“In the event of hyperinflation,” warns Glen Bradley, who has sponsored one such proposal in North Carolina “depression, or other economic calamity related to the breakdown of the Federal Reserve System… the state’s governmental finances and private economy will be thrown into chaos.”

And with that we find ourselves in peculiar territory this morning.

We’re on a train to D.C. to meet with fellow conspirators — gentlemen from the ‘left’ and the ‘right’ — who share in the belief gold must be reintroduced to the global monetary system. It’s become an unintentional hobby of sorts.

The meeting is classified at the moment, so we’ll reserve comments for another time.

But our current mission is only part of what’s making us uneasy.

We begin today by briefly exploring what our line of work is all about. Scientists who’ve studied probabilities and plotted them on a chart typically find a bell-curve distribution — in which the most likely events bunch up in the middle of the curve.

But a funny thing happens out at the ends of the curve, where the rare events are registered.

“Scientists have found small bumps and bulges,” explains Bill Bonner. “Things that were not expected to happen very often actually happened more than they thought.”

“’Hundred-year floods,’ for example, happened every 88 years. ‘One in a million’ shots hit their mark every 700,000 or so. Statisticians refer to these odd bulges on the extremities of bell-shaped curves as ‘fat tails.’ Instead of tailing off as they are supposed to, the rare events seem to swell up where you don’t expect them.”

We are in the business of anticipating fat-tail events — while the “mainstream media” sit in the middle of the bell curve. Click the graph to enlarge and you’ll get the idea:

The problem is that since 2008, “fat-tail events” — like the collapse of the U.S. dollar and the dismembering of the Federal Reserve system — have become harder for us to stake out.

We were once derided as “doom and gloomers.”

Now doom and gloom has become downright fashionable. Heck, we see the National Geographic Channel debuted a show last night visiting survivalists in their bunkers… and here we are carrying on with business as usual in the “belly of the beast.”

With all that in mind, we daresay that declaring the mother of all financial bubbles might be passe. Don’t get us wrong: It’s still inevitable the bubble will pop.

But today we throw in the towel and make a concession: The monetary mandarins will successfully inflate the bubble a few months longer. And the peace we expect to break out once they’re defrocked of their power and prestige will have to wait for another day.

“The Federal Reserve Open Market Committee (FOMC) has made it official,” writes Daily Reckoning regular Charles Kadlec at Forbes: “After its latest two-day meeting, it announced its goal to devalue the dollar by 33% over the next 20 years.”

And that’s if everything goes according to the plan… based on the Fed’s now-formal target of 2% annual inflation.

Likewise, the Federal Reserve’s latest figures on consumer credit jumped in December — to an annualized 9.3% rate, on top of November’s 9.9%.

We’ve seen nothing like it in 10 years — not since the Fed poured gasoline on the fire first ignited by the tech bust in late 2001 made it possible for automakers to offer 0% financing.

Yes, student loans are a big part of the growth, as they’ve been for many months now. But auto loans are up big, and even credit card use is growing again.

The Wall Street Journal talks to a bank president in Colorado who says loan volume is up because more people now qualify and they’re willing to take on more debt.

The paper also profiled a couple in Pennsylvania financing a new SUV. “We had looked at our budget, and it was something we knew we were comfortable affording,” said Heather Davidson. They’re buying a 2012 Nissan Armada for $57,000.

Presumably they got every bell and whistle available, since the manufacturer’s suggested retail for the base model Armada is $40,275. But hey, why not splurge and trick the thing out? It’s easy payments of $650 a month for the next 72 months, the paper says.

Six years? Oy…

Addison Wiggin
for The Daily Reckoning

Of Fat Tails and Fashionable Gloom and Doom originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Here’s the skinny. The European Central Bank has made key concessions over its holdings of Greek government bonds that will contribute to a reduction of Greece’s debt burden. The ECB has agreed to exchange the Greek government bonds it purchased in the secondary market last year at a price below face value, provided the debt restructuring talks under way find a successful outcome.

The ECB won’t make a loss on the transaction, but it is not clear whether the bank will exchange the bonds at the below-par price at which it purchased them or whether it will make a profit.

I find this to be very interesting, as the ECB previously didn’t want any part of this trade. And once again, I point to the fact that I told you last month that there would some changes to the ECB’s stance and that some semblance of calm would come over the eurozone. Not that they are out of the woods by any stretch of the imagination. It’s just that calm now means that all the negativity gets drowned out, temporarily.

So the euro has stretched all the way to 1.3280 overnight. And the rest of the currencies are following the old Big Dog’s lead.

And gold really took off! The shiny metal gained back all it had lost the previous two days, as the flight to dollars and the so-called “safe haven” was reversed. I would really like to see gold have some real direction, though. It goes up $25 and then goes down $25. But I did look like the Mighty Oz yesterday when I said that that it could be a good move to buy some gold at the cheaper price.

I have a couple of things to go over this morning that just made my blood boil yesterday. If you’re not interested, skip ahead.

First, my blood pressure just began to tick higher and higher when I read “Congressional Earmarks Sometimes Used to Fund Projects Near Lawmakers’ Properties”.

And another.

And then this one regarding the Federal’s Reserve’s explicit goal, to devalue the dollar.

A friend of mine sent this to me and asked what I thought. I said, “It’s nice to see someone other than the Butlers, Rogers, Caseys, Gallands, Bonners and Wiggins telling people that this is happening and what it’s going to do the value and purchasing power of the dollar!”

Yesterday, Big Ben Bernanke told the Senate that Congress should focus for now on economic growth, rather than budget deficits. “Abrupt action to reduce the deficit in the next few months could seriously damage the recovery,” he said

Lawmakers are torn. The have the general public banging on their doors to cut deficit spending and they have the Fed chairman banging to promote growth. It’s like a devil on the lawmakers’ collective right shoulder and an angel on the left. Who will win? I bet you all know which one I would side with if I were a lawmaker, even if I didn’t get re-elected — because it’s the right thing to do.

I would tell Big Ben, “Look, buddy, you’ve cut rates to near zero and held them there for over two years and you tell us they’ll stay there for another two years. You’ve implemented two rounds of quantitative easing. The government has done “cash for clunkers,” tax rebates, stimulus and many other stupid pet tricks to promote growth. But as the two old ladies in the old hamburger commercial said, ‘Where’s the beef?’”

I would continue to tell him that I’ve decided to go another direction. I would find ways to cut the deficit burden and remove the shackles holding back small business.

But I’m not a lawmaker now. I was once an elected official of my little river town, an alderman. But then lost re-election by 1 vote! Then I found out that a lot of friends and acquaintances that would have supported my re-election didn’t vote, because they thought I would win easily. I decided then that lawmaking, even in a little river town, wasn’t my cup of tea.

The Chinese renminbi, (CNY) after seeing weeks of give and take in the value, finally pushed higher versus the dollar last night, to an 18-year high! Of course, the news regarding Greece had a lot to do with this move higher, but add to that that Chinese Vice President Xi Jinping is on his way to visit the US. When the Schumers and Grahams try to box Xi in a corner and badger him about China’s currency policy, Xi can simply point to the fact that the renminbi is at a 18-year high versus the dollar!

I have to mention the move that the Mexican peso (MXN) has been on for the past month. I’m not a fan of pesos, but they sure have gotten some wind in their sails with all the talk about the US economy recovering. That alone should make you want to back away from pesos, because if the US economic recovery is lacking terra firma, as I believe (as does the Fed, or else they would not be keeping rates near zero and laying the groundwork for more QE), the peso rally could be short-lived. But for now, it’s trading like it’s the new Pet Rock!

Another currency that has been very strong for some time now but looks to me to be very overvalued, the Japanese yen (JPY) is seeing some selling this morning on the news that the Ministry of Finance reported that Japan’s current account surplus for calendar year 2011 was the smallest since 1996. It’s still a surplus, but it’s dwindling away.

