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.

But are gold buyers making a big mistake? Is history repeating itself? The New York Times suggests it is:

As it was in 1980, could it be again in 2012?

The 1980 presidential election was fought by a Democratic incumbent weakened by a poor economy amid worries that the United States had lost its ability to compete in the world. Gold prices had risen to unprecedented levels as the election approached, and the Republican nominee hinted he might propose a return to a gold standard.

That Republican, Ronald Reagan, won the election and soon appointed a commission to study the role of gold in monetary systems. To gold bugs, it appeared to be the best chance in decades to move the country toward gold and away from what they like to call “fiat money,” a currency anchored by nothing more than government dictates.

Last month, Newt Gingrich, seeking to widen his support in the days leading up to the South Carolina primary, promised that he would appoint a new gold commission. “Part of our approach ought to be to re-establish something Ronald Reagan did in 1981 and that is to have a commission on gold to look at the whole concept of how do we get back to hard money,” he said in a speech.

No, dear reader, history is not repeating itself. The NYT is wrong…about everything. Well, almost everything. It understands that gold is a threat to its big advertisers…and most of its readers (who don’t own any gold). It is also a threat to most economists — who have built their careers on not understanding how a real economy actually works…and whose income and whose professional status now depend on a gold-free, centrally-planned economy.

So, to prove that gold is a ‘barbarous relic’ and that gold bugs walk on four legs, they merely put the question to economists.

The University of Chicago last month asked a panel of 40 economists, including former advisers to both Democratic and Republican presidents, if they agreed that “price-stability and employment outcomes would be better for the average American” if the dollar’s value were tied to gold. Every one of them disagreed, some with more than a little incredulity that such a question was worthy of discussion.

“Why tie to gold?” asked [the very witty] Richard Thaler, a University of Chicago professor. “Why not 1982 Bordeaux?”

“Eesh,” responded Austan Goolsbee, a Chicago colleague and former adviser to President Obama. “Has it come to this?”

The Times goes on to report that “even economists with some sympathy to gold opposed the idea” of a gold-backed dollar. And Mr. Ben Bernanke, former professor of economics at Princeton, says he doesn’t think gold is money.

Oh yeah, replied Congressman Ron Paul, then why do central banks hold gold…and not things such as ’82 Bordeaux or diamonds?

Mr. Bernanke replied that it was just a matter of “tradition.”

Yes, he’s right…it is a matter of tradition, like marriage…like property rights…like government…like murder…like teenagers who moon adults out of car windows…or like drivers who give each other the finger.

Traditions become traditions because people keep doing them. And they keep doing them for reasons that aren’t likely to go away. Times change. Conditions change. Human nature doesn’t.

But let us go back to the New York Times’ silly notion that we are about to relive the period following ’80. What seems to have triggered the idea was Newt Gingrich’s proposal to study the idea of going back on the gold standard. Every right thinking person in the country — the Times implies — knows the idea is foolish. And the price of the yellow metal is sure to fall, as it did after the Reagan election, when people realize how foolish it is.

But gold didn’t fall after ’80 because the Reagan administration didn’t put it back in the monetary system. It fell because Paul Volcker made it unnecessary. Instead of printing money, Volcker tightened up…taking out some of the money that was already there. And he did it under conditions that were not merely unlike those of today…but almost the exact opposite.

Then, the US was still a creditor to the rest of the world, not a debtor.

Then, the US was still running positive trade balances, not losing money every month.

Then, US stocks were at bargain levels…selling for 5 to 8 times earnings; today, they’re twice as expensive.

Then, US bonds were cheap too…with yields for US Treasury debt as high as 18%, or nearly SIX TIMES as high as today’s long bonds.

Then, US households had debt of only 60% or 70% of their disposable income, not 120% like today.

Then, the Fed was determined to stifle inflation; now it is determined to cause it.

Then, the federal government’s debt was less than 40% of GDP. Now, it’s over 100%.

Then, even in today’s inflation adjusted terms, the US government ran a deficit of $197 billion. Today, the deficit is $1.1 trillion.

Then, stocks had been going down for the previous 14 years; bonds had been going down for at least 31 years. Now, stocks and bonds have been going up, generally, for the last 30 years.

This final point is now just a detail. It’s the heart of the matter. With bonds at a 30-year low, Paul Volcker could squeeze inflation…begin a 3-decade period of rising bonds (with falling interest rates)…and an 18-year bust in the gold market.

Will that happen again? Impossible!

What kind of strange history would it be if it could repeat itself…from totally different initial conditions? Could Napoleon march on Moscow…if he had started out in Chicago rather than Paris? Could Liz Taylor have married Richard Burton twice if she’d died in a traffic accident after her first marriage?

Can gold now repeat its path of ’80-’98, even though today’s situation is almost the opposite in every way?

No, dear reader, history doesn’t repeat itself. It just stutters out the same truths, over and over. G..g..g..g..gold is m…m…m…money. It says.

The N..N…New Y…Y…Y…York Times is full of s..s..s..s…

…error!

Who knows what the future will give us? We don’t. Not here at The Daily Reckoning…

…but we see what could be a bad moon rising. No, we’re not talking about a Great Correction…or even a Depression. Who really cares if GDP goes up or down? You can go broke with honor…with a sense of humor…and with grace and dignity. You can happily go broke.

But you can’t go to Hell with grace and dignity.

In the following article, the FBI notes that 18 people a year have been convicted, mostly of ‘white collar crimes.’ You wouldn’t think this would call for comment. But the FBI says these people are “extremists” who believe they have a right to protect themselves from what they see as an overbearing government. The G-men tell us that these extremists can turn violent “at the drop of a hat.”

How long before they’re rounded up? And maybe they’ll round up “potential domestic terrorists” too, even those who have never committed any crime? And what about gold bugs? They may look harmless, but they give aid and comfort to dangerous elements, don’t they?

Here is the FBI preparing the public for a trip to Hell.

(Reuters) — Anti-government extremists opposed to taxes and regulations pose a growing threat to local law enforcement officers in the United States, the FBI warned on Monday.

These extremists, sometimes known as “sovereign citizens,” believe they can live outside any type of government authority, FBI agents said at a news conference.

The extremists may refuse to pay taxes, defy government environmental regulations and believe the United States went bankrupt by going off the gold standard.

Routine encounters with police can turn violent “at the drop of a hat,” said Stuart McArthur, deputy assistant director in the FBI’s counterterrorism division.

“We thought it was important to increase the visibility of the threat with state and local law enforcement,” he said.

In May 2010, two West Memphis, Arkansas, police officers were shot and killed in an argument that developed after they pulled over a “sovereign citizen” in traffic.

Last year, an extremist in Texas opened fire on a police officer during a traffic stop. The officer was not hit.

Legal convictions of such extremists, mostly for white-collar crimes such as fraud, have increased from 10 in 2009 to 18 each in 2010 and 2011, FBI agents said.

“We are being inundated right now with requests for training from state and local law enforcement on sovereign-related matters,” said Casey Carty, an FBI supervisory special agent.

FBI agents said they do not have a tally of people who consider themselves “sovereign citizens.”

J.J. MacNab, a former tax and insurance expert who is an analyst covering the sovereign movement, has estimated that it has about 100,000 members.

Sovereign members often express particular outrage at tax collection, putting Internal Revenue Service employees at risk.

