opinions. Yet it’s from the clash of ideas that light shines forth: of the brutal clash of ideas, the Greek philosopher Heraclitus said 2500 years ago "Some it makes gods, some it makes men, some it makes slaves, some free". But Euroland’s citizens refuse to let this crisis turn them into slaves and that’s why the current debates within Europe are needed and useful. In three years, between 2008 and 2011, they have made two key things possible in the future:

. they relaunched European integration around Euroland and henceforth placed it on a path of accelerated integration. Our team now expects a strong revival of European politics from the end of 2012 (similar to the 1984-1985 period) including a Euroland political integration treaty which will be put to a Euroland-wide referendum by 2015 (22)

. they allowed the gradual emergence of two simple but very strong ideas: saving private banks is of no use to solve the crisis and it is necessary that the markets (that is to say essentially the big Wall Street and City financial operators) fully assume their risks without any further guarantee from the state. Today, these two ideas are at the heart of the Euroland debate, both in public opinion and amongst the elite ... and they gain ground every day. This is what causes fear on Wall Street, in the City, and amongst major private financial operators. This is the wick that has nearly burned down that will trigger the implosive fusion of global financial assets in the fourth quarter (in the prevailing context of the US recession and its inability to reduce its public deficits).

If markets begin to anticipate a 50% drop in Greek and Spanish securities it’s because they really sense the direction which events in Euroland are taking. For LEAP/E2020, there is no doubt that minds are ripe, throughout most of Euroland, for private creditors being asked to pay 50%, or even more, to resolve the future problems of public debt. This is, without doubt, a problem for European banks, but it will be managed to protect depositors. The shareholders themselves will have to take full responsibility: besides it’s really the foundation of capitalism!

Wall Street and the City, and their media intermediaries desperately want this debate not to take place, regardless of whether it’s ended by panic, so that governments should be forced to listen to their "experts" who assure them that the only way is to continue to recapitalize banks, and flood them with liquidity (23) ... as is the case in Washington and London. Two countries where these same financial institutions reign supreme in the government.

Incidentally the battle rages around the ECB as we mentioned in a previous GEAB: the appointment of Mario Draghi, a formerly with Goldman Sachs, the resignation of Jurgend Stark (24), ... arise out of these attempts to put Frankfurt under the same tutelage as London and Washington. But they are doomed from the start by virtue of this open forum, structurally inscribed in European construction, where discussions are fed by the failed policies of 2008 and the growing outbreak of public opinion in the debate. "Qui va piano va sano e qui va sano va lontano" (25) as the Italians say. This crisis is of historic proportions as we have said since February 2006. The steps to take to get through it as best as possible and come out of it stronger (free men and not slaves to quote Heraclitus) thus require serious and deep discussion (26) ... therefore time. And the time taken by the Eurolanders, is money lost to the markets ... which explains their fears. LEAP/E2020 thinks, of course, that it’s also necessary to act and we have pointed out from May 2010 that the actions taken in Euroland were of a magnitude unprecedented in recent European history. And we believe that we must allow time for the second aid package to Greece to be implemented. For the rest, we know also that the current leaders are mostly "at the limit" and it will be necessary to wait until the mid-2012 to witness a new and powerful boost to Euroland integration (27).

Meanwhile, with 340 billion USD to find for refinancing in 2012 (28), the European and American banks will continue to kill each other while trying to maintain the pre-crisis situation which gave them unlimited central bank support. As for Euroland, they may have a very bad surprise.

Comparison of the Philadelphia Federal Reserve index and US industrial production (2002-2011) - Sources: Philadelphia Fed, MarketWatch, 08/2011

The fourth quarter 2011 marks the end of two key examples of the world before the crisis

The implosive fusion of the fourth quarter will thus directly result from the encounter between two new realities that contradict two basic conditions of existence of the world before the crisis:

. one, born in Europe, consists of now rejecting the idea that private financial operators, of which Wall Street and the City are the embodiment par excellence, are not fully responsible for the risks they take. Yet for decades, this was the prevailing idea that fueled the tremendous growth of the financial economy: “Heads I win, tails you bail me out”. Even the existence of large Western banks and insurance companies has become intrinsically linked to this certainty. The balance sheets of major players on Wall Street and the City (and of many large Euroland and Japanese banks) are unable to withstand this tremendous paradigm shift (29).

