To be clear, the Treasury “will make sure the GSEs have the resources to meet their financial commitments,” Geithner added. Whatever the fate of Fannie and Freddie, it will be financed with tax dollars and controlled by government. Both companies, despite being at the very heart of the financial crisis, were left out of the recent Financial Reform Bill.

“Government is part of our future,” Bill Gross responded. “We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”

Scary stuff, eh?

But as menacing as this all ought to sound, here’s an interesting twist: Some of the best-performing stock markets in the world this year are in socialist-leaning nations. Denmark’s OMX 20 (like our Dow) is up 22% so far this year, the best-performing index in the developed world. Incredibly, Hugo Chavez’s IBVC index of Venezuelan’s stocks is close behind.

Compared to the S&P 500, it’s no contest… 2010 is the year of the socialist investor.

There’s more going on here than just form of government. Denmark, for example, is in the catbird seat of the euro crisis — part of the EU but not a euro nation, very low debt and a conservative banking system.

But still, it’s worth noting… in a world that’s terrified of excess government involvement, two countries with massive state presences are giving investors top-rate returns.

Ian Mathias
for The Daily Reckoning

Government Meddling: Bad News, Unless You’re an Investor 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.

So what’s the outlook from here?

“If history is any guide,” says US Global Investors chief and Vancouver favorite Frank Holmes, “gold is about to get even more attractive because we are heading into the fall and winter gift giving season.” The Muslim holy month of Ramadan is just around the corner… followed by India’s Diwali festival, Christmas in Europe and the Americas and then Chinese New Year.

“Looking at more than four decades of seasonality, September has been the best month of the year for gold. In a typical year, the September price rises 2.5% above the August price.”

“And to make the case even more compelling,” Frank adds, “the gold price has risen in 17 of the 21 Septembers since 1989, by far the best success ratio of any month of the year.”

July is usually a sleepy month for gold…but not for US Gold Eagles this year. Buying in May heated up to levels unseen in over a decade, and then cooled off in June. July turned out to be the second-best month this year.

Speculation continues to abound about whether the Mint will issue collector-grade uncirculated and proof Eagles this year – which it did not in 2009. The Mint says it’s “continuing to work with current and potential blank suppliers to increase the supply of silver and gold blanks in amounts that may make it possible” to do so. Stay tuned.

So what about gold stocks? “September is historically an even better month for gold stocks,” says Frank Holmes, “as measured by the NYSE Arca Gold Miners Index. The strong correlation between the gold price and gold-mining stocks explains much of the average September jump for gold stocks, which have historically offered leverage to the gold price.

“This leverage is shown on the chart of how bullion and the miners have fared in late-summer and fall rallies during the gold bull market that began in 2001. These uptrends have generally occurred between mid-July and early October, though in 2004, it extended into late November.

“The gold price has climbed an average of 12.4% during the 2001-09 seasonal rallies even as the price steadily moved into four digits. As good as that result was, the impact on gold stocks was even stronger – their annual jump averaged more than 26%.”

Dave Gonigam
for The Daily Reckoning

Frank Holmes Says “Buy Gold” 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.

According to The Pragmatic Capitalist:

“With most the commodities priced in USD, the recent strength in the greenback will hurt commodities. Demand may have become more price inelastic than in earlier years, but with the [Commodity Research Bureau] breaking its recent support expect further weakness to come…

“…the lesson from the Japanese experience of the 90’s was to sell the rally when the stimulus was removed.  With the US and China both applying their own versions of the withdrawal method (though we note that Japan is still pumping away as furiously as ever) now is that time…

“…As with many market signals in recent times, the bounce back in the steel price has been unusual as it has not yet been accompanied by supply constraints. In the context of a slowing in new orders, growth this inconsistently looks even weirder. [...] The disconnect between price and supply is even stronger in the copper market.  You could reasonably argue that the market is anticipating shortages to come as the new orders are stronger in this metal with only the US looking like turning weaker.”

The Pragmatic Capatalist is making the argument that in the near term commodity prices are set to weaken. However, should overall growth return to the world economy, and especially the emerging China and India markets, this trend will likely around soon enough. To read more visit The Pragmatic Capitalist to learn about where the commodity markets are headed.