Regards,

Bill Bonner
for The Daily Reckoning

Why Gold is Money Despite Changing Conditions 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.

Well… Speaking of things that probably aren’t safe to do… Jumping on the government’s “strong data bandwagon” probably qualifies… But that’s not stopping the lemmings — or as my friend, Bill Bonner, calls these people the “sheeples” — from jumping on the bandwagon… That’s why I back off and say, “something smells strange here”… And so I begin to dig into the numbers…

Now, let me first tell you that the current government/administration isn’t the first one to cook the books in an election year, so, I’m not just picking on the current administration. I’ve always maintained that the books were cooked, and get extra burnt during an election year. Yes, wouldn’t you do the same thing? Get reelected is the call to order, and there’s no better way to do that, than to show the sheeples how much better they are today than four years or whenever ago…

You know this is all leading to the major story from Friday… The Jobs Jamboree… Where the Bureau of Labor Statistics, (BLS) told us that 243,000 net jobs were created in January, and that the Unemployment Rate fell to 8.3% from 8.5%… OK… Maybe, just maybe, the net jobs are close to being correct… The thing that the government doesn’t tell us is that the employment to population ratio isn’t keeping up with the unemployment rate.

And, the unemployment rate is a joke… I’ve gone over this so many times in the past, so, here’s the Reader’s Digest version of this explanation… As people give up looking for work, they are no longer counted as “unemployed”… Well… In January 1.2 million people dropped out of the labor force… Yes, that’s right, in one month, 1.2 million people dropped out of the labor force, so… The unemployment rate drops… And this will continue to occur the rest of this year, folks… So, now you know!

Look… I’m not saying this report wasn’t a good sign for jobs… All I’m saying is that we shouldn’t be holding any ticker-tape parades for the labor picture in this country…

So… Why am I all in a fuss about this, today? Well… To watch the reaction to the jobs data was like watching everyone rush out to buy a Milli-Vanilli record… Boy are they going to be really disappointed when they find out it was all a sham…

OK… So, on Friday, the sheeples ran to stocks, and bought them like they were funnel cakes at a state fair. Bonds got whacked, but that’s fine with me, because they should get whacked… But currencies, save for the true commodity currencies of Australia (AUD) and New Zealand (NZD), got whacked… But the real trip to the woodshed was for gold (& silver)… And that hasn’t stopped this morning, as gold has lost over $50 of its price since the Jobs Jamboree on Friday!

However, having blinders on right now is probably not a very safe thing to do… And stocks look pretty shaky when you consider that profit margins are circling the bowl, having suffered their biggest quarter-to-quarter drop in the 4th QTR of 2011, since the financial meltdown in 2008… I’m not a stock jockey, so I’ll just leave that at that…

The Aussie dollar pushed the envelope very close to $1.08 on Friday, and the New Zealand dollar/kiwi, traded through 0.83-cents… But, those lofty figures from Friday have been wiped out this morning. The Aussie dollar saw their latest retail spending data weaken, which is probably that last nail in the coffin as far as whether the Reserve Bank of Australia (RBA) will cut rates tomorrow or not… At this point, I would say, why not? Everyone else is cutting rates to promote growth, and it doesn’t hurt their currency…

OK… For new readers… I’m not into countries that debase their respective currencies… But, the markets have turned to a “promote growth at all costs” mentality… So we have to play along… Yes, the “plays along with others” is important in our grades!

I do believe that after this weak retail spending data in Australia, and the price action since, that the rate cut has now been priced in… So, sell on the rumor, buy on the fact is probably in play here.

Look how long I’ve gone this morning without a mention of the euro (EUR)! Not that I was saving the best for last! Another week has gone by without an agreement in Greece with private creditors… And now this past weekend, the Trokia (which is a slang term for the three organizations that have the most power in Greece. And consists of: The European Commission, The IMF, and the European Central Bank (ECB) saw their plans for new austerity measures in Greece rejected by Greek party leaders… So, this is all unraveling very quickly, folks… The Greeks can’t come to an agreement with private creditors, nor can they agree with the Trokia…

Things are pretty dire in Greece… And yet the euro remains above 1.30… Doesn’t that give you any indication of what the markets think of dollars right now? Not that it will always remain that way… Remember, when the year began, I told you that I wouldn’t be surprised to see the euro fall to 1.18, or rise to 1.40…

I would also remind you that I tell you all the time that when picking currencies to own, you want to find countries with sound fundamentals, good fiscal positions, something that the rest of the world wants, or has ties to China…

Friday, we also heard St. Louis, Fed Head, James Bullard, say that the Jobs Jamboree probably removes the need for additional quantitative easing (QE)… Of course he called it “bond buying” as QE is now a dirty word, in Fed Head circles…

OK… One of my chartist friends (whom I’ve talked about before), Scot Pluschau, sent me a note on Friday about how the volume indicators are screaming bearish in the Dollar Index… Here’s a snippet from his post:

“As for this week’s Commitments of Traders Report in the Dollar Index, the Commercials got to bang the register a little liquidating 9,703 short contracts that they were piling on near the highs. As of this report they are short 47,734 contracts and long 3,302, which is greater than a fourteen to one NET short position. This is still a very bearish structure of the COT report as far as I’m concerned.”

Then there was this… Did you see what David Stockman, the former Budget Director under Ronald Reagan, had to say last week regarding Big Ben Bernanke’s testimony before lawmakers? Well… Stockman was full of you-know-what and vinegar, when asked about Bernanke, and he let loose… Remember this is David Stockman talking, not me! (For the legal beagles.)

Bernanke giving politicians advice about fiscal stability is “about as useful as an arsonist’s lecture on fire prevention. His radical zero interest rate policy has destroyed the bond market, crushed the yield curve and eviscerated any resolve to address the deficit on Capitol Hill.”

He went on to say this about the debt… “Basically, they’re going to be facing down a $7 trillion decision and it’s going to hit [the] economy like a ton of bricks if you let the everything expire. And if you don’t you’re going to be borrowing $1 trillion a year and wondering how long Bernanke can keep printing the money. It’s a giant trap that’s been created.”

But when the government can cook the books and print a strong jobs report, everyone takes their eyes off the ball… We need to remain focused on the ball!

To recap… The Jobs Jamboree had the stock jockeys planning a ticker tape parade on Friday… 243,000 net jobs were created in January, with the Unemployment Rate falling to 8.3%… Chuck digs deeper into these numbers and shows that the ticker tape parade should be saved for the NY Giants! Looks like the RBA will cut rates tonight (tomorrow for them) but maybe the rate cut is already priced in. And Greece seems to be unraveling quickly here, folks…

Chuck Butler
for The Daily Reckoning

Jobs Data Sends Currencies and Gold 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.

What is most interesting is the movement in the price of gold. It seems to be heading up again — almost no matter what else is happening.

So, let’s look at what might be going on…

If investors sensed a recovery…they would expect banks to lend more freely…people to shop more freely…and prices to rise.

This would raise consumer prices; the price of gold should go up.

But if the market sees growth and inflation ahead, why is oil slipping? And why is the Baltic Dry Index — which measures shipping prices — at a 25-year low? And how come last month’s employment figures were disappointing? And why aren’t stock market prices going up?

Most important, if the economy is really recovering, why is the 10-year note yielding only 1.82%? And what about the long bond? Shouldn’t it be trading at a yield higher than 3%?