. the other, generated in the United States, is the proven end of the US engine of global growth (30) against a background of the country’s complete political paralysis which, de facto, will end 2011 as Greece ended 2009: the world discovering little by little that the country has a debt it can no longer support, that its creditors are unwilling to lend, and its economy is unable to cope with significant austerity without plunging into a deep depression (31). In some ways, the analogy can be taken further: just as the EU and the banks, from 1982 to 2009, lent freely to Greece ... and without pressing for accounts, over the same period, the world has lent freely to the United States believing its leaders’ promises about the state of the economy and the country’s finances. And in both cases, the money has been wasted in real estate booms with no future, in extravagant crony politics (in the US cronyism is Wall Street, the oil industry, health service providers) and in unproductive military spending. And in both cases, everyone discovers that in a few quarters you can’t fix decades of recklessness.

The politico-financial « perfect storm » of November 2011

So, in November 2011 the United States will brace itself for a politico-financial "perfect storm" that will make the summer problems look like a slight sea breeze. The six elements of the future crisis have already come together (32):

. the "super committee" (33) responsible for deciding budget cuts on which there was no agreement this summer will prove incapable of resolving the tensions between the two parties (34)

. the automatic budget cuts required to be made in the absence of agreement will result in a major political crisis in Washington and increasing tensions, especially with the military and the recipients of social benefits. At the same time, this "automatic function" (a real abdication of decision-making authority by Congress and the United States Presidency) will generate major disturbances in the functioning of the state system.

. the other major rating agencies will join S&P in downgrading the US credit rating and diversification out of US Treasury Bonds will accelerate, in the knowledge that the United States now depends primarily on short-term financing (35).

. the inability of the Fed to do anything but talk and manipulate stock markets or gasoline prices in the United States (36), now makes any last-minute "rescue" impossible.

. over the next three months the US public deficit will increase dramatically as tax revenues are now already in the process of collapsing under the impact of the relapse into recession (37). In other words the increased debt ceiling voted in a few weeks ago will be reached well before the November 2012 elections (38)... and this is information that will spread like wildfire in the fourth quarter of 2011 ... reinforcing all investors’ fears to see the United States follow Euroland’s example over Greece and force its creditors to take heavy losses.

. Barack Obama’s new plan in the fight against unemployment will have no significant effect. On the one hand, it’s not up to the challenge and, for this reason, can’t rally the country’s energies; and on the other, it will be cut to pieces by the Republicans who will only keep the tax cuts... The only result of which will be to increase the country's debt even more (39).

The US debt super committee’s connections with Washington lobbyists - Source: Washington Post, 09/2011

So for LEAP/E2020, it's a combination of all these elements at the end of 2011 that will trigger this major financial shock ... a kind of final shock thrusting the planet out of the world before the crisis for good. But the world after is still to be built because many futures are possible, beginning 2012. As Franck Biancheri anticipated in his book, the period 2012-2016 forms an historical crossroads. One must try not to mistake the path (40)!

Risk Off Day as correlations spike further

The Day we sold everything. Oil, Gold, Silver, EUR, AUD, Equities all down today. With correlations running high, we could be facing another Flash Crash sooner than later. Only “thing” not trading at day lows, is actually the Athens Index.

and the only asset bouncing is ironically the Greek Market.