Best,

Rocky Vega,
The Daily Reckoning

Why Commodities are Looking Weak in the Short Run 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.

When the time comes for the US to refill its coffers there’s going to fewer workers to pass the hat around to… an unfortunate state of affairs.

It’s Tough to Pay Taxes Without a Job 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.

Former chief economist of the US-China Economic and Security Review Commission Thomas Palley digs into a few key reasons the second Great Depression remains utterly imaginable. First off, he’s critical of the constant cheerleading of public officials, and “Wall Street’s genetic propensity to pump the economy.” The financial services industry only stands to benefit from the increased management, advisory, and transaction fees that take place in a bull market. It follows that they want to believe, and make others believe, that recovery is underway.

Instead, Palley points out that “there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression.”

Unlike mainstream economists who believe the economy will naturally once again resume its gravitation towards full employment, he believes, and The Daily Reckoning agrees, that our previous economic paradigm has imploded.

There’s little reason to expect that the main factors that have in recent history contributed to economic growth, namely debt and asset bubbles, are somehow going to return to save the day. It just doesn’t make sense. The economy needs to return to growth free from stimulus and boondoggles.

The Financial Times has the full contents of Thomas Palley’s insight on the second Great Depression.

Be Wary, Greater Depression Still Around the Corner 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.

From the PBS website, “Just two years ago an office space in midtown Manhattan could fetch close to $1.7 billion. Today, the same property trades for about $600 million.”

At tip of the hat to The Money Game for getting this real estate wreckage on our radar.

Close Up Look at Ugly NYC Commercial Real Estate 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.

Included in the mix of coins no longer available in 2009 are the “one-ounce American Eagle Silver Proof Coin; the one-ounce American Eagle Silver Uncirculated Coin; the American Eagle Gold Proof Coins (all weights, as well as the four-coin set); the one-ounce American Eagle Gold Uncirculated Coin; the United States Mint Annual Uncirculated Dollar Coin Set, which also includes a one-ounce American Eagle Silver Uncirculated Coin; and the American Eagle Platinum Bullion Coins (all weights).”

The shortage is being blamed on “unprecedented demand” and the Mint claims to be “working diligently” to be able to offer the coins again in 2010. We’ll believe it when we see it.

Read more details, including text from Franklin D. Roosevelt’s 1933 Presidential Executive Order that prohibited “hoarding gold,” on Zero Hedge’s coverage of this gold shortage.

6 Bullion Coins the US Mint Refuses to Sell You 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.

Yesterday, I told you that I was going to do some additional research into the TICs data that showed a Net Total TICs at -$97 billion for July! OUCH! The only thing I could really find was some stuff by a “Mr. Obvious” that said that foreigners sold Treasuries in July…

OK… But that’s important, because… The Fed knowing this happened, long before we did, saw yields climbing and that’s when they stepped in and bought that 7-year auction piece that I told you all about a month or so ago… The Fed Heads bought the piece of Treasuries from the primary dealers to support the market, and accomplish two things… 1. To make the auction look good, and 2. To keep rates artificially low… They made their goals… But at what cost? We all know what the Fed is up to, and it kind of takes the shine off of them, eh?

I was reading some stuff on the Internet last night, and mentioned to my beautiful bride that if I were a first time investor, I would be so confused… I read one story that said “euro ready for correction versus dollar,” and then one story below it that said, “dollar set to slide further”… I mean, that’s confusing, right? And then letting me know that after all these years of “hearing me” but not “listening to me”, she surprised me, and said… “But that’s good right? Not everyone is on the same side of the trade” WOW! I was smiling like a Cheshire Cat!

This morning, there’s not much difference in the stories on the screens versus last night… One says, “Euro may strengthen to Sept 2008 high on Technicals”… And another says, “Euro may be set for correction, per Bank of Tokyo”… Basically, I agree with both! The important thing here is that the second story says, “Euro MAY be set for correction”… It doesn’t say it WILL! And that’s what I’ve been talking about lately… The feeling that risk assets, led by stocks, have gone too far too fast, and a correction could be forthcoming, which would take an adverse affect on the currencies and commodities. But… We’ve seen things go like this before, right? It’s just like everything else in life… Something goes too far one way, it corrects and goes too far the other way! Never, right in the middle, where everyone would be happy.