Yesterday, I told you about the Misery Index and how the US Misery Index had increased in 2011. A very astute reader mentioned to me that since I talk about John Williams and Shadowstats all the time, that instead of using the government numbers for the Misery Index, I would use the Shadowstats numbers. Very good point!

The US Misery Index goes from 11.30% per the government to 29% per Shadowstats. OUCH!

Remember a couple of weeks ago I told you about Byron King and his story about the US becoming energy independent? According to The Wall Street Journal:

“The US has reversed a decades-old trend of increasing dependence on foreign energy and is closer to complete energy self-sufficiency than it has been in nearly 20 years. Data from the Energy Department show that through the first 10 months of 2011, the US met 81% of its energy requirements from domestic sources.”

That’s great news! But then why is the price of oil still around $100? The cost to get the oil or natural gas out of the ground remains very high, and until those costs come down, if ever, the price of gas at the pump will remain high. In fact, I saw a story on HLN yesterday morning saying that gas would reach an average price of $4 a gallon by May.

To recap, the currencies and metals began to rally yesterday midmorning on rumors that the ECB was going to ease their stance on holding Greek debt. When those rumors proved to be true, the currencies and metals rallied even more strongly. Chinese renminbi reached an 18-year high versus the dollar last night, ahead of a visit to the US by the Chinese vice president. And the Japanese current account surplus is at the lowest level since 1996.

Chuck Butler
for The Daily Reckoning

Fed to Devalue Dollar by 33%? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

I think the currencies are well bid this morning, because most economists and analysts believe the US Jobs Jamboree this morning will be strong, thus fueling the global growth thoughts. So, the Jobs Jamboree is the 500 lb. elephant in the room, today, so we might as well go right to it!

January’s Jobs Jamboree is expected to show job creation of 140,000… You may recall that December’s trumped up figure was 200,000, but as I pointed out then, I’m sure a lot of that was seasonal part-time workers. So, while 140,000 isn’t going to give our economy a strong push, it’s better than what we saw all of last year. The Unemployment Rate will remain at 8.5% according to the Bureau of Labor Statistics (BLS)… Of course, long time readers know that I don’t believe anything that the BLS prints, and prefer to use the numbers that John Williams prints over at Shadow Stats, where he believes that unemployment is really around 23%…

The thing to really watch in this report, though, is the Average Hourly Earnings, and Average Weekly Hours… This is where wage inflation shows up before most people know what’s going on… I would bet that wage inflation is nowhere to be found in this report, and that’s the kind of thing that the Fed wants to hear, so they can point to deflation when they implement their next round of quantitative easing! OK… That’s just me forecasting that the Fed will do that, I don’t have any inside information of the Fed Heads’ thoughts… Just what I read…

So… The way the market has been dealing with the Jobs reports is that a strong report is bad for the dollar and vice versa… We’ll just have to wait-n-see, but the price action of the currencies this morning indicates to me that the markets will keep that strange perverted way of reacting to the Jobs Jamboree…

Yesterday, I found myself watching news headlines go across the screens throughout the day, and each time I looked up from what I was doing, a different headline would catch my eye. Here’s a snippet of the ones that caught my eye yesterday.

1. Bernanke urges Congress to put US fiscal policy on a sustainable path

2. Bernanke warns that the nation risks the possibility of a sudden financial crisis unless action is taken

3. Bernanke says discretionary spending cuts will not fill gap

4. Fed Chicago President Evans said the central bank needs a clear low-rate commitment or a third round of purchases of Treasuries and Mortgage bonds to further stimulate a still struggling economy.

5.  US debt balloons to $15,356,140,000,000

6. Weekly Initial Jobless Claims drop from 379,000 to 367,000 last week.

OK… Let’s address these and why they are important to the value of the dollar…

1. This isn’t anything new here, folks… Even Big Al Greenspan warned lawmakers of their addiction to deficit spending… What I do believe Bernanke was doing here though, was deflecting blame. The lawmakers wanted to chastise him for his low rate policy to 2014, and Bernanke was quick to deflect it to the lawmakers’ problems.

2. Again, Bernanke is deflecting… However, he’s absolutely correct here. But then he wouldn’t be if there hadn’t been deficit spending going on for a decade!

3. Yes, the discretionary spending cuts will not bring us back to a sustainable path, but at least they are a start! And if we continue to go along without any cuts at all, our debt will be around 140% of GDP in 2015… When we reach the point of no return, only the shadow knows, but without real spending cuts, we’ll get there faster than even “doom and gloomers” think…

4. This is simply laying more groundwork for QE3. And another round of QE will deep-six the dollar once again!

5. When you put down all the zeroes, and all the commas, and the numbers, it’s pretty daunting, don’t you think?

6. Long ago, I told you that eventually, companies run out of people to cut…that is without closing their doors, so eventually the 400,000 per week figures for new claims was bound to come down… But if you did it as a percentage of the working force, I would think the number would not look so good… As if 367,000 new claims last week was a “good number”…

OK… That was fun, eh? This morning, the euro is holding its own around 1.3160, and that’s in the face of a weak Eurozone Retail Sales for December, report that printed this morning.

I think that given the ongoing Greek saga, and this weak retail sales figure, the euro would be getting taken to the woodshed… However, that’s not happening, and there are two reasons that I believe outweigh the bad reasons… First and foremost… The euro is the offset currency to the dollar… If the lemmings aren’t flocking to the dollar for so-called safe haven reasons, the euro gets to add to its value… And second… The news coming out of China regarding the Eurozone is promising…

Chinese Premier Wen Jiabao, who has been meeting with German Chancellor, Angela Merkel, told Ms. Merkel, “China may be prepared to assist in resolving the Eurozone debt crisis.” The markets are fixated on the thought that “may” is a “will”… It remains to be seen if China does find a way to participate in helping the Eurozone… As I said yesterday, China will find a way, for they understand that they need to be the world’s financier, if they want to have the reserve currency of the world!

Gold and silver had very good price action yesterday, and are struggling to gain traction this morning ahead of the Jobs Jamboree… In keeping with my thoughts on the direction of gold… I saw this in the UK Telegraph… “Troy Asset Management began buying gold at $450 an ounce in 2005 and now has 16pc of its £60m Troy Spectrum fund invested in the precious metal. Troy’s co-manager Francis Brooke tells Robert Miller why he believes the value of gold will continue to rise. Gold will rise against heavily debased currencies.”

The Swiss National Bank (SNB) is going to have to show how strong their resolve is regarding the “floor” that was established for the euro/franc cross at 1.20… The cross currently stands at 1.2045… So, it’s getting close to the level that the SNB will have to do something or suffer the consequences of having the franc rise to bloated, overvalued levels once again. This will be “the test” for the SNB… It will be interesting to see how the SNB reacts now that former Governor Hildebrand is gone…

And there was a story that I read last night regarding the Chinese renminbi (CNY)… The Chief Executive of Fosun International Ltd., told reporters yesterday that he believes the “yuan (renminbi) will likely depreciate against both the US dollar, and the euro this year, especially before the Eurozone debt crisis is resolved.” He bases this thought on the “flight to safety of dollars that will occur this year due to the Eurozone problems”…

OK… This is the first thought I’ve seen on the renminbi that goes that way… But, being fair, I printed it even though I don’t believe in it…

Then there was this… From The Wall Street Journal…

After years of delay, Congress took a big step toward approving new rules to ban lawmakers from trading stocks based on information they pick up in the halls of Capitol Hill — a move aimed in part at helping repair the institution’s low approval ratings.

The US Senate was poised to pass legislation Thursday that would ban insider trading by lawmakers, after senators reached an agreement to vote on a series of 20 amendments to the bill. Brody Mullins has details on The News Hub.