Market is a Rotting Rose by Another Name – Sector Review 9/18

In Romeo and Juliet Shakespeare wrote the line “What’s in a name? that which we call a rose, By any other name would smell as sweet”. A rose is a rose is a rose. Such a simple line and used so often to describe the world we view. But also extremely applicable to the world of technical analysis. Over the past few weeks there have been many debates about whether the major indexes and their sector components are in bear flags, or rising wedges, or channels. There is spirited discussion from all sides about the distinction but in the end none of them smell sweet, they all stink. All are about bearish formations after a move lower. With this backdrop deeply ingrained, the past week was a pretty good one for the markets (think less smelly). There were also some changes in the relative leadership in the Select Sector SPDR’s. Lets take a look.

The New Leaders

Two sectors the Technology Select Sector SPDR, $XLK and Consumer Discretionary Select Sector SPDR, $XLY jumped out of the morass to join the Utilities Select Sector SPDR, $XLU as the clear leaders. The $XLU chart below shows that it is flirting with all time highs after a week of over 4.5%

Utilities Select Sector SPDR, $XLU

gains. It may be getting tired though as the Relative Strength Index (RSI) is near 60, where it stalled on the last move higher and is moving sideways. The Moving Average Convergence Divergence (MACD) indicator is rising though as are most of the Simple Moving Averages (SMA). If it can break through to new highs it will confirm an Inverse Head and Shoulders pattern with a target of at least 38.80. A Sector at all time highs? Sounds great until you realize it is the most defensive sector. Then it is not a surprise. But the other two are surprising. Every sector had an up week but using the chart of the $XLK to illustrate, it and the $XLY were relatively the strongest. Both rose through

Technology Select Sector SPDR, $XLK

not only the 20 day SMA but the 50 falling 50 day SMA as well. They both finished the week at the highs and with a strong performance on Friday suggesting continuation. The RSI for each is rising, not stalling, and the MACD is increasing. That is the good news. But you can also see that they are still in their bear flags/rising wedges/channels and have some work ahead to break through them and above the 100 and 200 day SMA’s. The least smelly.

The Old Leaders

The old guard that has been accompanying the $XLU at the top of the garbage heap, the Consumer Staples Select Sector SPDR, $XLP and Health Care Select Sector SPDR, $XLV had decent weeks but are showing the same potential for tiring that the $XLU is. The stronger of the two, $XLP, shown below, is approaching the 100 day SMA where it has failed in the last two

Consumer Staples Select Sector SPDR, $XLP

attempts higher. Notice the RSI stalling without getting over 60 and the MACD stalling as well. It printed a Hollow Red candle Friday, near the Thursday high but without the same urge shown in the $XLK and $XLY. It may go above the 100 SMA next week and the $XLV over the falling 50 day SMA but until then consider them smelly.

The Clearly Rotting

The final four sectors, the Materials Select Sector SPDR, $XLB, Energy Select Sector SPDR, $XLE, Financials Select Sector SPDR, $XLF and Industrials Select Sector SPDR, $XLI not only smell but they look like crap. Oh, each had a nice rise for the week but each ended it with long legged doji signaling indecision and a possible reversal, and with a RSI that is stalled and not over 50. The

Financials Select Sector SPDR, $XLF

chart above for the $XLF could be relabeled as any of the four. Nothing but a bear flag with all of the SMA’s falling. The latest weeks gains came on declining volume. A lot of work to do on these flowers before you could decide that they are not already destined for the compost heap to be next years fertilizer.

There have been some relative changes in the leadership, rotation perhaps, but remember the context is that of a rotting rose. Picking the best one is only for the nimble.

Imminent Silver Price Crash to Devastate Longs

Silver has fallen back over the past week as expected, and although its uptrend from late June has now failed, which is viewed as significant, it managed to hold up above nearby support which may generate a bounce early next week. However, this should not be a cause for celebration by silver longs, as overall the picture for silver continues to look precarious in the extreme. We can see why on the year-to-date chart below, which shows that silver appears to be completing the B-wave of a large 3-wave A-B-C decline, the 3rd wave of which, believed to be imminent, is likely to be really severe and will devastate silver longs. 