And how come house prices fell over the last year…and the last month?

And how come incomes are falling?

Or, to look at it from the opposite point of view, how is it possible for a real recovery to take root in the hard, barren soil of falling house prices and slipping consumer earnings?

But if the economy is not improving…then there should be no increase in inflation…and no pressure on the price of gold, right?

Maybe investors don’t anticipate a recovery at all. Maybe they’re buying gold because they see the economy getting worse, not better. We associate a rise in the price of gold with inflation. But gold is much more versatile than we think. It protects your wealth when paper money loses its value. It also protects your wealth when paper money gains in value. It protects you when you are right…and when you are wrong.

How so?

During the Great Depression, for example, the price of gold rose…against dollars…even though the prices of food, clothing and other consumer items…as well as the prices of investment assets…were falling in dollar terms. Why? Because money gains value — relative to things — in a depression. Gold is money. It is the best money. It is the only money that has stood the test of time.

Besides, there is more going on. In a financial crisis…or a depression…investors begin to doubt that their counterparties will make good. Banks fail. Investors go broke. You own a mortgage, and then you discover that the homeowner has left town…and the house has lost half its value. You own a note, and then you discover than the payer is bankrupt; your note is worthless. You own shares in a company; and then the company goes out of business.

When you are in a de-leveraging phase, you discover that many of the assets of the previous credit bubble are not assets at all. And while you’re waiting to find out, the best thing to have in your safe is gold.

As uncertainty rises; so does the price of gold.

The price of gold also rises when the return on other assets declines. At 1.82%, the real return on a 10-year T-note is negative. Consumer prices are rising faster. So, the reward for lending to the government is less than zero.

Normally, holding gold costs you money. You give up the return you could get from ‘risk free’ investments (Treasury debt). Now, you give up the risk from reward-free investments.

Gold goes nowhere. It produces no yield. It pays no dividends. It makes no profits. You can’t live in it. You can’t drive it. You can’t hang it on your wall and admire it.

But when the return on Treasury debt is negative, what do you give up by owning gold? You give up a loss!

You also give up the risk of a much bigger loss. The Fed is bound and determined to bring up the inflation rate. Ben Bernanke has suggested that he might set the inflation target higher than 2%. He has announced that he will keep the Fed’s key lending rate near zero for the next 3 years. He has hinted that he is ready to print more money — QEIII — if conditions warrant.

Holding gold protects you from Bernanke’s success. For if he succeeds in raising the rate of inflation, gold will surely soar. And there is substantial risk — bordering on certainty — that he will be no better at creating moderately more inflation than he has been at creating moderately more GDP growth.

It is quite possible that he will overshoot.

Normally, inflation is a feature of the banking system. The system takes the Fed’s monetary grubstake and parleys it into the nation’s money supply. Banks magnify the money supply by lending…and thereby create more demand, which raises prices. They do this by making loans…to people who then spend the money.

This sort of inflation is controllable, by raising interest rates and tightening banking credit rules. But there’s another form of inflation. The kind that starts with an “h.”

Hyperinflation happens when the banking system breaks down. People lose faith in the money itself…and the people who control it. Foreign dollar holders may worry that the Fed is printing too much money. It may even be good economic news that causes them distress; they may anticipate higher inflation rates, and a sell-off of the dollar, which would lower the value of their dollar reserves. They may figure that they are better off diversifying into yuan…or gold.

Then, when other investors and householders see the dollar falling…they get panicky too. Pretty soon, people are digging around in drawers, bank accounts and mattresses…looking for dollars — just so they can get rid of them.

That is when dollars hit the hyperinflationary fan. Our old friend Michael Checkan tells what it was like in Argentina in the late ’80s:

“Imagine a $2.00 gallon of milk spiking to $775.40 within a year — like in Argentina, 1988.”

Bill Bonner
for The Daily Reckoning

Buying Gold in Uncertain Times 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 drove back into town on Sunday night. People moped around in front of bars. Groups walked uptown from the stadium, their shoulders down, the chins dragging. The city was dark…and unhappy.

There was no joy in Baltimore on Sunday night. Baltimore is a sports town. The Ravens — the only team we know named after a poem — had lost. They would not be going to the Super Bowl.

Baltimore is a funny place. We were happy to leave it for 15 years when we lived in Europe. And we are happy to be back. Living in Europe was hard. Here it is easy. Living in Europe was chic and fashionable. Here, moving to a trailer park would be moving up in the world. Living in Europe was expensive. Baltimore, meanwhile, is one of the cheapest cities in the world.

But we’ll come back to Baltimore in a minute…

What’s in the news today? The Dow rose 83 points yesterday. The 30-year, ‘long’ bond yield dropped below 3%. The price of gold rose to $1,749.

Bond yields signal a recession. Stocks hint at a recovery… Gold? The correction in the gold market didn’t go nearly as far as we expected. And now it’s over. What to make of it? Do people expect inflation? Why are they buying gold?

We know why the Syrians are buying gold. There’s a war on. Gold has always been the thing to own in a war zone. But here, people think the economy is recovering.

The public and the investoriat seem to think all is well. We’ve just had one of our best months in stock market history. Many investors are convinced that it is the beginning of something big.

Our old friend Mark Hulbert, for example, tells us that some of the oldest and wisest of the newsletter gurus are now bullish on stocks.

We don’t have any opinion about stocks. We just don’t like them. And we figure that if they were as valuable as people think, the owners wouldn’t be in such a hurry to unload them. At least, not to us. Instead, they’d hold on.

But some people are always selling. Others always seem to be buying. Prices go up…and down…the world goes ’round and ’round…

…and who are we to argue with it?

The trouble is, the economy is not nearly as strong as most people think. There is no growth to speak of. And without growth, it doesn’t make sense to pay so much for stocks. Forbes:

The Q4 2011 GDP reading of +2.8% produced what may appear to be a respectable headline number, a full percentage point above Q3 GDP growth of 1.8%. On the surface, the Q4 report also compared favorably to an increase in real GDP of 1.7% for all of 2011. But 2.8%, even at first look, is still softer than the 3.0% gain in real GDP logged for 2010, repeating a pattern that we’ve seen over the past few years: GDP rises, only to drop off again.

Although it may be tempting to look at the economy as a glass that’s half full, I’m afraid it’s far emptier than it looks. Diving into the Q4 GDP report, we see that two-thirds of the amount of growth reported (1.9%) was due to private inventory build-up. (According to standard accounting practice, growth in inventory increases GDP, while sales of inventory reduces it.) Drilling further, the stat that is most meaningful is the real final sales of domestic product — GDP minus the change in private inventories. This data point eked out only a 0.8% increase in Q4 2011, compared with an increase of 3.2% in Q3 2011. That is very telling.

Another weakness in consumer spending was reported by the Commerce Department: Personal income grew by 0.5% in December, up from a 0.1% rise in November. Spending was flat, however. The personal saving rate, meanwhile, was 4.0% in December, compared to 3.5% in November. Saving instead of spending may be good for consumers’ personal balances sheets, but it doesn’t do much good for an economy that needs to gain traction. Additionally, sales increases still appear to be driven by increases in debt which is not sustainable.