The Senate voted overwhelmingly, 96-3, to pass the legislation, called the Stop Trading On Congressional Knowledge Act, or Stock Act. The bill now moves to the House, where Republican leaders said they would vote on it next week.

OK… Who are the low-lifes that voted against this? Just shows to go you that there’s always people who think they are above the law…

To recap… It’s a Jobs Jamboree Friday, and the markets are all expecting 140,000 new jobs created in January, not the stuff that strong economies are made of, nor what December produced, but still better than nothing! But if the markets like it, the currencies should be good today, after holding their gains yesterday… China’s premier is giving signs that he will allow China to participate in the Eurozone… And the SNB is going to have to show their resolve soon…

Chuck Butler
for The Daily Reckoning

Currencies Hold Ground Ahead of Jobs Jamboree originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

On Friday, I told you that the “experts” were forecasting 3% growth for the US economy in the fourth quarter of the year just passed… I told you that I did not expect this 3% growth rate to be sustainable into 2012… Then I was sitting at my desk, feeling very satisfied having just polished off some veggie pizza and salad, when I looked up and saw a news flash on one of the TV screens… NY Fed Head, Dudley, who’s always got some Aaron Neville in him, and tells it like it is, told reporters that the “fourth quarter economic boost was temporary growth and will not carry over.” He went on to say… “the US economy will probably slow this year while confronting risks skewed to the downside. It is unlikely that the faster growth experienced in the fourth quarter of 2011 will be matched in the first half of 2012.”

So… There! The legal beagles, who cringe every time I mention a Fed Head, in fear that I’ll say something I shouldn’t, won’t believe their eyes when they see that I commend Fed Head Dudley for telling it like it is!

Oh… And fourth quarter GDP didn’t print at 3% after all! It did muster a 2.8% growth rate, which isn’t shabby… But… A large portion of the increase was a 1.9% add to growth from inventory adjustment… Consumer spending grew 2% in the quarter… Funny, though, the Christmas sales were negligible at best, but consumer spending grew 2%… The big hit to GDP was government spending, which is about time! However, unless consumer spending really takes off, the absence of government spending is going to be a real drag on economic growth…

Not that I want to see government spending underpin economic growth… But, I find it curious that the government spending began to back off during an election year… Someone will notice that, and correct that, I’m sure!

So… When the US fourth quarter GDP printed on Friday, we saw the currencies rise and bring gold and silver along for the ride… The euro (EUR) printed above 1.32 on Friday, and the really interesting thing that caught my eye, was the fact that US stocks were getting sold like funnel cakes at a state fair, while the currencies were rallying! WOW! Could it be? Could we really begin to see a return to real fundamentals, and risk asset valuations based on those fundamentals and not just the stuff we’ve had to live with since 2008, which is simply throwing all risk assets in a barrel? Could it be? Well… As I always tell you, one swallow doesn’t’ make a summer… And so, one day of “the way it used to be” doesn’t turn things around for good… But I’ll be watching this, you can bet your sweet bippie!

Well, all that currency frothiness on Friday was wiped out last night, and in the morning session…The euro has led the currencies and metals lower on the heels of yet another disappointment from Greece. Greece was supposed to have reached an agreement with the private creditors yesterday, but once again it got postponed… But that’s not the biggest thing that happened this past weekend to deep six the euro…

Late Friday, The Financial Times (FT) leaked news of a German proposal to get tougher on Greece. They would do this by appointing an external ‘Budget Commissioner’ who would have an ultimate veto on Greek fiscal decisions. The proposal also suggests Greece should legally commit itself to servicing its debt before spending money on anything else.

Hmmm… Greek ministers fully rejected the idea. I don’t think that even the Greeks are ready to give up their sovereignty, which is what this German proposal would do… Apparently the proposal was supported by Austria and Finland… Another Hmmm…

Well… Anyway… We’re left with picking up the mess created by Germany with this proposal. And now the euro looks like it will have a difficult time holding on to the 1.31 handle, after being over 1-cent higher when I went home on Friday!

There WAS some good news from the Eurozone this morning, though… Italy sold 7.5 billion euros of debt, with borrowing costs falling… This makes two consecutive auctions for Italy that have seen decent interest, and with borrowing costs falling. I would doubt that their borrowing costs can fall much more, though… Unless, of course, things get better in the Eurozone.

Another European Summit begins today… And these summits hang over the euro and thus all the other currencies like the Sword of Damocles… So, as I look at the currency screens, this morning… The Canadian dollar/loonie which hugged parity with the green/peachback all day on Friday, is weaker, as are the Aussie and New Zealand dollars. And gold is down $17 this morning! UGH!

Last week I wrote to you about how maybe, just maybe the bond bears had come out of their hibernation, as bond yields in the US and Germany were moving higher… But, then along came the Fed… OK, I don’t know that the Fed was the real reason for the drop in the yield of the 10-year, but the “risk on” trade was on last week, thus eliminating the need for the so-called “safe haven Treasury market”… But, curiously, the yields dropped like a bad habit, moving from 2.06% to 1.85% in less than a week! So… The reason I say along came the Fed is simply that there are guys out there that track this stuff, and they say they can prove that the Fed’s balance sheet increases by huge amounts any time you see this drop in yields occur… And we all know that this isn’t the first time this has happened!

So… Do we really care if the Fed is indeed supporting the Treasury market? Somebody’s got to do it, if we want to keep rates low, right? And economists would tell you that they are simply taking up the slack left by the private market… And if that was all there was to it, that would be fine, for they would simply sell off the “slack” when the markets turned around… But, that’s not what has been going on… The Fed’s balance sheet just continues to balloon, larger, and larger…

When something like that goes on and on, the Treasury bond bubble… I’m reminded of what one of my economic mentors would always talk about… Hy Minsky, was his name, and it was his thought many years ago (this was the ’80s when I would talk to him), that a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. A Minsky moment is based on the idea that periods of speculation, if they last long enough, will eventually lead to crises; the longer speculation occurs the worse the crisis will be.

So… When the Treasury Bubble finally pops… Remember Hy Minsky… But more importantly, steer clear of Treasuries! That is unless you enjoy receiving tiny yields, and a potential bear market if you sell before maturity…

But, the popping of the bubble isn’t going to happen as long as the markets allow the Fed’s balance sheet to expand… So… Yields will remain low for an even longer period of time, which, according to Minsky, will only increase the severity of the crisis…

Oh… And a recent survey by the Fed indicates that the US economy faces a risk of deflation, not inflation…. Never mind that the cost of gasoline is up 10% from a year ago… And that Americans face sticker shock every time they go to buy groceries… And companies are having to deal with soaring commodity prices (remember the Hostess cupcake people?)… And tuitions, insurance, medical costs, and baseball tickets just keep getting more expensive… But our Fed Heads are all about deflation, folks…

The Chinese return from their week-long new year holiday last week… And they immediately marked the renminbi (CNY) weaker versus the dollar by a very large amount! Here’s something that’s going to really tick off US lawmakers… The renminbi, which reached a high on January 4th of 6.2920, has steadily fallen in value versus the dollar, falling to 6.3330 today… (Remember, renminbi is a European priced currency, which is opposite of what we normally think about prices) That’s about 2/3 of a percent… And while it’s not that big of a deal, the lawmakers will not like it…

Actually, I’m surprised by the move, because the dollar fell by quite a bit last week, even with the selloff overnight and this morning. So, to me, I would have thought the Chinese would play catch-up today… But not so… Oh well… Like I said, no biggie… Really…

The Brazilian real (BRL) has gotten back on the rally tracks, and without too much fanfare and chagrin of the Brazilian officials, who have done everything, including throwing the kitchen sink at Brazilian real strength. But, as I said all along… Brazil needs financing from outside of the country for their infrastructure projects for the upcoming Olympics and World Cup… So, Brazilian officials are sort of like the comedian that tells people to stop applauding but at the same time motions with his hand to keep the applause coming… They want to appear to the world as though they are turning away inflows of investment, while waving them in the back door…

Then there was this… There was a new release this weekend in New Zealand, which caught my eye… Reserve Bank of New Zealand (RBNZ) Governor Allan Bollard, announced that he will not seek another term as Governor when his current term ends in September, later this year… Bollard served 2-5yr terms as RBNZ Governor and I have to say that I was never a fan of him… He was the antithesis of what I believe a central bank leader should be, as he never missed a chance to deep-six his own currency, the kiwi (NZD)… I’ve always believed that if a central bank says enough times that they need a weaker currency, eventually the markets will get the hint and oblige them!