On its 6-year chart silver looks like it is completing a classic large top formation. First it rose vertically to hit its most overbought levels late in April since the good old days of the Hunt brothers back in 1980. Then a panic selloff hit, triggered ostensibly by hiked margin requirements (of course, its being insanely overbought had nothing to do with it), all of which was accompanied by the huge volume characteristic of a top. Lastly, the johnny-come-latelies are corralled into silver by proliferating cheerleaders to drive the weak rally back towards the highs that we have seen over the past couple of months. There is just one instalment left to go, the drop down to the support shown at the lower boundary of the top area, the failure of that support, and the final devastating plunge that leaves hordes of silver speculators hung up in the large top area and smarting from massive losses. subscribers are prepared for this with our Complete Toolbox for Capitalizing on a Gold & Silver Plunge

The likely reason for a severe decline in silver, and in commodities generally, and a heavy correction in gold, which is another deflationary downwave that has been signaled by the dollar breakout, is discussed in more detail in the Gold Market update.

The latest silver COT, shown below, looks quite bearish with a quite high Commercial short and Small Spec long position. In comparison, the gold COT looks considerably more positive. 

What Future US Monetary Policy Means For Gold Prices

Gold has traded in a choppy lateral motion recently, with prices sliding south over the past week or so. The market looks hesitant ahead of the FOMC meeting this week, with traders cautious not to take on too much prior to what could be a game changing announcement. Bears are cautious about getting too short in case Bernanke announces a significant easing of monetary policy and bulls share a similar sentiment in case the Fed announces less easing that the market currently expects. This lack of conviction coupled with some profit taking has contributed to the recent price action in gold.

As our regular readers will know, we view US real interest rates as the primarily driver of gold prices over the medium term. Gold prices exhibit an inverse relationship with US real interest rates, with looser monetary policy leading to lower real interest rates and higher gold prices. Further discussion of this relationship can be found in our previous articles “The Key Relationship between US Real Rates and Gold Prices – 5th December 2010” and “Decline In US Real Rates To Send Gold Past $1800 – 18th July 2011”. We will not go into depth on the mechanics behind this relationship again in this article, but we note that the relationship is still intact and therefore it remains the cornerstone of our gold market analysis.

In order to form a view on where gold prices are going, we must also have a view on US real rates and US monetary policy. Our view for some time has been that the Federal Reserve would embark on further monetary easing as a response to a deteriorating economic outlook and persistently high unemployment. This view was based on the fact that the US yield curve had flattened to levels not seen since the Fed first hinted at QE2, as the chart below shows. A flattening yield curve is a sign of economic weakness, further discussion of the dynamics at play there can be viewed in our article entitled “US Yield Curve Flattening To Prompt Fed Easing and $1800 Gold -3rd August 2011”. The increased expectation of easing in the past two months has sent gold prices dramatically higher and real interest rates lower.

The question becomes not “Will the Fed ease?” but “To what degree will the Fed ease and what form will the easing take?” We will now take a moment to discuss the various options available.

The consensus expects that the Fed will implement “Operation Twist” – a policy that will see the Fed sell some of its holdings in shorter dated Treasury securities and buy longer dated Treasuries. This would be done with the intention of keeping longer term interest rates low and hopefully stimulating economic activity. Although this could be done without technically expanding the Fed’s balance sheet, it would dramatically increase the duration risk of the Fed’s portfolio and therefore still has similar effects to other forms of easing. However there are a number of other policies that could also be announced.

The Fed could simply expand the balance sheet again and simply buy more bonds, as they did in QE2, except target the long end of the yield curve. The goal of this policy would be to lower longer term interest rates. However such a goal could also be achieved by the Fed announcing a specific target or ceiling on a longer term interest rate. For example by announcing that they were targeting a yield of 1.5% of the 10 year notes. This would be achieved in a similar fashion to what happened at the August meeting when the Fed announced that they would not raise interest rates until 2013, effectively capping the 2 year note.

Another policy which could be announced is decreasing, or perhaps even eliminating, the interest paid to commercial banks on excess reserves. This rate (often referred to as the IOER) could be cut to 10bps to even to zero, in an attempt to spur lending. We are not sure how much of an effect this would have even implemented, and it would likely not have any significant effect on gold prices.