Without growth, the average stock will go nowhere. How could it? There’s nowhere to go. No growth means that the economy is no larger at the end of the year than it was at the beginning. So, for any company to grow, it would have to take sales and profits from some other company. For one to grow another must shrink. Overall, there would be no growth, and no capital gains for investors.

Trouble is the dividend yield of the stock market is only around 2%. That’s not enough. Take inflation and taxes into account, says our Family Office strategist, Rob Marstrand, and you need more than an 8% return just to break even.

So, if you’re buying stocks in a no-growth market…with a 2% dividend yield…you’re losing 6% on your money.

Heck, you’re much better off buying gold…or property in Baltimore.

Gold has been up every year for the last 11. Even last year, when it supposedly suffered a big correction, it still ended the year up about $300 — which is what you would have paid for a whole ounce of gold in 1999.

As for Baltimore real estate…

We’ve been looking at apartment buildings in B’more. This city is unusual, so you probably shouldn’t generalize. But we’re seeing buildings with “cap rates” of 10% and more…and return on cash as high as 20%. Interest rates are so low you can finance much of the purchase price at low cost…and leverage your investment to get a higher return.

How does that work? Well, the building we just looked at had 5 units. The sales agent explained it to us.

“You get gross rents of about $100,000 and you can buy the building for $800,000. You put down $100,000 and borrow the other $700,000. Then, you pay off your mortgage, pay the upkeep, property taxes, utilities and so forth… You also have to pay management…leave an allowance for vacancies and major repairs…and you end up with about $20,000.

“That’s your return on cash. Not bad, huh?”

Well, it’s about 10 times what you can expect from the stock market.

Trouble is…trouble. Being a landlord in an inner city is trouble. You get trouble from the tenants. Trouble from the city. Trouble from the pipes, the roof, the wires…lead…asbestos — everything. Buy city apartment buildings and you are asking for trouble.

But if you can handle the trouble, hey…see you in Charm City.

Bill Bonner
for The Daily Reckoning

Investment Alternatives in a No-Growth Market 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’s talk of a halo effect from the pending IPO of Facebook, which could file the paperwork as early as today.

Oy… Talk about “riding on a smile and a shoeshine,” to borrow from Death of a Salesman.

“You have 500 million people,” we wrote 13 months ago, the last time we deemed Facebook worthy of our attention, “playing Farmville and Mafia Wars and telling the world how wasted they got last night… but what makes them worth an average $100 in market value?

That was based on a presumed market cap of $50 billion.

We pose the same question today… only now, with 800 million users, and a presumed market cap that’s doubled to $100 billion, that “value” has grown to $125.

“The $10 billion IPO alone,” writes our Greg Guenthner, “easily places Facebook among the largest offerings of all time — and the biggest U.S. internet IPO by leaps and bounds.

“For some perspective, Google’s 2004 IPO netted the search engine (and now-Facebook rival) what now seems like a paltry $1.2 billion.”

For further perspective, consider the biggest U.S. company by market cap is Apple — valued at $425 billion, according to the latest figures from FactSet. Number two is Exxon Mobil at $403 billion.

Apple produces computers, phones — tangible stuff. Exxon Mobil produces oil, natural gas — tangible stuff.

Facebook produces… eyeballs to deliver to advertisers.

And coming out of the gate it will be valued at nearly 25% of the nation’s biggest companies with decades, if not a century, of track record.

The giddy reaction makes us long for some of the most tangible stuff of all this morning. And we’re evidently not alone…

The owner of the world’s 16th largest gold reserve has finished up the process of repatriating its overseas holdings. The final shipment of Venezuela’s gold bars arrived at the Caracas airport Monday.

Its transport to the central bank was the occasion for a motorcade broadcast on state TV. “In two months, we’ve brought 160 tons of gold valued at around $9 billion back to Venezuela,” said central bank chief Nelson Merentes.

President Hugo Chavez ordered the operation last August, cleaning out its vaults at the Bank of England and J.P. Morgan Chase, among others, as a precaution against turmoil in the financial markets. “The repatriation of our gold was an act of financial prudence and sovereignty,” Merentes said.

Meanwhile, the owner of the world’s 8th largest reserve is beefing up its holdings.

Iran’s gold reserves now total 907 metric tons, according to a Tehran Times report citing Yahya Ale-Eshagh, who heads the Tehran Chamber of Commerce, Industries and Mines.

The average purchase price, he says: $600 an ounce. At current prices, Iran’s gold is just under 10% of its total foreign exchange reserves.

“We don’t have any shortage of foreign currency or gold to meet the local demand,” Mr. Ale-Eshagh said. Music to the ears of President Ahmadinejad, we presume…

They might be idiots, but they’re no fools…

Ordinary Chinese couldn’t get enough gold for the Lunar New Year. Sales volume at Beijing’s biggest gold markets — Caibai and Guohua — totaled $95.3 million.

That’s nearly 50% more than the year before, according to the Beijing Municipal Commission of Commerce.

We were at Caibai last May. The place was mobbed… early on a Tuesday morning.

And now? “You can hardly even see the gold bars, necklaces and pendants in the display case,” said one shopper looking for gold bracelets for his granddaughter. “You have to quickly decide whether to make a purchase, or it will be taken away by others,” he told China Daily.

They’re no fools either…

“Gold is no longer owned only by a privileged few,” according to Caibai assistant manager Guan Qiang, “ but has become a new investment channel open to all.”

In fairness, some Americans seem to recognize gold’s value: In fact, it’s flying out the door of the U.S. Mint.

The Mint sold 127,000 ounces of Gold Eagles in January. That’s the highest monthly total in a year… although no doubt sales were goosed by the availability of fractional sizes, which ran out at the end of last year.

Silver Eagle sales totaled 6,107,000 — the second-highest month on record after January 2011.

Heck, even Pimco chief Bill Gross is coming around to gold. “Recent central bank behavior, including that of the U.S. Fed,” he writes in his latest monthly missive, “provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside.”

“Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”

Welcome to the club, Bill.

Addison Wiggin
for The Daily Reckoning

Gold in the Face of Facebook 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.

After watching time and time again, the overseas markets take the dollar to the woodshed, and then when the New York traders come in, the price action all gets reversed. I thought to myself, “Self, doesn’t it look like New York traders have orders from the top of the house to make sure the dollar doesn’t fall off a cliff? Why, yes, self, it does look like that!” Now let’s get back to reality…

Here’s an illustration that shows us just how dumb the markets are these days… Yes, I know they’re always right… but in all my days as a currency analyst, trader and writer, what happened yesterday would have never happened before 2008…

First of all — for one of the few times recently — consumer confidence surprised the experts who thought it would rise by a large margin, by falling by a large margin! I don’t want these things to happen… I just want what’s the correct reaction to happen… And given what the Fed Heads had to say, real unemployment at 23% and home prices still falling, consumer confidence should fall… and, finally, it did! But what happened afterward is just not right!

Pre-2008, a weak consumer confidence report would have sent the dollar to the woodshed, and currencies and metals onto the rally tracks… But not any longer, it seems… That bad stuff in the U.S. (except quantitative easing) sends the markets to dollars… stranger than fiction… but it is what it is, and we have to deal with it!

The dollar rallies on a day when the Congressional Budget Office (CBO) issued a report in which they forecast the U.S. budget deficit to be greater than $1 trillion — for the fourth consecutive year — in 2012. Now, isn’t that special, as the Church Lady on SNL would say! As most of you know, and all new readers are about to find out… The budget deficit at the end of the year is what is added to our national debt.