So… We get Bollard’s insistence to diss kiwi for eight more months!

To recap… After a wild and crazy rally in the currencies and metals on Friday, most of those gains have been wiped out overnight and this morning. We actually saw the currencies rally while stocks sold off after the somewhat disappointing fourth quarter GDP printed at 2.8%. Greece disappoints once again with no agreement with private creditors, and a new European Summit begins today. China returns from its weeklong New Year’s celebration and immediately weakens the renminbi… And Chuck talks about a Minsky Moment…

Chuck Butler
for The Daily Reckoning

Greece Disappoints Again! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

What I also found interesting on Friday was the price action of silver… I don’t know if you follow silver or not… I do — very closely, I might add! But silver was outperforming gold by a long shot, rising over $1 on the day, which you don’t normally see in the silver price action. My colleague Aaron yelled over the desk to ask me what was going on with silver, as he too watches it closely… I couldn’t really find anything out there, so the thought came to me very quickly that silver must be playing “catch-up”…

I don’t know if you follow this stuff or not, and I don’t really put that much emphasis on this, but from time to time, I come back to the gold/silver ratio… but what was once thought a real indicator for silver has to be pushed to the back of the closet these days, for the gold/silver ratio has spread out to over 50-1… That’s pretty crazy stuff… and doesn’t look right… So maybe, just maybe, silver was playing catch-up to gold, which had gained over $90 so far this year, and silver’s gains were negligible until Friday…

Both metals are up this morning, so we have that going for us, eh?

The Aussie dollar (AUD) touched $1.05 this morning and is spittin’ distance of the figure now. And lookie there, it’s back over $1.05! Just like that! I would say that the A$ is benefitting from a lower-than-expected PPI (wholesale inflation index) number… which indicates to me that the markets still have an appetite for rewarding currencies that have been debased to promote growth. If you’re an Aussie bondholder, this is what’s called the “golden scenario”… That’s when rates are being cut and the currency maintains its value or even increases in value. The bonds and currency rallying = the golden scenario…

When I was a foreign bond trader, I saw this happen only a few times… I saw it Germany in the mid ’90s, and in Australia and New Zealand around the same time… I haven’t traded foreign bonds since 1998 and don’t recall if there were other instances since then. But it’s happening now… the thing about the golden scenario is that it doesn’t last long…

The euro begins another week as the most-talked-about currency, with the U.S. dollar coming in second and the renminbi (CNY) placing third. The euro (EUR) is trading above 1.29 this morning, as it has range traded for over a week now, but around the 1.29 level, which is probably driving the analysts that have called for a collapse of the euro crazy… I’ve told you probably three or four times since the year began what I think the euro will do this year… so as to not beat a dead horse (no animals were hurt), I’ll go to what I really want to point out this morning about the euro…

In the past couple of weeks, we’ve seen the economic data from Germany to be better than forecast for them. We’ve seen the Italian and Spanish bond auctions go quite well, with more bonds sold than planned, and at lower yields! And money market rates have eased…

I talked about the beginnings of a stabilization here on Friday, and I just can’t help but think that this is just the beginning. Now, that doesn’t mean that everything we see from here on out from the eurozone is good… baby steps, wobble, go backward sometimes and even stumble… So… we have that to watch for.

Every winter, about 2,600 political, business and financial leaders meet in Davos, Switzerland, for a five-day boondoggle. There are always some very good sound bites from Davos, and this year will be no different. You’ll see the eurozone contingent continue their attempt to calm the markets, and then you’ll have the euro naysayers like George Soros doing his best to deep-six the euro…

Speaking of deep-sixing something… I can’t put enough emphasis on this, folks, but the Asian countries are removing dollars from their terms of trade. One by one, the Asian countries draw up new currency swap agreements that basically exchange the two countries’ currencies and remove dollars from the terms of the trade. This has long been one of the benefits of having the reserve currency of the world, for if two countries want to trade oil, they have to convert their currencies to dollars and settle the transaction in dollars.

This kept dollars in each country’s reserves by the truckloads… But first it was China alone signing swap agreements to remove dollars from the terms of trade. Then Russia joined in, and now India is jumping on the bandwagon. India and Iran have signed a currency swap agreement for oil…

Now… let me be clear here… I do NOT want to see this happening, for I live here and work here and use dollars for my gas, groceries and giggles. And… once I’m gone, my kids and grandkids will learn what it’s like to not have the reserve currency of the world… It’s a sad thing…

However, since I began writing in 1992, I have always made it a point to not let my love of country get in the way of telling it like it is… I was even called unpatriotic years ago… and that hurt!

But… at the same time, I warned and warned about the growing debt and people thought I was nuttier than a fruitcake. Well… when countries turn away from using your currency, I think it speaks volumes… So… how does that fruitcake taste these days?

Last Friday, we saw the latest existing home sales data, which was pretty strong… But here’s the thing I keep harping about… home prices… The national median sales price of existing homes fell 2.5% in December year on year. This is the 13th straight monthly decline in home prices. Foreclosures and short sales accounted for 32% of the total sales… So all in all, I would say the data were not good… one-third of the sales were forced by foreclosure, and the median home price fell 2.5%…

I don’t think home prices have found a bottom yet… One of the reasons I feel strongly about that is the fact that the “robo-signing” case that held up foreclosures in 2011 has been settled, which means foreclosures could really ramp up in 2012 and push prices downward.

The data cupboard is empty today and doesn’t really get restocked later this week… We will have an FOMC (Fed Reserve) meeting on Wednesday, but since the Fed told us that interest rates are going to remain at current levels until mid-2013, this is a little anti-climatic, eh?

OK… back to the currencies… I guess the Bank of Canada’s (BOC) bunker mentality is beginning to pay off for them, but I’m sure they didn’t really think that this would happen… The “this” I’m talking about is a larger-than-expected drop in consumer inflation. Canadian CPI fell 0.6% in December from the previous month, and the year-over-year rate stands at 2.3%… Still higher than the target rate of 2%, but moving in the right direction as far as the BOC is concerned…

The Canadian dollar/loonie (CAD) took the data and digesting it, moved lower… The loonie is attempting a rally this morning trying desperately to grab onto the coattails of the Aussie dollar.

Remember when I told you that we could see a “pop” in the Swiss franc should then Swiss National Bank (SNB) President Philipp Hildebrand resign, as the markets would want to test the resolve of the new president? Well… Let’s see… the franc has really been on a run in the past 10 days and has climbed back to a dollar price of $1.0750… After falling to a $1.04 handle… I think this is simply the markets testing the SNB, folks… nothing to hang one’s hat on for any extended period of time… leave this to the “traders”…

I mentioned at the top and then forgot to talk about it until now… But the Greek/private creditors meetings have stalled on a deadlock over the interest rates to be paid. People close to the meetings still believe that an agreement will be ironed out soon.

Did you see what the Bank of Canada’s Gov. Mark Carney had to say about the U.S. economy? You had better sit down for this… Mr. Carney said that the “U.S. economy might never recover.” He went on to say, “It will take many more years for the U.S. economy to get back on its feet, and it might never completely recover. In fact, they are not in our opinion ultimately going to get back fully to the U.S. we used to know.”