I did see the text of an interview with Black Rock’s CEO, Fink… He said, “The dollar is a better long-term store of wealth”… Ahem… Hold on a second, I’m choking… Store of wealth? Wait, we’re talking about the dollar, right, not gold? The dollar, which has lost 95% of its purchasing power since the Fed took over in 1913? That dollar? OK… If you say so! But I’m not buying it!

You know, I put the New Zealand dollar (NZD), – or “kiwi” as traders call it – into the “high deficit crowd corner” all the time… I love kiwi, and always have, but kiwi is sort of like that kid that keeps getting into trouble… You love ’em… But they keep trying your love! That’s how kiwi is for me… I’ve always said I can’t bang on the US for having high deficits, and then not bang on New Zealand… But, here we are with kiwi set to complete its longest set of weekly gains since 1999! And it’s the leader of the pack when it comes to currencies in the industrialized countries, with their performance this year.

Here’s my thought on what’s going on here… Right now, investors all over the world are looking for yield, and they are not going to find it in the US, UK, Eurozone, Japan, and so on… They can find it in New Zealand, Australia, Brazil, and South Africa… So… You then look at these and say, “Brazil and South Africa are of the speculative nature”, and then between kiwi and Aussie, kiwi has the better yield… And fundamentals like deficits are thrown out the window… And once again, you’re standing there, and the kiwi bus is heading right for you… What are you going to do, just stand in front of this bus?

British pound sterling (GBP) took a blow to the mid-section after The Wall Street Journal printed a story entitled, “A New Carry-Trade Currency?” And then went on to describe why pound sterling would be a good funding currency for a revival of the carry trade… Hmmmm… Personally, I think the US dollar would be even better, given the fact that there are so many dollars floating around; it wouldn’t be difficult to find dollars to borrow, when you sell them short!

Gold is finding a tough row to hoe, getting past $1,018… We need to keep an eye on this today… The IMF Executive Board is meeting to discuss selling 1/8th of their gold. Doesn’t sound like much, eh? Well, think again… With the IMF holding the third position of official largest holders of gold, 1/8th of their holding would be equal to about 13 million ounces of gold!

Hello, China? Are you ready to buy? Speaking of which, Aaron was telling me yesterday of a story he was reading, that described the Chinese government’s efforts to get the Chinese public to buy gold… One comment to the writer was from a Chinese citizen that said something about how the US keeps telling their people to buy stocks, and my country keeps telling us to buy gold… No question as to who has the best interests of the citizens in mind.

Speaking of China… I keep reading stories about China telling lies about their economic growth… Hmmm… I mean it’s government stimulus growth, but it’s there! I’ve said this before, but as a Communist country, they were able to direct where the stimulus went, and how it was to be used… And the other most important difference between China’s stimulus and ours is the fact that China has a war chest of reserves to spend… The US doesn’t!

So… Anyway… Chinese growth, no matter how they get it, is good for the global economies, so don’t look gift horses in the mouth… I think that’s how it goes!

The Indian rupee (INR) has really been on a positive run in the past month. The rupee has gone from 49 and change to 48.10… In percentage terms it’s not much (just 1.5%), but the trend looks good…

On the data front… Yesterday, we saw housing starts print a modest rise of 1.5% in August… And the Philly Fed Index (manufacturing) hit a high that it hasn’t seen since June of 2007! But before we throw our hats in the air, let’s remember that this is all government stimulus… As witnessed by the 6-month forecast component of the report, which actually fell! The reason the 6-month forecast component would fall, is because that is about the time table for removal of the government stimulus…

And before you get all huffy, and start to pound the keyboard writing a reply to me, asking me how the Chinese stimulus is different from the US stimulus… Go back up a few paragraphs and re-read…

Today’s data cupboard is empty… Which means that the currencies will get their direction from stocks… That’s been the trading pattern for several months now, and one that I don’t agree with, but, as I said above with kiwi… Am I going to stand in front of that bus? NO! Asian stocks were sold overnight, while European stocks are stronger this morning, so there’s no real direction that can be found there. So, we’ll just have to wait-n-see, eh?

OK… It’s Friday, there’s no data to look at, and the currencies are weaker than they were yesterday afternoon, but the euro seems to bounce off 1.47 – at least for now!