Now, I know a lot of economists — and people that I think should know better — seem to think that this growing national debt is no problem… That superpowers are allowed to grow such debts without recourse, because of their status as a superpower… Hmmm… Of course, they have no proof that this will have no bad recourse, while the proof of empires that got over their heads in debt, go back so far, with so many instances, that you would have to be wearing blinders to not see what’s ahead for the U.S. and the dollar!

But that’s just me. I’m no Harvard grad. I’m not an economist. I’m just your friendly neighborhood realist that understands that the depreciating dollar has been like a tax to U.S. citizens, as the purchasing power has been chopped off at the knees. That rising debt will have to be dealt with by either raising taxes to the hilltops or allowing a depreciating dollar, thus inflating away the debt. Or both! And spending cuts… No, in contrast to what Angela Merkel believes, the debt cannot be “austerity measured” away. But some exercise in spending cuts does shorten the work that the increased taxes and inflating dollar value have to do.

And there will come a day when the U.S. abuses the ability to run up debts because of it being a superpower. Look, I’m a proud American, and this is not what I want to see happen, but this is the cruise ship we’ve embarked on… we have no power to stop the cruise ship from its destiny with an iceberg, we can only make sure we have on our life jackets, and the shortest route to the lifeboats… Which means nondollar investments, along with gold, silver and other commodities…

OK… a lecture from your friendly neighborhood realist this morning… Not what you wanted first thing this morning, I know. I apologize, but when I have something on my mind, my fat fingers begin to type away, and the next thing I know, I’m halfway through the letter and haven’t told you a thing about the markets this morning! UGH!

Well, another morning of currency and metals strength… let’s see if their strength can hold up to the New York traders. The things that have the currencies all lathered up this morning center around two manufacturing reports… one from China, the other from Germany. First, China saw their manufacturing index rise again, marking two consecutive months of increase in the index.

China printed a 50.5 level for the manufacturing index called PMI — this is an increase of 0.2 from December’s 50.3 reading. So once again, the Chinese economy continues to make those that called for a collapse over two years ago go hide and hope no one remembers what they said!

And Germany… Germany’s PMI manufacturing index rose to 51 in January from 50.9 in December. For those of you new to class, these manufacturing indexes use a number of 50 as the line in the sand between contraction and expansion for the manufacturing sector. So any number above 50 represents expansion…

So it was with China and Germany overnight. This good sign from both reports has put wind in the sails of the currencies, and metals this morning. The biggest beneficiary of the Chinese data is Australia. The Aussie dollar (AUD) is back to climbing toward $1.07.

I know that the prime minister has nothing to do with the currency’s value, and monetary policy. But I found it interesting that Australian Prime Minister Julia Gillard to reports last night that the Aussie dollar will likely stay “relatively high for years to come.” I’m sure that comment won’t make the exporters of Australia happy.

Australia is not of the caliber regarding manufacturing as China and Germany, but the Aussies also printed a stronger-than-expected PMI manufacturing index last night. The Aussie rise was stronger than those in China and Germany, printing at 51.6 in January versus 50.2 in December. I think it’s important for lawmakers and kings, presidents and other dictators to take notice here, that even though the A$ is very strong, not only has their manufacturing also remained strong, but their trade balance has turned to surplus!

It can be done. But you need to have the “stuff” that other countries want and need. Raw Materials in Australia, keep the wind in their sails.

The Chinese and German data also have gold and silver moving higher this morning. You see, if China and Germany are still pumping out the manufacturing, the global growth isn’t fading away, and with global growth comes inflation.

Remember about a month ago, I gave you some great info on the trading pattern of gold and silver and how they for the past 10 years (except 2008) had booked their lows in January. This year will have been no different, as gold is off to its best start of a year since 1980! 127,000 ounces of American Eagle gold coins were purchased from the U.S. Mint in January, the most in a year. Hey! There’s a reference to last Jan.! I guess that data and info I gave you came in handy, eh?

So it’s not just the global growth thing pushing gold higher. The eurozone debt debacle continues to fuel gold’s run to higher ground.

Moving over to silver, my colleague here, Aaron Stevenson, sent me an article on silver yesterday that was pretty interesting. The writer gave all the reasons why he believed that there was about to be a paradigm shift in silver. I can say that I didn’t disagree with his thoughts. He believes silver is going to break out to the upside, and I agree!

So here’s the definition of a paradigm shift: a radical change in underlying beliefs or theory.

Here’s a snippet of the article: “The coming paradigm shift in silver will not happen due to technical analysis, fundamentals or supply and demand forces, but rather due to a change in mass psychology of investors. Even though fundamentals and supply-demand forces will play a part in this shift, they will not be the ultimate cause. I believe technical analysis as it is used today only charts the amount of manipulation and mass psychology in the silver market.”

The U.S. data cupboard will print its own PMI manufacturing report for January today, and it too is expected to be stronger than December’s print. And in a pre-game look at the jobs jamboree that will print this Friday, the ADP employment change for January will print today, along with vehicle sales and construction spending.

Then there was this, from The Washington Post:

“Data released Tuesday showed that seasonally adjusted housing prices have reached a post-bubble low, as the minor surge that began in 2009 fizzled, to be followed by the almost continuous slide of the past 18 months.

“The housing bust, in other words, appears to be even worse than it was at the nadir of the recession.

“For millions of homeowners, that’s an unsettling reality, and potentially an issue in the presidential campaign. But the damage may be far more widespread.

“By making people less wealthy, according to economists, the decline in home values inhibits consumer spending and hampers the nation’s stop-and-start economic recovery.”

I was just going over my presentation for the Orlando MoneyShow next week and there’s something there that plays well with this. In 2004, I began to notice that housing in my small river town was not selling as quickly as in the past, and it occurred to me then that we were in a housing bubble. I began to write about then, and people thought I was crazier than a loon. We all know what happened a few years later. But the next thing was that in 2009, I said that home prices would lose another 10%. And once again, people thought I was crazy. Who’s crazy now?

To recap, the currency rally yesterday morning was wiped out as U.S. consumer confidence hit the skids in January. The currencies are back on the rally tracks this morning, as both Germany and China printed stronger-than-expected manufacturing data. Australia too, printed strong manufacturing data. Gold and silver are stronger on those reports and the continuing debt debacle saga of the eurozone. And a guy believes that silver is about to take off to the moon!

Chuck Butler
for The Daily Reckoning

Manufacturing Growth Continues 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.

No, Greece didn’t come to an agreement with private creditors. But the eurozone leaders did agree to accelerate the setup of a full-time 500-billion euro (EUR) rescue fund, and adopt the German-inspired deficit control treaty… This helped the euro rise…

Then there was this ditty, a simple twist of words that confused the markets into thinking something that was not assured… Greek Prime Minister Papademos said he “seeks” to reach a conclusion on talks with the troika in concert with the final agreement with private creditors “before the end of the week.” I saw it written that the markets obviously confused the meaning of “seeks” for “expects.” But the markets are never wrong, right? So this helped the euro rise, too…

And then finally, in keeping with the recent trend in Germany for stronger than expected data prints, German unemployment fell 34,000 in January (-10,000 was expected). This brings the German unemployment rate to its lowest level since the series began in 1992! WOW!