Then he made a statement that qualifies him as a recent addition to the “Mr. Obvious Club”… when he said, “If Canada is to grow, it must look beyond the U.S. for trading partners.”

Then there was this… my friend, and former colleague David Galland did it again this past weekend… He wrote something that made me want to pump my fist in the air and say “Yes!” I don’t have the room here to do him justice, but he wrote about the U.S. government meddling in the economy and in private business… If that’s the stuff that interests you, and I would hope it does… then click here and read the first part of the letter on government meddling: After clicking the link, click on “The Contrarian View of Argentina”… http://www.caseyresearch.com/

To recap… Currencies are in rally mode this morning, along with gold and silver. Silver outperformed gold big-time on Friday… just playing catch-up, I think. The ECOFIN meeting begins today, and Greece is still working with the private creditors on an agreement. The FOMC meeting this week is a nonevent. And the data cupboard is empty today.

Chuck Butler
for The Daily Reckoning

Home Prices Keep Falling originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

There they are on display: coins from all lands. Why are they worth more than the coins in your pocket? Because they are old? That’s part of it. There are some new coins here that are also just as valuable as the old ones.

What is critical is that they are made of gold and silver. You can pick them up and tell the difference. They are heavy. Stack them and let them fall on each other and they make a different sound from the coins that usually rattle around in your pocket.

It strikes everyone and anyone immediately. Somehow these coins are “real”; the coins we use today are not. But what does this really mean? And what does it imply?

The value of the coins amounts to far more than their marked value. Even dimes before a certain date sell for 10 and 15 times face value. The larger coins can be quite expensive.

What is real here is their substance, not the printing on the outside. This is the opposite of modern coins, the substance of which is completely irrelevant: All that matters is what is printed on the outside.

So the use of the term “real” here parallels how we use this term in any other context. Reality TV is said to provide the unvarnished truth about what people really do. We say someone should “get real” if we suspect that his thought or behavior is a mask or a blindfold obscuring a more-obvious truth.

So it is with coins. The new coins we use in transactions are not real. They are wearing a mask, a disguise, one put on by the state. More absurdly, the state tells us not to look at the reality, but rather to trust God that all is right with the money in the realm.

The old coins, in contrast, are precisely what they say they are and, therefore, have nothing to hide. There are no invocations that require a leap of faith. The truth is found on the scale and is told in ounces.

The gold ones are, of course, the ones you really want to hold. Their value reflects the metal content. Melt them, restamp them, make them into jewelry and they are still worth no less than the market value of the metal.

And who decides what the values of these old coins are? The coins might bear the likeness of a politician. They might bear the name of the nation-state. But these pictures and slogans are merely interlopers on the real point. What you hold is valuable not because some legislature, Treasury Department or central bank says it is valuable. Its worth was and is dictated by the market, which is to say, the choices and values of human beings. No government can add to or take away this value except by physically manipulating the coin itself.

Not only that. If you dig deep enough in the coin shop, you might run across coins that were not minted by governments at all, but by private manufacturers. In the early years of the Industrial Revolution, this was the way coins were made in Britain. Not by the Royal Mint, but by entrepreneurs no different from any other. George Selgin tells the whole story in his aptly named book, Good Money.

It turns out that making money is a business like any other, not something that only governments do. In a free world, it would be done entirely by private enterprise. The same is true of exchanging money. Some of the world’s first great fortunes were made this way, profiting from the buy/sell spreads in coinage markets. Today, the business is the same in some respects, and one can see the appeal of it all. Bless those who sustain it and believe in it.

So long as this good money is in your hands, it is your independent store of wealth. There are no taxes due, no withdrawals required, no forms to fill out. It is the physical embodiment of independence. It gives you freedom. It secures your rights. And because this coin is valued not by the nation-state, it rises above it and extends beyond it. Its value is recognized the world over, and not because the U.N. has proclaimed it, but rather because it is something everyone on the planet agrees on.

Geographic mobility is only part of it. Look at the dates on the older coins: 1910, 1872, 1830, 1810 and earlier and earlier. They are still beautiful because they are durable. Their value is not diminished over time, as with just about everything else we know about; rather, it increases over time. And by its very nature, gold protects your investment from the depredations of modern life.

How they inspire the imagination! What was the world like when such coins served as money? The economy wasn’t managed by some central authority. It managed itself from within, by the buying and selling decisions of economic agents themselves. The coins were selected by the market to serve as the facilitator of exchange, the things by which we were permitted to rise above the limits of barter.

They made possible calculation between goods and services that were as widely diverse as the whole of the human project, and reveal what was profitable and what was not. So these coins made it possible to organize the world’s resources into lines of production that served society in the most-efficient way.

And how did the politicians figure into this mix? When they got their hands on these coins, they could do terrible things. But it was rather difficult for them to get them. They had to demand that the citizens fork over the coins or else, which is to say, they had to tax people. You have to have a pretty good reason to do this. Or the lie you tell has to be pretty darn compelling. You can only tell fibs so many times before people catch on.

If this is the only money that circulates, the aspiring leviathan state faces a serious limit on its capacity to expand — a limit imposed by physical reality and the unwillingness of most people to give up something for nothing.

This is why every state is so anxious to see money substitutes circulate widely, preferably in the form of paper that can be made at will. If that same state can get banks to cooperate in creating more paper than can be redeemed by gold and silver coins, it can begin to habituate the population to the idea of a “fiat” currency, that is, money invented out of whole cloth.

Even better for the state is a system that completely separates “paper money” from its historical roots in good money. Then there are no limits at all to how much money it can make to fund itself and pay its friends, even if that means that money in general becomes ever less valuable.

And here we have the short history of how money came to be destroyed and how the modern world came to host the ghastly leviathans that dominate it. Here is the basis of destructive and unnecessary wars that last and last, the character-shredding welfare state and the swarms of bureaucrats who run our lives in every respect. It all comes down to the way money was destroyed.

You can tell from looking at the dates on coins that all of this happened surprisingly recently. The process began in the early 20th century with the cartelization of the banking system so that banks could loan money out of deposits they promised to pay on demand. The government’s own debts would be paid no matter what. This helped with the war — taxes don’t cut it when it comes to funding global war — so the financial system was encouraged to set aside its usual concerns over stability, since it was now guaranteed not to fail.

The process continued with the attack on gold during the New Deal under the influence of people like John Maynard Keynes, who believed that paper money would usher in a new utopia of a government-managed economy. So desperate was FDR to have people stop trading good money that he demanded it all be turned in; he said this was necessary to stop the Depression. Then the paper money revolution was furthered by people like Milton Friedman, who believed that a pure paper money would somehow bring about a stable price level — through a formula that may have looked good on paper but failed to account for the realities of politics.

In the end, we ended up on the other side of the great divide between freedom and tyranny, all symbolized by the contrast between the coins of the past and the coins of the present. It is reality versus fiat, independence versus dependence, value that lasts versus value that is the whim of the transitory political class.

You discover all of this when you walk into the coin shop.

Have a conversation with the proprietor, who tends to be of a type: perhaps a bit crusty, but highly knowledgeable and independent-minded. At his office, he lives amidst this history. He is surrounded by the truth about money that most people never discover. He is daily faced with the beauty of what once was, and perhaps, too, he imagines the possibility that it could be again. He is not usually the despairing type, either. He sees the difference between what is permanent and what is transitory. If you take the time, you can learn from him.

If you trade with him, you can enter into his world of knowledge and partake in the ancient truth about money, politics and civilization. Owning these coins helps grant some sense of independence to you, too. You will possess a store of wealth not subject to wild bubbles, state-manufactured inflations and political whims. It is a kind of privatized secession.

Is it any wonder that people who enter this world think differently from others? Their blinders are off. They see what is real and true. They no longer believe in the great modern lie that the state is our wise master, in whom we should trust our very lives. The owner of gold and silver coins is just a bit less attached to the state than others. And should a time of great crisis come and you look among the survivors, you can be pretty sure that pre-eminent among them will be those who love the coin shop as much as I do.