If Bernanke really wanted to enact a controversial policy, the Fed could buy foreign securities. By purchasing say peripheral European bonds and bailing out Europe, the Fed would reduce many concerns regarding Eurozone sovereign debt and weaken the US dollar. However we think that this policy is probably to unpalatable to the Fed and it is very unlikely that we will see a policy like this any time soon.

Although the technicalities of the easing are important, one must not overlook the psychology involved in the decision as well, which we view as at least equally important. Therefore we think there is a significant chance that the consensus view of the Fed stopping at Operation Twist may be in for a bit of a shock.
Thinking back to August 9th, the consensus was that the Fed would simply make a stronger commitment to keeping interest rates low for an “extended period” of time. But Bernanke went further than this and announced that he would keep rates near zero until mid 2013 – going further than the vast majority of people thought he would go.

Ben Bernanke has demonstrated on multiple occasions that he is not afraid of taking risks and he is willing to be very aggressive with monetary policy. With unemployment still above 9%, who can blame him? Regardless of whether one thinks that the Fed’s dual mandate of full employment and low inflation is right or not, the fact of the matter is that mandate is what it is and with unemployment at these elevated levels the Fed is not achieving its targets.

At the August meeting, we know both from the statement and meeting minutes that additional rounds of unconventional easing were discussed, plus Bernanke said at Jackson Hole that these such options were on the table. Therefore we feel that there is a significant risk that the Fed will ease much more than many expect. We do not think that the Fed will risk announcing something that is below market expectations, since markets would instantly tank. The Fed actively monitors what the market expects and if they were not going to announce anything then the Fed would have tactically hinted this prior to this week, to prevent markets being shocked to the downside.

The fact that it is going to be two day meeting also increases the probability that we are going to see something significant. The last time a two day meeting was called was in December 2008 and QE1 was put into action. We think Bernanke will use the extra time to convince the dissenters (there were three at the August meeting) that further aggressive easing is necessary.

So what happens after the Fed eases and what does it mean for gold?

Of course monetary easing is bullish for gold prices, but once the easing is announced, digested and effectively priced in, gold prices will be dependent on future expectations of monetary easing and therefore the future economic outlook. If Fed easing, whatever form it takes, is successful at improving the economic outlook then this is not bullish for gold prices over the medium term. An improving economic outlook would probably see longer term US real interest rates increase, the yield curve steepen (unless longer term rates are specifically capped) and therefore flow through to a decrease in gold prices.

This happened after QE2, when the flow of economic data was much more positive and US real rates began to rise. This initially capped gold prices, before causing a decline of about 11% in early 2011, a similar scenario could unfold after this Fed meeting. Also increasing US real rates in late 2009 and early 2010 was accompanied by gold prices declining some 14% in early 2010.

So considering all of the above, what is our trading strategy going forward?

As a reminder, all of our trading recommendations are based on options traded on US markets. Therefore when considering gold we trade options on GLD. We do not trade gold mining companies (and have rarely touched the mining stocks since May 2008) or options on gold mining companies for reasons discussed in our previous article, “Are Gold Stocks The Real Barbarous Relic? – 11 Jul 2011”.

We are maintaining a moderate long position on GLD through the FOMC meeting. Our exposure is however significantly lower than it was in the run from $1600 to $1800 when we felt that the risk-reward was far more skewed to the upside than it is at present. Nonetheless we maintain a sizeable long bias and still expect gold prices to reach $2000 in 2011, but most likely within the next month. Our reluctance to take a more aggressive position is not reflective of a lack of conviction that gold will reach $2000, but more due to our view that risk looks more symmetric than it did a couple of months ago.