The eurozone unemployment is not so good, though… but that plays along with the whole story of Germany’s data versus the eurozone as a whole…

So the euro is back to 1.32 this morning, which means the Canadian dollar/loonie (CAD) is hugging parity to the dollar once again, and rhe Nordic currencies of Norway, Sweden and Denmark are all stronger this morning as well.

Gold has gained back the $11 it lost yesterday before the turnaround, with a $10 gain so far this morning. Commodities as a whole are stronger on the eurozone info… Everything from cocoa to precious metals has green numbers beside their values this morning… And we all know that having commodities on the rally tracks is good for the commodity currencies: Australia, New Zealand, Canada, South Africa, Brazil, Norway and a few others…

I see German Chancellor Angela Merkel is going to be visiting China… I do believe that she will be going to assure the Chinese that Germany is strong, and hope to get more commitment from the Chinese regarding bond buying. She might get somewhere, as long as she doesn’t do a Tim Geithner, and chastise the Chinese for their currency policy…

Speaking of China’s currency policy, I told you yesterday that the Chinese came back from holiday and immediately marked the renminbi (CNY) down versus the dollar. The renminbi was set to post its worst monthly loss in 18 years, before a turnaround last night. Following the Sunday night weakening of the renminbi, the Chinese allowed the renminbi to gain Monday night…

I can tell you what the Chinese were doing during most of January, folks… They were doing the same thing they did in 2008, when the financial meltdown hit the global markets… They sat on the renminbi and waited for the coast to clear before getting back to currency appreciation… Same thing here… The eurozone debacle was teetering on causing another global financial meltdown, so the Chinese just sat on their currency. But the news last night from the eurozone was better, so the renminbi gained in value, thus heading off the title of worst trading month ever!

The latest manufacturing index report will print tonight for China, and that report will be gone over with a fine-toothed comb, as investors and traders want confirmation that China’s economy is simply moderating and not collapsing… You know where I stand on that, and have stood for over two years now… I’m still here, and so is the Chinese economy!

While I’m talking about China, I might as well talk about one of my fave currencies, the Singapore dollar (SGD). There’s hardly ever news from Singapore, so I have to search through all kinds of articles to find a snippet on Singapore. We can call Singapore the best-kept secret. What I found this morning was mention of the S$ closing in on its 200-day moving average. Now, that’s something! Especially since the 200-day moving average was 1.2541 and the S$ flew right through it this morning, and is now 1.2510.

Here’s the thing that happened to the S$ last September when it reached 1.20 and change: It got ahead of the renminbi’s advance against the U.S. dollar. These two normally move in tandem. You can tell that by looking at their gains versus the dollar since July 2005, when the renminbi broke the peg to the dollar. Their gains are right on top of each other, around 28%.

So watch the S$. If the renminbi gets back on daily appreciation, then the S$ will move freely along with the renminbi. If the renminbi halts appreciation for some reason, the S$ will too. For, you see, these two countries are in competition for exports.

Speaking of China, there’s one more thing this morning. The World Trade Organization (WTO) ruled against China, and said that China must eliminate taxes and quotas on the export of nine industrial materials. This is a real blow to China, for now that the West has the WTO’s attention, I believe they will go for China’s throat and challenge other natural resources, including rare earth metals. (Remember last year when China halted rare earth metals to Japan?)

And India, the country that I took the woodshed for not addressing their rising inflation in time to prevent a currency sell-off, is seeing their move to reduce reserve ratios that I talked about last week come to the aid of the rupee (INR). The rupee has been on a tear since the announcement last week. It’s good to see, for this currency had gotten beaten badly around the head and shoulders.

The U.S. data cupboard sees some action today, with the S&P/Case-Shiller home price index for November. Home prices are expected to decrease at the smallest rate in some time but still decrease. We’ll also see the Chicago Purchasing Managers Index (manufacturing). And the consumer confidence hogwash, consumer confidence, is expected to rise by a large amount in January. As usual, we begin the year with lofty expectations of what the year has in store for us, only to see that drift away as the year moves along. The people surveyed for this confidence report must not have heard the Fed Reserve lower their forecasts for 2012 economic growth, or lay the groundwork for more quantitative easing.

Then there was this: Speaking of the Fed and their lowering their economic forecasts for 2012, I saw that The Economist had a note about the Fed leaving rates near zero could end up competing with Japan for record length. The Economist also had this to say about the Fed laying the groundwork for more quantitative easing: “Unemployment, now 8.5%, is seen edging below 8% only by the end of 2013. Inflation, meanwhile, will be at or below the new target of 2%. With unemployment too high and inflation still weak, more monetary stimulus is easily justified. Mr. Bernanke left the door open to that option. The odds are that he will walk through it.”

To recap, the currency/metals rally that got stalled out Monday morning regained its legs and got back on the rally tracks last night and this morning. The eurozone came to an agreement on the size (500 billion euros) of a permanent rescue fund and adopted the German-inspired deficit control treaty. Greece is still negotiating. The news from the eurozone was enough to get the markets feeling comfy-cozy with a rally for the risk assets. Commodities are all stronger, and gold gained back its loss from yesterday. A lot of data to sift through today. The final piece of data will be consumer confidence, and it is expected to be quite strong. Strange, I know.

Chuck Butler
for The Daily Reckoning

Currencies Rally on Eurozone Agreement 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 currency guys are optimistic too, for they are willing to keep the euro above 1.31 at this point… Here’s the skinny on the whole process: Greece must repay 14.5 billion euros of bonds in March, and unless all bondholders agree to receive a haircut, a default could happen, and then default insurance contracts begin to get kicked in and things get pretty ugly from there…

So… a haircut it is… that’s fancy talk for “losses”… But since I haven’t been to someone that cuts hair in over 10 years, I find it strange. I know in my heart of hearts that Greece is going to default, sooner or later… But… if the actual default can wait for more stabilization to happen in the eurozone, then the foundation might be strong enough to withstand a default. The center is strong, but needs to get stronger. A default now would be ugly for all of us!

I know, people are going to send me notes to ask me where my “If they can’t make it, let them go bankrupt” thought that I had in 2008 go? I’m not saying bail them out anymore… and I’m not saying that the government should sell their soul to the devil… I’m just saying give it more time before defaulting…

OK… As I said above, the currency guys are allowing the euro to remain above 1.31 this morning on the Greek news… Yesterday, we saw the euro rise to 1.3160, and then fall right back down to below 1.31… But this morning, as I said, it’s back to above 1.31…

With the euro hitting all the green lights this morning, the rest of the currencies can too, and lookie there… one of my fave currencies, the Canadian dollar/loonie (CAD), is back to parity this morning! With the Fed announcing that they are keeping rates near zero for an even longer period than first announced, currencies that have even the slightest rate differential in their favor versus the dollar have really taken off to higher ground.

I just noticed that the Swiss franc/euro cross was 1.2075… That’s getting quite close to the floor level the Swiss National Bank (SNB) put in place a couple of months ago. So the “new guy” at the SNB will earn his stripes right out of the starting blocks, if he defends the 1.20 cross rate ceiling… I told you that when Philipp Hildebrand resigned there would be a pop in francs as the markets test the resolve of Hildebrand’s replacement. So all that’s happened as the franc has risen from $1.04 to $1.09… And more importantly for the SNB, the cross has risen from 1.23 to 1.20 (European-style pricing) I expect the SNB to do “something”… not sure what, but they will attempt to defend the 1.20 cross… Good luck with that SNB!