Regards,

Jeffrey Tucker,
for The Daily Reckoning

Joel’s Note: So what about the price of the metal in those coins then, eh? Up…down…neither?

There has been much ado about various predictions for the price of gold in 2012 that have recently appeared in these pages. “Flat for the year,” reckoned Bill just last week. “A buy, perhaps now more than every,” countered Eric Fry. “Gold stocks will have a great year,” added Chris Mayer, tossing his stock-picker’s hat into the ring.

What to think, Fellow Reckoner? Well, we’ve gathered some of the brightest minds in the business to discuss just that in a special webinar presentation to be aired at 11am this Thursday.

In short, our handful of experts reckon they’ve discovered a price anomaly that could deliver investors hefty profits even if the price of gold goes nowhere for the year. But, judging by a few charts we saw them forwarding around this morning, the opportunity to cash in on this anomaly may be closing even faster than they first expected. If you’d like to sit in on the webinar (it’s entirely free), please let us know here. And do so quickly…even virtual rooms get crowded.

A version of Jeffrey Tucker’s essay, above, appears in his excellent book, Bourbon for Breakfast: Living Outside the Statist Quo.

The Nearest Thing to a Permanent Thing originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

We gave you a hunch yesterday. The price of gold will probably go nowhere this year.

We have a feeling that 2012 is not going to be a great year for money you get from the ground. Oddly, it will probably be a better year for the money you get from trees.

How is that possible? We all know paper money is going to be worthless. Yes…dear reader…but not necessarily in 2012. It’s just part of the curious way Mr. Market does business…and a feature of his nasty habit of ruining as many investors as possible.

Look, it’s pretty simple. The private sector debt bubble blew up in 2008. The public sector debt bubble will blow up too. Maybe in 2012. Most likely not for a while longer. But when US debt begins to blow up, the feds will come in with everything they’ve got trying to stop it.

And all they’ve got is a printing press. Ben Bernanke:

…the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Positive inflation is the feds’ answer to a debt blow-up. They have no other answer… When bond buyers refuse to roll over US debt at reasonable rates, the Fed will use its printing press. The resulting “positive” inflation will blow up the world’s monetary system as well as government debt. Gold will be the about the only money left.

So, we should just buy gold…and avoid US dollar-denominated debt, right?

Hold on. Mr. Market doesn’t make it that easy. Our guess is that he’s going to lure trillions more dollars into the US debt market…and then blow the whole thing sky high.

Just look what happened last year. Bloomberg tells us that stocks worldwide lost 12% of their value. But bonds actually went up…about 6%. And there’s a good chance that the same thing could happen in 2012. Stocks down. Bonds up.

Stocks won’t be cheap until they are about half today’s prices. So they have a long way to go.

When stocks go down, investors will go into the US bond market looking for shelter. This will drive down yields and drive up prices. And bonds — judging from Japan’s example — can keep edging upward for a long time. Especially now that everyone thinks US debt is 100% safe.

And the worse things get, the more people want the safety of US Treasury debt. That was the lesson of 2011.

Like people buying houses in 2005…investors will buy bonds and think they are geniuses — for a while.

The feds are already running into the limits of their ability to borrow. Here’s the Bloomberg story:

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan’s $3 trillion and the US’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg. Ten-year bond yields will be higher by year-end for at least seven of the countries, forecasts show.

Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show. The International Monetary Fund cut its forecast for growth this year to 4 percent from a prior estimate of 4.5 percent as Europe’s debt crisis spreads, the US struggles to reduce a budget deficit exceeding $1 trillion and China’s property market cools.

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the US’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

Borrowing costs for G-7 nations will rise as much as 39 percent from 2011, based on forecasts of 10-year government bond yields by economists and strategists surveyed by Bloomberg in separate surveys. China’s 10-year yields may remain little changed, while India’s are projected to fall to 8.02 percent from 8.36 percent. The survey doesn’t include estimates for Russia and Brazil.

The world’s economic knees are beginning to buckle. Higher borrowing costs reduce the fiscal support governments can give to their economies. “Austerity” becomes less of a choice and more of a necessity. Europe is already in recession. America is probably not far behind.

The feds may have to turn to the printing press sooner than we thought.

***Who’s number one?

Depends on what you mean.

Who’s number one in steel production? China.

Who’s number one in mobile phones? Well…China again.

Who’s number one in manufacturing output? That would be China too.

How about car sales? China!

How about exports? China.

Patents granted? China.

Energy consumption? China

Fixed investment? China

The Economist:

The country that invented the compass, gunpowder and printing is also challenging America in the innovation stakes. We estimate that in 2011 more patents were granted to residents in China than in America. The quality of some Chinese patents may be dubious but they will surely improve. The World Economic Forum’s “World Competitiveness Report” ranks China 31st out of 142 countries on the quality of its maths and science education, well ahead of America’s 51st place. China’s external financial clout also beats America’s hands down. It has total net foreign assets of $2 trillion; America has net debts of $2.5 trillion.

Wait a minute, the US must be number one in something.

Yes, dear reader, we can hold our heads up high. We are still number one in zombies. When it comes to consuming, rather than producing…we’re in the lead. Out in front. We buy more and import more than anyone.

And we’re way ahead on the most zombie industry of all — the military. Heck, China won’t catch up with us on military spending until 2025, estimates The Economist.

Then what? What will happen when China spends more on its military than the US? Hmmm….

We’re not going to think about it. Too far in the future. Here at The Daily Reckoning we take it one day at a time. Day after day…we follow the news. Day after day, we try to make sense of it…we squint and try to see what is going on. And day by day, we think we see it more clearly. It is like the early morning. In the half light we can barely make out the shapes. A house in the distance could be a small hillock. A tree could be a cloud on the horizon. And what is that moving…?

Then, the light comes and the figures become more distinct…2012 comes into focus…

…and then it grows dark again.

Regards,

Bill Bonner
for The Daily Reckoning

When the Public Sector Debt Bubble Blows Up originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

I see from the Pfennig replies that most of you enjoyed my Christmas Pfennig this year… And in reading the Pfennigs supplied so eloquently by Chris and Mike while I was gone, I know coming in today that the currencies have been in a very tight range… Although I do see that the Aussie dollar (AUD) is much stronger today than it was when I left you.

I can tell you that I pretty much think we’ll see another repeat of what we’ve seen for the past few years in the currencies… And that is… Drum roll please… We start each year fresh, and with the freshness comes forecasts of grander things for the US economy, which the markets swallow, hook, line and sinker. That brings about dollar strength and all the claims from people who should know better that the dollar is ready to begin a multi-year rally… And then by the time major league baseball players move north to begin their seasons in April, the reality begins to set in…

And, the Christmas present the US lawmakers gave us this year was yet another $1.2 trillion increase in the debt ceiling… You know, I prefer the grinding of teeth, shaking of fists, and name calling that went along with the debt ceiling raise back in August of last year, to the increase that almost went unnoticed at the end of the year… Yes, I would rather the lawmakers at least fight for the increase!

Last week, I sent Mike a note regarding the agreement that China and Japan have entered into that will allow them to exchange each other’s currencies in trade, thus removing the US dollar from those terms of trade. I’ve written and talked at conferences about these currency agreements for a couple of years now… Japan was the 500 pound elephant in the room that China finally came to agreement with, thus closing the door on Asia… So, now probably about 90% of trade in Asia among each other is done without using dollars in the terms of trade…

Maybe I’m the only one that notices these things because I never see any other writers talking about the currency agreements… But then in 2001, I was the only one pointing to the exploding debt, which at that time was scary at $400 billion added a year… Now, people don’t even get excited about $1.4 trillion being added each year! Eventually these things come back to haunt anyone that does not pay attention to them… And while the commercial that claims a very bad thing was going to happen in 2011 to change the way we do everything, came to an end without it happening in 2011, it doesn’t mean it won’t happen eventually… Debt, as Europe has now learned, is a bad thing… When will we learn that lesson here in the US?