Our plan for after the FOMC meeting will be largely dictated by the language in the statement and the behaviour of US real interest rates in the weeks following. An exceptionally accommodative statement coupled with significantly declining US real rates would likely see us increasing our gold exposure. However an announcement of easing that is within a reasonable range of current market expectations will not cause us to increase our gold exposure. In fact a scenario where the statement is more accommodative that expected, but US real rates are rising would cause us to reduce our gold exposure. Rising US real rates and rising gold prices would see us selling into gold’s strength, as we view US real rates as the lead indicator here.

If a situation of increasing US real rates and rising gold prices persists and we have exited our long positions then we would be considering a short bias. We are not comfortable with outright aggressive short positions on gold due to the significant event risk, but we would be open to selling call spreads into such a market. These limited risk trades carry positive Theta and would look particularly attractive if near term calls are heavily bid and we see a backwardation of the volatility curve. Further discussion of the recent examples of backwardation in the gold volatility curve can be found in our previous article, “The Market Dynamics That Sent Gold Past $1800 – 15th August 2011”. A market with a vol curve in backwardation and skewed heavily towards calls is prime for selling call premium in our opinion, since both are symptomatic of a frothy market packed with speculative longs. Such a market could occur in the next month or so.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

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The Gold Continuation Triangle, and the Coming Breakout to $2,100

By: Jesse

The Gold Daily and Silver Weekly charts are growing rather large since the key breakouts that mark this leg of their bull markets. It does give the big picture, but it could make things a little more difficult to see for the short term movements. Here is a closer look at daily gold.

Although there are a number of possibilities, some of which have been promoted by other 'name' chartists which people have sent to me, it seems most likely that gold is in a short term consolidation pattern, as a pronounced symmetrical triangle. A breakout to the upside seems most likely. That breakout will target 2100.

Notice that gold seems to find resistance and support roughly every $100 higher, at the 80's. So we might expect some hesitation and resistance at the 2080 level should the break out occur.

Barring a major intervention by the central banks, or a liquidation selloff, I fully expect gold to continue to move higher. Rumour has it that China has responded with its terms to remain neutral during such an intervention, and they were draconian indeed. And there is no controlling the mass buying by the peoples of Asia which is still just awakening. Buying repression, if any, is most likely in continental Europe if bank runs occur.

Other forms of general political repression which are already underway in the Mideast, are most likely to make their appearances in at least a few Western countries seeking their Orwellian fulfillment. This depends on some variables which are understandably difficult to forecast. Who will be the first Nato member to declare martial law? .

This is not over, not by a long shot. There is no resolution to the global currency and financing situation which is in a multi-decade change from one system to another. So I would say that we are roughly half way there. My long term target for gold has been in the $4000 to $5000 area, although a spike panic could take us as high as $6700. If it reaches that point I will be a seller of at least a portion of my long term holdings.

My longer term target for silver is in the $250 area, although its volatility could take it above $400 in a buying panic or exchange signal failure. I would consider selling long term silver holdings at the $400 level.
All these levels are obviously reviewed as more data becomes available. What else would an intelligent person do?

Watching the intermediate trend on the second chart, the dip towards 1700 was most likely a significant buying opportunity. I hope so as I took it, and in some size, although I have added and subtracted to that position as the trading fluctuations have suggested in this short term pattern.

I own no stocks, and have a slight short position on the SP.

The Best Currency to Short Right Now

By Sean Hyman

There's never been a better time to be a short-seller.

Right now stocks are slipping and sliding all over the place, overall trending downward. And it doesn't look like this downtrend is going anywhere soon.

Short-selling can help you protect your overall portfolio when stocks start sliding off the map. Also, you can earn some of the fastest profits from short-selling in "down" markets because markets drop a lot faster than they rise.

We saw that over the last few weeks as the Dow Jones Industrial Average and Standard & Poor's 500 Index erased all their 2011 gains in a couple of days. That's pretty common. In fact, it usually takes an index all year to gain 10% to 20%. Then it can drop as much as 30% in a week.

So if you were able to short stocks during those times, you would make a decent return for a full year within weeks, or even days.

However, it's not always easy to execute short- sells in the stock market - which is why I always look for the best short-selling opportunities in foreign currencies first.