US vs. Chinese Stimulus 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, maybe not our souls…but at least our convictions.

But look at gold this morning!

Yesterday, we got word that the PPI rose 1.7% in August. Let’s see, if producer prices are rising…consumer prices follow, right? Well…usually…

…but these are strange times…

We also got word that retail sales were up…that’s UP…2.7% last month – the biggest increase in three years.

Now hold on. We’ve been saying that retail sales were going down. Not up. Our view of the big picture has a consumer in the center of it. And it’s a consumer who is NOT increasing his spending. Instead, he’s reluctant to buy anything.

There’s a reason for that. He’s a guy who didn’t save anything over the last 10 years. Now, he’s 10 years older…facing retirement with insufficient funds…and scared to death that he’ll run out of money before he runs out of time.

The US consumer was counting on rising house prices to pay for his retirement. Now, he’s disappointed…and worried. What can he do? He has to cut back. He has no choice. He can’t depend on his house. He can’t expect pay increases. Having neglected his savings during the fat years…he has to tighten up in the lean ones. He has to save at the worst possible time – in a downturn!

We don’t see any way around this situation. We don’t see any shortcut. We don’t see any way to make it disappear or ignore it. THE CREDIT CYCLE HAS TURNED…from expansion to contraction.

Meanwhile, the feds are muddying the waters. They’re trying to fool the consumer…to trick him…to make him think that up is down and down is up. They want him to believe that the fat years are coming back…that he doesn’t have to save. In fact, they want to cause inflation…to encourage him to get rid of his money as soon as possible. That’s why that PPI figure is important. If they can successfully inflate consumer prices (not just producer prices) the whole picture might change. Then, we’d have an inflationary depression rather than a deflationary one.

Our commodities man, Alan Knuckman, was on Bloomberg Television yesterday, talking about this very phenomenon. (You can watch the whole interview here.)

“What do you make of the PPI numbers?” the host asked him. “They did come in higher than expected. Is inflation going to be a concern for the market?”

“That is always a question,” answered Alan. “The fed was trying to spark inflation and get money moving again. There is a delicate balance there, but we’re coming off record lows and inflation numbers from last month. That is to be expected. I am not that concerned, but I think you are touching on something very important as far as the market momentum. If the market momentum is so strong right now – the one disconnect is crude oil. It is failing to make the highs, even though the market is. That is something to really pay close attention to I think.”

For now, it appears to us that retail prices are still going down. And we doubt that the feds can cause a genuine recovery – simply by throwing money into the economy. You can boost spending when you’re in a credit expansion…but not when you’re in a credit contraction.

That’s why we’re suspicious of that retail-spending figure. How much of that is just spending funded and coaxed out by the feds? 60%? 80%? 100%?

David Rosenberg says it’s 100%. He’s probably right. And what would the economy look like without the phony demand ginned up by the feds? It would be shrinking at a 6% rate. And what will happen when the feds stop goosing it up? It will fall back.

But can’t the feds continue stimulating the economy indefinitely? Maybe. Even so, the lesson we learned from the Japanese is that even with huge inputs from the government (the Japanese passed 11 separate stimulus measures totaling some $30 trillion yen) the real economy won’t budge. Over nearly 20 years, the Japanese economy went from on-again, off-again recession to on-again, off-again deflation. The government muddied the waters. Still, consumers saw clearly what they needed to do. They had lost money in the crash of ‘90. Their Bubble Era stocks went down first. Then, their property went down too. They needed to save money for their retirements. This they did, resisting all of the government’s efforts to get them to save.

Will the situation be any different in the United States?

Probably not.

Without extra earnings, the only way the consumer can increase his spending is by going further into debt. He is unwilling and unable to do that himself. The banks won’t lend him money and he wouldn’t take it if they would (at least, that’s our view). So what’s happening? The feds are borrowing big time – IN HIS NAME. They’re running up federal debt – that he’ll have to pay, one way or another. This money is then funneled to him in various devious and mostly ineffective ways…resulting in enough activity to make it look like something is happening in the economy.

It’s a fake. It’s a fraud. It’s fundamentally counterproductive. But it’s all it takes for people such as Ben Bernanke to believe the economy is recovering. Today’s headline news:

“Bernanke says recession ‘very likely’ has ended.”