Not until that “something bad happens” that changes the way we do everything… And as long as the lawmakers, administration, Treasury and Fed, continue to kick the can down the road, everyone will think I have gone off the deep end, talking about how debt is going to kick us in the rear one of these days…

OK… Enough of that, Chuck! You don’t really believe that your dear readers want to get the “debt is a bad thing” on the first working day of 2012 do you? Ok… Sorry… But when I get started on that stuff, I can’t stop!

So… As I said above, the Aussie dollar has rebounded nicely since I left, and is up almost a full cent this morning. Another currency that has really taken some huge strides in appreciation since I left is the Chinese Renminbi (CNY)… I find this a bit strange because the “forward market” for renminbi is no longer speculating strong moves in the next year… You know, as I’ve explained before, but will go here again for all the newbies to the Pfennig….

In currencies that trade freely (well supposedly that is) the forward market price is simply the difference between the two countries’ interest rates and the number of days to the maturity of the forward… But with a “non-deliverable forward” like the Chinese renminbi (Indian rupee (INR) & Brazilian real (BRL)) the forward market price also includes “speculation”… So, when I say that the renminbi forward price is no longer seeing speculators drive the price higher… Well… That concerns me…

But, the markets have been so wrong about China from the get-go, that I think this reversal of speculation now, is simply them readjusting their pie-in-the-sky forecasts for the renminbi, and coming back to reality… Theses speculators might be changing their tune soon, after seeing the latest measurement of Chinese manufacturing that was printed this past weekend…

The December manufacturing Index (PMI) rose 49 points in November to 50.3… Remember, any number above 50 represents expansion…

I read a report on the Bloomie this morning that reported Fund Managers putting on trades that bet commodity prices will increase the most since August 2010 this year…. The Fund managers believe that there are signs that we will see sustained economic growth in 2012, and it will drive a rebound in raw materials…

While I believe that economic growth in Asia will be the thing in 2012, I’m not “buying” the sustained growth here in the US. I just don’t see where it comes from… As we saw with the final revision of third quarter GDP, Consumer Spending is flat at best… The boys and girls over at Macroeconomic Advisors are forecasting 2% growth in Consumer Spending in the first half of the year… 2% Consumer Spending growth isn’t going to sustain anything but our reliance on government spending to keep us out of an official recession…

Long time readers know that I believe the US economy to be in a depression, and therefore shake my head at those who say that the US economy left the recession a couple of years ago…

The Big Boss, Frank Trotter, sent me a PDF that highlights the countries that waded into currency markets in 2011… It was interesting, but all have been highlighted here in the Pfennig before, but the PDF had the amounts that each country spent intervening to keep their currencies weak… For instance… Brazil spent $50.1 billion in 2011… Japan spent $165 billion! The rest of the “currency interveners” includes: Mexico, Switzerland, Poland, Turkey, India, South Korea, and Indonesia…

I was given the book Currency Wars by James Rickards as a Christmas Present from a friend, and hoped to have read it during my winter break, but never got around to it… So, I’m sure it will highlight this stuff…

And the actual folding currency of the euro celebrated its 10-year anniversary on Jan 1st… Just a few years ago, the word “euro” was followed by the word “successful”… These days, the word “euro” is followed by the word “crisis”…

Speaking of the euro… I wouldn’t be surprised one iota if the euro (EUR) fell to around 1.18 this year… But then I also wouldn’t be surprised if it rallied to 1.40 either… It was the weight of the world on its shoulders, but the focus could easily shift to the US this year, like it did for a couple of months last summer…

Gold is rallying this morning, pushing its price higher by $25… So, all-in-all, it looks like there’s a better feel for risk assets this morning… But be careful, don’t read too much into the price action today, for the markets are still pretty thin…

Speaking of today, the US will print its own version of their manufacturing index (ISM) for December, and it is expected to have pushed higher… Along with the prices paid component of the index… I talk about this component from time to time, and it is important to follow it… For if the price component is rising, you can expect higher prices down the line…

Then there was this… OK… Many of you know my view of gold (and silver)… It has not changed, and if anything… The drop in the price of gold since last summer, only allows me to buy more at cheaper prices… Which I did! But, in the interest of being fair… Here’s a link to a 7-minute video of two guys talking about gold… I obviously do NOT agree with them, but thought I would show that gold has a two way market…

Visit msnbc.com for breaking news, world news, and news about the economy

To recap… Happy New Year! Risk assets are looking healthier this morning, but the markets are still pretty thin, so be careful today… China printed a stronger manufacturing index this past weekend, and that is the catalyst to the risk assets rally this morning. The physical euro celebrated its 10th birthday on Jan 1. And the forecasts for 2012 are looking and sounding very much like the ones we saw and heard the past few years, in January…

Chuck Butler
for The Daily Reckoning

China’s Manufacturing Index Rebounds originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The euro-feds have opened the valves…turned on the spigots…and let nearly a half trillion euros worth of liquidity flow directly into the very same banks that have proven they can’t be trusted with a penny.

But that’s how a zombie system works. The living give. The monsters get.

And since, at this stage of the credit cycle, the living don’t have much to give, the feds turn on the printing presses.

Then, from whom does the money come?

Gotta come from someone, no?

That’s right… When you borrow it, it comes from the people who lend it. When you tax it, it comes from the taxpayers. But whom does it come from when you just print it up?

Well, at first it appears to come from no one. Nobody reaches in his pocket and finds fewer dollars. Nobody’s pocket has been picked. But how could that be? Nothing comes from nothing. You add a zero to a zero and you still have a zero.

And yet, the zombie banks now have 489 billion more euros in their vaults. That’s what it said in yesterday’s Financial Times.

“Banks snap up 489 billion euros in ECB loan offer.”

This money certainly seems real. The banks can lend it. Spend it. Toss it out the window or down the drain. They can light cigars with it. They can use it to wrap gold coins before sending them out as Christmas presents.

Let’s see, we saw an ad. Mercedes Benz CL class 2011-2012 autos are selling, in round numbers, for $100,000. With this money, you could buy about 6 million of them. Which is probably more or less what will happen to the money.

But what concerns us today is not where it goes but where it came from. Did it come from space? From another galaxy? No? Then, isn’t all wealth on earth owned by someone? Yes? Then, it must have come from some humans somewhere on Earth.

But who?

Here’s an answer: Each unit of currency represents a claim on resources. Now, there are enough new units to claim 6 million new Mercedes. We infer that people who had claims on them previously have less of a claim now, because there are only so many new Mercedes available. And since those claims arose from the value of the currency they earned and saved, we further infer that the value of the new money must have been stolen out of the value of the old money. What else can you call it but theft? People who had euros previously now have less purchasing power (at least theoretically). They never agreed to let their money be clipped. They never even knew what was happening to them.

But since we’re in a Great Correction…and since Europe is entering a recession…and since recessions and corrections are basically deflationary (prices fall as demand eases)… the old currency holders aren’t likely to notice…or raise a stink about it.

It may be larceny, but it’s grand larceny. Heck, it’s great larceny. The perfect heist. The poor victims don’t even know they are victims. They have as much money in their pockets and bank accounts on Friday as they had on Monday. And if prices rise slightly, not one in a hundred will blame the ECB.

Meanwhile, over in the USA, the criminal gangs can’t seem to get organized.

Late yesterday came a report that a deal had been struck to extend the payroll tax by 2 months. But a bigger problem is coming up. Just wait ’til next year. Here’s Bloomberg with a full report:

Payroll Tax Tiff Times 25 Awaits Congress in ‘Utter Dysfunction’

Dec. 22 (Bloomberg) — The brinksmanship in Congress over a payroll tax-cut extension may end up looking like a quaint disagreement by next December, when lawmakers must grapple with a fiscal policy debate at least 25 times more costly.