Well… commodities, and not just gold and silver, liked the sounds coming from the FOMC meeting the other day… Commodities like copper, cocoa, soybeans, sugar, cotton, cattle and lean hogs have all gained nicely since Wednesday… Just to be clear here, it wasn’t just the fact that the Fed pushed zero rates out longer. It was the Fed rhetoric that was laying the groundwork for another round of quantitative easing (QE). All ingredients to soaring inflation in the future, so investors are buying commodities now, ahead of the rush to buy them in the future… It’s the guy and the snow tires story again!

A day after Reserve Bank of New Zealand (RBNZ) Gov. Alan Bollard did his “I’ve got to say something to weaken the currency” dance, the kiwi (NZD) got a nice boost when it received a surprise: New Zealand announced last night that they had posted their first trade surplus in five months… The trade surplus for December was $278 million… Hey! It’s not China-like, but it’s better than a sharp stick in the eye. I can’t say that anymore. It’s better than the average bear!

It’s been a tough row to hoe for the kiwis as they try to recover from two earthquakes last year. But recent reports have shown some nice growth in the economy, and even Bollard, who makes a habit of talking bad about the kiwi currency, saw his RBNZ issue a report saying that the RBNZ should see a “gradual lift in activity in 2012, consistent with demolition and repairs to housing and infrastructure getting under way,” with full reconstruction to come in 2013.

I bet it just killed Bollard to have to say that! He’s known to be quite hard on the Beaver…

OK… a quick trip over the Tasman to New Zealand’s kissin’ cousin. Here in Australia, exports of raw materials and gold continue to keep the economy strong. Speaking of gold, I was reading yesterday about jewelry demand, which is the primary driver of gold demand. Yes, believe it or don’t. I was reading about this jewelry demand and how 55% of global gold jewelry demand comes from China and India.

Gold bars are a close second to jewelry demand… And again, the Asian buyers are the leaders of the pack when it comes to hoarding gold bars… I think that sometimes it pays to step back from the forest so you can see the trees.

I bet you thought how’s he going to tie this together? Here in the U.S., most people, not Pfennig readers, of course, don’t understand the bad things that come from printing money. We’re too close. But in Asia, they are away from the trees and see perfectly what’s going on. And when the U.S. begins to feel the warp speed of inflation, the rest of the world will too, and the Asians have decided to buy their snow tires now…

OK… today, the data cupboard here in the U.S. will give us a first look at fourth-quarter GDP, which will see a couple of revisions before it is finally recorded. The “experts” believe that the U.S. economy grew at 3% in the fourth quarter. And yes, for a brief time there in the fourth quarter, things did begin to look better. But think about this now and remember it later: The economy was still feeling its oats from all the pumping up that Hans and Franz did… So in other words… it was pumped up by money supply, but now things are beginning to show some signs of weakening again… If the Fed didn’t think that, they certainly wouldn’t have stayed longer with lower rates and would discuss more QE…

While 3% is a good number, it won’t be sustainable going forward into 2012. However, a 3% print today would be good for the global growth campers, and that would certainly fuel some inflation fears, and all that would be good for gold and the currencies today…

Yesterday, the weekly initial jobless claims printed at 377,000, which was 21,000 more than the previous week. Remember that during the previous week, all the media outlets were flashing the number on the screens and the government was all about pointing out the drop in unemployment claims. Yesterday, when the number rose again, there was no flashing the number, nor were there any government people talking about the number… One thing I’ve learned with this letter is that you’ve got to report the good and the bad. Otherwise, people don’t trust what you tell them. I don’t think, though, that the government cares if you trust them or not!

The other econ print we saw yesterday was new home sales for December. They were awful, and closed the worst year of new home sales in a very long time. And the thing that really points out the weakness: The inventory of New Homes rose in December from November, and the median sales price for new homes was 12.8% below its level a year ago! So there’s enough inventory, and the prices are falling, but the homes aren’t selling.

And then the good… Durable goods orders for December were very strong, up 3% versus November. That marks two consecutive months of very strong durable goods orders… I would like to think that this is a good sign… but the data tell me that December marked the second consecutive month of outsized increase in commercial aircraft… What happens when the aircraft orders end? We’ll probably go right back to where we were before the aircraft orders, which was three consecutive months of decline… Sorry, just calling it like I see it…

Then there was this… I came across a great piece by John Williams on the King World website. Most readers know him as the person I quote quite often, as he is the former government accountant that takes the cooked reports of the government and shows you what they would look like before all the hedonic adjustments… Here’s a statement that which is very strong and scary:

“The U.S. economic and systemic solvency crises of the last five years continue to deteriorate. Yet they remain just the precursors to the coming Great Collapse: a hyperinflationary great depression. The unfolding circumstance will encompass a complete loss in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it and a likely realignment of the U.S. political environment.

“Outside timing on the hyperinflation remains 2014, but events of the last year have accelerated the movement toward this ultimate dollar catastrophe. Following Mr. Bernanke‘s extraordinary efforts to debase the U.S. currency in late 2010, the dollar had lost its traditional safe-haven status by early 2011. Whatever global confidence had remained behind the U.S dollar was lost in July and August.”

“That was in response to the lack of political will — shown by those who control the White House and Congress — to address the long-range insolvency of the U.S. government, and as a result of the later credit rating downgrade to U.S. Treasury debt.”

To recap: The Greeks and private lenders are back at the negotiating table this morning, and once again I’m optimistic that a deal will get done to keep Greece from defaulting, for now. This thought is ringing through the markets as the euro remains above 1.31, thus rallying the other currencies too. Gold demand continues to be strong, and John Williams gives us his thoughts on the coming hyperinflation…

Chuck Butler
for The Daily Reckoning

Commodities Take Off! 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.

OK… The Fed announced yesterday that they “expect short-term interest rates to stay close to zero at least through late 2014.” So much for the previous statement that rates would remain at current levels through mid-2013… But, 2014? And late at that! That’s just crazy, folks… But, as I expressed here many times over the years… We’re turning Japanese, yes, I really think so! Didn’t the Japanese cut rates to zero, pass stimulus after stimulus, and keep rates near zero for over a decade? Yes, they did… And… Haven’t we done close to the same thing, with our zero rates running for 6 years if they end in late 2014? Why, yes we have!

But, as I’ve always pointed out… The US consumer is different than the Japanese consumer… The Japanese are savers… We are spenders… But… As I pointed out to a group of “big guys” last week, where someone thought deflation for that long a time was OK… Yes, it does keep prices down, but you, me and the guy down the street know that prices aren’t going anywhere. And if that happens, no spending will occur, and that will shut down the economy, just like it has in Japan!

So… You should have seen the euro (EUR) lead the currencies higher along with gold and silver when the Fed made that announcement yesterday… The overnight markets also decided that the Fed is going in the wrong direction, and to the woodshed.

The other thing that gives me reason to pound on my chest this morning, is that Bernanke said that he was laying the groundwork for a third round of large-scale asset purchases (I told you they wouldn’t call it quantitative easing) should unemployment remain higher than the Fed Reserve would like, while inflation falls below a newly-established “target”… He went on to say, “The FOMC recognizes the hardships imposed by high and persistent unemployment in an underperforming economy, and it is prepared to provide further monetary accommodation.”