And so, our convictions are put to the test. Everything seems to be improving. The numbers – many of them – show an increase in business and retail activity (New York’s manufacturing index is at a 2-year high…).

The commentators, economists, and analysts all say things are getting better (except for those who know what they are talking about)…

And the stock market is still going up. The Dow finished up 56 points yesterday. Gold closed at $1006 yesterday. This morning, it’s up to $1017. (More about gold later in the week…we’ve done a lot of drinking on the subject…) And oil is just under $71.

So, who’s right? Who’s wrong? Us? Or them? We say there is no real recovery going on…and there won’t be one. They say the recovery is already here.

Stay tuned.

“You can still sell property,” said brother Jim. “But only if you’re willing to discount it.”

Jim is visiting from Virginia. He is a real estate agent of some renown in Charlottesville, VA, dealing only with large farms and estates. His customers are on the golden side of the light spectrum; they tend to pay cash.

“Yes, these are not people who need to mortgage property. But the story is not very different. They still have their lives…and their problems.

“What’s happening now is that there aren’t many buyers and those who are buying expect to get very good deals. So, you can still sell a nice property, but only if you’re willing to heavily discount it.

“Prices are down, say, 20-30% from where they were a few years ago. But the buyer wants another 30% discount. Not many sellers are willing to give up that much, so in my area there aren’t many sales that go through.

“I’m lucky because I’ve been at it a long time. People know me. So when they want to move a property…or to buy one…they contact me. But I have to tell them what’s going on. And I tell them that if they’re not willing to sell at a big discount, it will be hard to sell at all.

“As I said, most people just sit tight. But a few get into situations where they don’t have a choice. One poor woman has gotten sick. She is going into a nursing home and apparently the children need the money to pay her medical expenses…so they’re forced to sell. Sometimes there’s a divorce that forces a couple to sell a place. Otherwise, not much activity.

“And I feel sorry for all those real estate agents who came into the market over the last ten years. What do they do? There aren’t enough transactions to keep them in business. But what else can they do? They’re not a lot of jobs open in other areas either.

“My guess is that they are all treading water…hoping for a change…living off savings…until they have to make a big change.”

We wonder how much of the economy is treading water…hoping for a lifeline…hoping that all this talk of ‘recovery’ is going to make it possible to avoid any unpleasant changes… hoping that things go back to the old normal…that somehow, everything will be all right again…

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Credit Cycle Has Turned 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.

Heh, well today, American poultry experts have returned fire with the help of The New York Times: “We have these jumbo, juicy paws the Chinese really love,” said the NYT expert, “so I don’t think that they are going to cut us off.”

That’s right, the U.S. contends that the Chinese appetite for overgrown U.S. chicken feet is so insatiable that it will squash the trade dispute. They can conduct a legendary Olympic Games, build nuclear bombs and space shuttles, but NO WAY they can match our chicken feet.

Really… how could anyone live without?

“Besides from being just ridiculous,” notes Chris Mayer. “I find stories like this very worrisome. History gives us some chilling lessons.

”I think most people tend to take globalization for granted. In other words, most people think that the world is getting smaller and more connected all the time. This is really not true when you look at the longer historical picture. It ebbs and flows.

“For instance, a pretty good, if dense, book on the history of world trade titled Power & Plenty makes one thing very clear. ‘If anything,’ the authors note, ‘history suggests that globalization is a fragile and easily reversible process.’

“Where it gets chilling is during the Great Depression: ‘When the system was hit… the result was wholesale protectionism, and a renewed disintegration of international commodity markets.’

“The authors go on to show how the collapse in trade led to all kinds of bad things. It created mass unemployment in places such as Germany, which was a big factor in Hitler’s rise to power. In Italy, the Depression contributed to Mussolini’s rise to power. The rise of tariffs and trade disputes also fanned imperialistic flames in Japan as it sought to gain self-sufficiency through conquest. All of this contributed to the outbreak of World War II.

“In any event, many people call what we are going through today the Great Recession — the worst global slump since the 1930s. And I wonder if the playbook will follow the path of the 1930s. It seems as if it might.”

First Stages of the US vs. China Trade War 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.