Unless Congress acts by the end of 2012, income tax cuts will expire, automatic reductions in defense and domestic spending will start and the alternative minimum tax will ensnare millions more taxpayers. The same Congress that can’t find a way to extend the widely supported payroll tax cut beyond Dec. 31 will be seeking to bridge long-held ideological differences.

“The prospects are bleak,” said Leonard Burman, a former Treasury Department official who teaches public affairs at Syracuse University in New York. “I’ve never seen such a high level of dysfunction in the 25 years or so that I’ve been paying attention to government.”

The year-end 2012 series of deadlines on tax and spending policy stems from Congress’s tendency to push problems into the future with temporary solutions. This year alone, lawmakers have flirted with a federal government shutdown three times, almost defaulted on the US debt for the first time in history and allowed aviation taxes to lapse for two weeks.

Trillions at Stake

The $4 trillion in expiring tax cuts and $1.2 trillion in potential spending cuts dwarf the $200 billion at stake in the current fight over the payroll tax cut and other provisions, including expanded unemployment insurance. Those items, if extended for another year, would expire at the end of 2012.

Bill Bonner
for The Daily Reckoning

The Perfect Heist: Why Government Theft Continues to Go Unnoticed originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Initial jobless claims were 24K lower than expected last week, with 366K first time claims. Continuing claims increased slightly to 3603K versus last week’s adjusted 3599K, but the number was still lower than economists expected. Another big surprise came in the form of the Net Long-term TIC Flows which were expected to be $62.5 billion, just slightly lower than last month’s $68.3 billion. But the actual amount of International Capital coming into the US in October was just $4.8 billion! Demand for US debt fell in October as investors moved out of their ‘safe havens’, selling US Treasuries. But November brought renewed worries regarding the European debt crisis, so most economists believe the TIC data will be back up near $70 billion next month.

Capacity Utilization, which is one of our favorite indicators of future growth, came in right where it was expected: unchanged at 77.8%. The Industrial Production data was the sole piece of data which was negative, dropping 0.2% in November versus October’s 0.7% increase. But this was the last piece of data released yesterday, and the markets basically ignored it, focusing instead on the weekly jobless claims which for once showed a move in the right direction. The weekly numbers weren’t outstanding, but the equity markets are desperately looking for something to spark a ‘Santa Claus’ rally, so the pundits jumped all over the 19,000 fall in the number of applications for unemployment payments. It wasn’t as if we had more people going to work, but instead the stock jockeys are getting excited because the rate of firings is slowing down. But the markets were desperate for any good news, and jumped all over the better-than-expected weekly jobs numbers.

Chuck was busy trading for the last time in 2011 yesterday, but still took some time to analyze all of the numbers as the plethora of US data releases came across the Bloomberg. He sent me the following to include in this morning’s Pfennig; so here’s Chuck:

OK… Chris mentioned that Capacity Utilization fell 0.2%, from 78 to 77.8… I told the boys and girls on the desk that Capacity Utilization (Cap U) is one of the few forward-looking pieces of data, and when Cap U begins to bog down, it tells me that the economy is bogging down. We might not see it in other stuff for a couple of months, but we can see it right here, right now… And for the current stuff, Industrial Production decreased 0.2% in November… Yes, October’s number was strong (0.7%)… But you have to remember that in October, the economy was still breathing on the $2.1 trillion in stimulus that the Fed has put into the economy the past three years… And probably proved once again that a star burns brightest right before it burns out!

The number of hours worked is falling… And to me… The wheels are beginning to come off the economy again… And like Steve McCroskey in Airplane… The economy picked a bad time to have the wheels come off of it! This IS going to be an election year… Good luck with that!

Well… The TIC’s data gave us some interesting news yesterday. According to the US Treasury, China bought less Treasury debt (Treasuries) in October and their total foreign holdings of Treasuries dipped for the first time since July. China, the largest foreign holder of US Treasuries (remember our own Fed is the largest holder of our debt) bought 1.2% less in October to bring their total holdings to $1.13 trillion. Could this be a signal? Probably not, as we also saw declines in July and August, only to be reversed in September. But… This eventually is going to happen, folks. China will say no mas. And all hell will break loose. Are you ready for that to happen?

Remember years ago, in the fall, during Bonanza, Chevy would introduce their new lineup of cars? And they used to play that song… See the USA in a Chevrolet… OK… For people my age and older, that song is now in your head… Now use these words to that music…

Here we go again, deficit spend again, it’s the only thing our lawmakers know how to do…

Congressional negotiators signed off Thursday evening on a sweeping $1 trillion spending agreement for federal agencies, just 28 hours before a deadline that would have led to a government shutdown. Boy… Aren’t we lucky to have these guys working for us? Where else could you find lawmakers that were so willing to deficit spend to make our lives easier? Ahem… Did I hear someone say… Greece?

Thanks as always to Chuck for his thought provoking contribution to this morning’s Pfennig.

The dollar started falling after the data releases yesterday morning, and continued in overnight trading. Currency investors moved out of the ‘shelter’ of US dollar holdings and went hunting for yield. Those currencies with the greatest interest rate differentials were the leaders yesterday, with the New Zealand dollar (NZD), Aussie dollar (AUD), and Brazilian real (BRL) leading the way. Brazil’s real moved up over 1% versus the US dollar as the central bank said it will lend dollars to help exporters, adding to the supply of the US currency. The central bank will do ‘repos’ to add US liquidity to the markets, and pulling Brazilian reals out.

The Swiss franc (CHF) joined in the rally with the ‘high yielders’ after the Swiss National Bank stayed on the sidelines. Currency traders were expecting another move by the SNB to weaken the currency, but after they refrained from intervention, it gave traders a green light for further appreciation of the franc. The SNB kept the franc’s minimum exchange rate at 1.2 per euro and also maintained its benchmark rate at zero.

The euro rallied from an 11-month low against the dollar after Spain’s debt auction met with more buyers than supply. Spain sold more bonds than its maximum target at rates which were high, but still within expectations. The Spanish government was able to sell 6.03 billion euros of bonds compared with a maximum target of 3.5 billion euros. The yields were 5.545%, just slightly higher than the 5.433% it paid when it auctioned 10-year bonds at the end of October. Another report showed that European manufacturing and service industries contracted less this month than economists forecast.

One of the surprise moves by currencies on the day came from the Indian rupee (INR) which had been one of the worst performing currencies in Asia this year. The big move up in the rupee came after India’s central bank curbed trading in rupee forwards and Prime Minister Manmohan Singh pledged to open up the retail industry. The central bank said it would reduce the amount of open positions dealers can maintain overnight, helping to prevent speculators from pushing the currency lower.

Then there was this… Peter Mason sent me the same link to a story from our friends over at Casey Research regarding ‘Re-hypothecation’ which is the newest buzzword surrounding the fall of MF Global. This story does an excellent job of explaining what this word actually means, and clearing up some of the confusion regarding the competing claims for gold held at HSBC for customers and/or counterparties of MF Global.

Thanks to Peter for bringing this article to my attention. Peter joined EverBank last year as a member of our Infinity Elite Plus group, and has really been a great addition to our customer service team.

To recap… The bunch of data released yesterday in the US was not stellar, but the markets were looking for a reason to rally. Investors went hunting for yield and the NZD, AUD, and BRL all rallied. The Swiss National Bank stayed on the sidelines and allowed some appreciation for the CHF. The Indian government curbed forward trading, helping to bounce the rupee back up. And our friends over at Casey Research explain why ‘Re-hypothecation’ is the new buzzword.

Chris Gaffney
for The Daily Reckoning

Weekly Jobs Data is Positive, Pushing the Dollar Lower originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.