And I just found the ideal short-sell in the f orex market to play as markets fall.

Why to Use the Forex Market for Short-Selling

Many countries are instituting a ban on short-selling some stocks, making it hard to take advantage of market downtrends.

France, Spain, Italy, Belgium, Greece, Turkey and South Korea recently have created some rules against short-selling.

With a short-selling ban in effect, it means even if you believe a stock will drop in value, you can't try to profit off that decline by simply shorting stocks.

Luckily, there will never be any short-selling bans in the f orex market.

You see, currencies are traded in pairs. When you buy the first currency listed in the pair, by default you're also shorting the second currency in the pair. And if you short the first currency listed in the pair, you're automatically buying the second currency.

currency So if I bought the EUR/USD (the euro vs. the U.S. dollar), I'm buying euros and shorting dollars at the same time. If I shorted EUR/USD, I'm short the euro and long the dollar.

In other words, you're always shorting something. That's why there will never be "short-selling bans" in the spot f orex market.

It also means that with currencies, you can just as easily profit in a "down market" as you can in an "up" market.

Even better - what if there was a "stock-market sensitive" currency in the forex market: As stocks dive, this currency would dive; as stocks rise, it would rise.

Thankfully, that pair does exist.

The Currency Short Sale to Make Now

It's the AUD/USD (Australian dollar vs. the U.S. dollar). Take a look at the accompanying chart .

The AUD/USD has been in an uptrend as long as stocks have. This pair also traded sideways just like stocks did. That caused it to form a chart pattern called a "double-top" at the same time that stocks did. currency

Now it's started its downtrend, just like stocks.

Simply shorting this AUD/USD pair is like shorting the Dow or S&P 500. And since it's a currency pair, it's much easier to short-sell it in the f orex market.

It's one of the best hedges you can use to take the sting out of your portfolio as stocks drop. If the Dow really starts falling, your AUD/USD short position will grab even more profits.

Most people don't realize that such a simple solution is out there, but it is. Therefore, take advantage of this time in market history. Simply shorting the Aussie dollar in the f orex market is the easiest way to do that.

The Looming Bear Market: What You Can do That Washington Can't and Wall Street Won't

By Keith Fitz-Gerald

I just finished a battery of media appearances on Fox Business, Bloomberg, BNN and CNBC Asia, and without exception I was asked about two things: President Barack Obama's jobs bill and the U.S. Federal Reserve's "QE3."

The first thing investors and analysts alike want to know is whether or not the president's jobs bill will work. The answer to that question is "no" - not as it stands, anyway.

The second question is whether or not Fed Chairman Ben S. Bernanke will further extend the central bank to help the economy. Well, I do think the Fed will intervene, but I don't believe for a second that the central bank's intervention will help the U.S. economy.

As a result, we're likely to see stocks enter into a bear market and retest their March 2009 lows.

I know that's a terrifying thought. But to be perfectly honest, there's nothing President Obama or Bernanke can do at this point. If companies don't want to spend the $2 trillion worth of cash they're hoarding, there's very little the government can do to encourage them to loosen their purse-strings.

That said, I want to give you five specific steps to take to protect yourself from the looming bear market, preserve your sanity - and even profit.

But before I get to that, you need to understand the dangers that are fast approaching.

A Roadblock to Recovery

President Obama and Chairman Bernanke can toss all the money they want at the economy. But no amount of spending can change the fact that we need the following three things to get our market moving again. They are:

  1. Sustained demand.
  2. A solution to the European sovereign debt crisis.
  3. And a bottom in housing prices.
As it currently stands, the U.S. economy will be lucky to log 1% growth this year, which is even lower than the anemic 1.5% I predicted in my annual forecast in January.

That's pathetic for a nation that spent more than $1.4 trillion of borrowed money on "stimulus." This lackluster growth is also evidence that the Obama administration's $800 billion stimulus plan - and the Fed's two rounds of quantitative easing - did absolutely nothing to salvage our economy.