Currencies and gold (and silver) weren’t the only beneficiaries of this statement… US stocks rallied too.

So… Once again, my confusion gets some clarity, for I had said originally that the next round of QE would come last fall, but the Fed decided that it wasn’t time yet… So, then I said it would come about the time I get back from spring training… And it looks like I’ll be bang on that…

Not that I want any accolades. This is bad stuff, folks… This Quantitative Easing or QE… Not bad for stocks, bonds, currencies, and metals… But bad for us, and US citizens… One day, all the money supply that the first two rounds of QE generated ($2.4 trillion) and the next round of “X”, are going to be unleashed on the economy… And you want to talk about the velocity of money? This will be warp speed!

Now… Onto other things… You know the baby steps of stabilization that I’ve talked about for the Eurozone lately? Well… What if I told you that it just so happens to have coincided with a HUGE increase in the money supply here in the US? And what if I told you that $103 billion seems to have been sent in swaps to the Eurozone? Well… I do believe that’s what’s happened… So, when it comes down to it, you and I are bailing out the Eurozone… And, I can’t imagine that $103 billion is going to be “it”… More dollars will be printed, and shipped…

And, now I want to talk about something that I found on the BLS website the other day… Read it first, and then I’ll have comments…

Effective with the release of The Employment Situation for January 2012 scheduled for February 3, 2012, population controls that reflect the results of Census 2010 will be used in the monthly household survey estimation process. Historical data will not be revised to incorporate the new controls; consequently, household survey data for January 2012 will not be directly comparable with that for December 2011 or earlier periods. A table showing the effects of the new controls on the major labor force series will be included in the January 2012 release.

OK… Clear as mud, right? Well… More confusion is in store for us, folks… From here on out, we won’t have a previous reading to compare the data with… Reading my friend, Bill Bonner, in The Daily Reckoning yesterday, he addressed what’s going on with data here in the US. Here’s a snippet of Bill, first quoting Bloomberg…

“The adjustment process ‘has been knocked out of whack by the financial crisis,’ Ellen Zentner, a senior US economist at Nomura in New York, said in a telephone interview. “The model ends up adjusting for a growth pattern that isn’t there. The sudden drop-off in economic activity in late 2008 is not a pattern, it doesn’t happen late every year. It was a one-off event.”

In effect, the models are over-compensating…trying to make sense of the big collapse of ’08-’09 by treating it as though it were a seasonal adjustment issue. If the winter weather were so severe as to cause such a big drop-off, the machines reason, we must move the bar lower next year. Then, even a modest improvement will look spectacular.

But Goldman’s economists estimate that unemployment will average 8.5% this year — almost unchanged from last year. That is not a recovery.

Thanks Bill!

Now back to the Fed… O’ brother where art thou? Remember all last year, the Fed kept saying that they expected stronger growth in the fourth quarter? I wonder where that thought went… Now “The Federal Reserve downgraded its outlook for economic growth this year”… Really?

Remember what I said at the top of the year? I said that the year had already started with glowing forecasts for the economy in 2012, but by the time I headed to spring training, those glowing forecasts would be fading… Well, the Fed didn’t even wait until pitchers and catchers report next month to begin downgrading those forecasts…

OK… The Greek talks with private creditors resumed this morning, after being suspended yesterday… I can’t believe an agreement hasn’t been ironed out by now (recall I thought it would be done last weekend)… Just goes to show you that when you have debt, you are not in a position to negotiate… I hope US lawmakers are paying attention here, because if they don’t, this is the same thing we’ll be going through at some time in the future.

The Aussie dollar (AUD) has pushed back above $1.06… I’m told by my charts friend that the next resistance level in Aussie dollars isn’t until $1.0760… So at $1.0675, where it is right now, it’s still got room to run without resistance… The Aussie dollar, even with the RBA doing their best imitation of Alan Greenspan, still enjoys a very strong positive interest rate differential and, with the Fed’s latest announcement, that rate differential will remain for some time, eh?

But… More than the positive interest rate differential, what the Fed’s announcement does is open the playing field for the low rate currencies around the world. Specifically, the Asian currencies. I’ve said for some time now that the Asian currencies were the place to be this year, and as long as interest rates don’t in the way of comparisons, the Asian currencies should be able to win a comparison to the dollar…

And, when the euro goes on a rally like yesterday and overnight, the currencies like Norway and Sweden get to have moon shot rallies!

And then gold… OMG! What a rally! And then push that further, with the rally that silver had too! Gold and silver are both up this morning, too… Not like yesterday when gold added nearly $40 and silver $1.20… But still up, good to see that profit taking or price manipulators haven’t entered the market. Speaking of the price manipulators… A reader asked me yesterday about if the new commodities exchange that’s starting in Asia is going to help gold and silver; and I said that as long as the price manipulators aren’t allowed there, yes!

A friend of mine, (thanks, Dennis) sent me a note from a guy that does numbers, and I found one of the items to play well with the Fed announcement yesterday… OK, let me set this up for you… The Fed announces that interest rates will remain near zero for more than two more years… It’s more than inflation they want, folks… Consider this:

The average interest rate paid on the $15.2 trillion of debt that the USA has outstanding is 2.826% as of 12/31/11. Every 1% increase in the average interest rate paid by the US government would add $152 billion of additional cost per year, equal to $4,820 of additional interest expense per second for the entire year (source: Treasury Department)

So… Now you know the rest of the story…

Then there was this… I’ve quoted James Turk many times over the years… Mr. Turk is the foremost expert on the history of money and the role of gold in our economy. James thinks that hyper-inflation is coming down the road. This leads him to forecast an eventual price for gold of $8,000 or more. He sees mining companies as a good option now, as costs are down relative to revenues that can be realized (given the price of gold at $1,600 and growing).

A Bull Market on most mining stocks in 2012 will create great profit opportunities. Silver could likely outperform gold in 2012 as the historical silver/gold ratio is 16:1 and this ratio is currently out-of-line at its current ratio of 50:1. This ratio is likely to be closer to 30:1 by the end of 2012. Gold is money as it was chosen by the people some 5000 years ago as money.

Yes… All good thoughts, and the hyperinflation he’s talking about is the warp speed velocity of money, when the (to be) 3 rounds of QE/money printing are unleashed on the economy… When that is… Is the question of the day, but, when it hits, I don’t think anyone will have time to react, which is why I truly believe you have inflation fighters, like gold and silver, in your portfolio now! That way, you won’t have to be the guy that remembers he needs new tires before the winter snow begins, but keeps putting buying the tires off, and then one day he wakes up to a foot of snow on the ground… Now, he has to try to get to a tire store, with every other procrastinator that put off buying new tires, and now he’ll have to pay whatever price the tire dealer chooses to charge him… Don’t be that guy!

To recap… The FOMC meeting threw a cat among the pigeons yesterday, by not only announcing that the Fed Funds rate would remain near zero until late 2014, but also that more QE is coming should unemployment remain sticky… So, you might as well oil up the printing press, Ben, unemployment is going to remain sticky! The currencies, metals and stocks all rallied on the news, and have continued those rallies in the overnight markets.

Chuck Butler
for The Daily Reckoning

Big Ben Discusses Another Round of Quantitative Easing 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.