Citizens are scared silly. Businesses are uncertain. They're uncertain of regulatory changes, uncertain of taxes, and uncertain about their overall economic environment. So they're doing what rational people do when confronted with the unknown: They're hunkering down.

And with good reason.

The typical U.S. family got poorer during the past 10 years due to a decade-long income decline. Median household income fell to $49,995 last year, and is now 7% below where it was in 2000. The number of people living in poverty has risen to 15.1%, the highest level since the U.S. Census began tracking this information in 1959.

It should also be noted that a large portion of that decline is directly attributable to inflation, which the Fed continues to assert is "transitory."

Out of the Fire...

You may be holding out hope that the president's jobs plan will help turn things around - but it won't. 

Jobs exist because they create value. You can't just assume businesses will hire for the sake of hiring, which is essentially what the Obama administration's plan does. There has to be demand. All the employees in the world won't do any good if business owners can't grow their customer base and their revenue.

This is true for infrastructure as well. Infrastructure should be built as a means of increasing productivity - not just to put bodies in motion. That's something the "bridges and tunnels" crowd doesn't seem to understand.

That's why we have to consider the president's plan for what it is - yet another government-sponsored diversion of capital and resources.

As such, there are the usual questions about how President Obama wants to pay for this. And that's assuming the plan even manages to get through Congress, which I don't believe it will.

I think the jobs bill is dead in the water, and that the fight over some of its elements will create more uncertainty than jobs. That will be bad for the economy and even worse for the stock market, which will react negatively to the bickering and yet more indecisiveness.

Enter the Fed.

A Five-Step Plan for Dealing with the Looming Bear Market

When the president's jobs bill fails - just as his previous attempts to jumpstart the economy with deficit spending failed - and unemployment rises a year from now if not sooner, Bernanke will undoubtedly step in with QE3.

Of course, it may not be called QE3. It will likely be called "Operation Twist," or some derivation thereof.

But here's the real rub. Quantitative easing, no matter what it's called, is a euphemism for printing money. It is an attempt to bring down longer-term rates and twist the interest rate curve in such a way that companies have no choice but to spend money, and investors have no choice but to take on more risk.

But how low can you go when rates on the short end of the curve are already near zero? Not very.

I saw this firsthand in Japan. The Japanese government took rates all the way down to zero - and nobody wanted the money! Japanese companies wouldn't spend their cash then any more than U.S. companies will spend the $2 trillion they're sitting on now.

Instead, the government will be "forced" to spend even more.

So while Bernanke and President Obama are trying to dig their way out of this mess, they're really only digging our economy into a deeper hole.

That's why stocks are destined to retest the market lows of 2009. I don't know exactly when but I intend to help investors safeguard their assets and profit by preparing for it now - before it actually happens.

Here's five steps to get you started:

  1. Sell Strategically: Sell into strength and capture profits using trailing stops that are gradually ratcheted up as the bounce begins. This will help you raise cash (that can be used to buy into the rebound when it eventually happens)
  2. Hedge Your Bets: Use specialized inverse funds to hedge downside risk that will accompany the rollover to the downside and rack up significant gains at the same time.
  3. Consider Alternatives: Buy commodities - most notably gold and oil - on pullbacks. These alternative assets will help preserve the value of your portfolio as the markets roll over. Their value will accelerate dramatically when the world economy recovers - as it eventually will.
  4. Think Globally: Put new money to work in so-called "glocal" stocks with fortress-like balance sheets, diversified revenue and experienced management. Not only will they help hedge the value of your portfolio, but by concentrating your focus on them you are building in upside potential even if we haven't hit a bottom. Those offering big dividends are best because that will help you keep pace with the inflation the government debt will ultimately induce.
  5. Stay in the game: I know it's tempting to bail out given my prognosis for more downside, but attempting to time the markets is a fool's errand - and never works. You just wind up getting skinned twice - once on the way down and again because you were standing on the sidelines and got left behind when the markets ultimately reverse - which they will.

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