MUST READ ARTICLES ON "OF TWO MINDS" BLOG

Charles Hugh Smith has some fantastic posts on his blog:
http://www.oftwominds.com

The Big-Picture Economy, Part 3: Scarcity, Risk and Debt 
(September 25, 2013)

The Big-Picture Economy, Part 2: Surplus, Spending and Debt
(September 24, 2013)

The Big-Picture Economy, Part 1: Labor, Imports and the Dollar
(September 23, 2013)

 The Trouble with Asset Bubbles: If You Stop Pumping, They Pop 

(September 20, 2013)

GOLD AND SILVER - CONSOLIDATION IN A BULL MARKET

CLIVE MAUND once again has some excellent precious metal charts

GOLD & EURUSD - INTRADAY - 7th SEPTEMBER 2012

Well, promises from the ECB, a below expectations jobs number in the USA, hopes of QE3 from the FED....... and we see a breakout in Gold and a EURO/USD rally!

These really are crazy days. Hopes....promises....and stop gap fixes. A mega global equity rally today and now a rally in precious metals and the Euro.

WATCH THIS SPACE!

RAY DALIO ON GOLD

Ray Dalio’s latest investment letter updates some of their macro positioning and offers some insights into the bull case for gold.  He writes:

“Gold is primarily an alternative to fiat currency and a storehold of wealth.  The main advantage that gold has over other currencies is that it can’t be printed.  While we have just gone through a period in which the degree of monetary stimulation has ebbed, the ongoing deleveraging means that developed economic will remain highly reliably on continued stimulation for years.  By the end of the quarter, central banks were starting to shift back toward renewed stimulation.  In addition, one of the primary disadvantages of gold relative to fiat currencies, that it doesn’t pay interest, is mitigated by low rates in the current environment.  Real interest rates are likely to remain very low and below real growth rates as a means of combating deleveraging and improving debt sustainability (as described in our “beautiful deleveraging” work).  As such, deleveragings strongly favor shifts from financial assets into gold and other tangible assets.

Gold is also being supported by secularly increasing demand. “

Above is the post from Cullen Roche's post on his Pragmatic Capitalism website.

Ray Dalio on the Primary Reason to own Gold

Ray Dalio (of Bridgewater Associates) sums up the current rally in Gold quite accurately.
Gold prices have risen by $88 over the last month as the market eagerly awaits QE3 and more Bond Buying from Central Banks.

Chart of the Day: Chinese stocks in steep downtrend & CBOE VIX AT NEW LOWS

As stock markets around the world continue to edge upwards, the Chinese Equity Markets and the CBOE VIX have both been trending downwards.

Chart of the Day - Chinese stocks in steep downtrend

Equity valuations continue to be driven by hopes of QE3 and Bailouts/handouts by Central Bankers rather than fundamentals, which at this stage are still looking rather weak.

As the VIX trends to new lows, it's important to take profits in stock portfolios and rebalance them towards more stable large cap companies that preferably have less leverage than their mid-cap counterparts.

GLOBAL BANKING - NO RECOVERY YET.

The ever articulate David Rosenberg has continuously maintained that the Great Recession of 2008, was no garden variety recession.

 According to him a combination of deleveraging, demographics and deflation  - the result of a post credit bubble collapse has meant that despite record stimulus packages and accounting rule changes and Central Bank Balance Sheet expansion; we are still a long way from an end to the crisis.

The Charts below clearly demonstrate how the stock prices of large multinational banks have fared during the post bubble bust scenario. 


As worries of the debt crisis in Europe continue unabated and market watchers are eagerly hoping for a QE3 to boost global equities; it's quite clear from the stock prices below that the crisis is far from over.

THE INDIAN RUPEE - WEAKNESS CONTINUES.....

The continuing weakness of the INR vs the USD is starting to worry both investors and regulators alike. Negative FII fundflows in the Equity markets is adding to the weakness of the INR.

At a time when inflation continues to be persistantly high, a weak INR will add to India's already increasing Crude Oil import costs.

The Equity Markets in India are preparing themselves for forex loss announcements from companies that import their raw materials and those that have large Foreign Currency borrowings.

We are now surpassing levels last reached during the heights of the financial crisis in the first quarter of CY 2009, just after the Lehman Crisis!

Energy and commodity prices were far lower in March 2009 than they are right now; so the Government and especially the Central Bank (R.B.I) will have to come up with some strategy to stabilize if not support the INR at current levels.

WATCH THIS SPACE!

MARKET UPDATE: THESE ARE CRAZY DAYS

Just a quick post today before I put up some detailed analysis soon.

There's so much happening in markets these days - Debt Ceiling, US AAA downgrade, Equity Market crashes, a really manic VIX (Volatility S&P500 ^VIX), UK Riots and all the ongoing discussion of the ''fragile'' global economic recovery!!

Below is a snapshot of todays wildly gyrating markets! For the ''goldbugs'' out there, Gold has been riding high, driven upwards by all the uncertainty & it is overbought in the near term!

The FED has signalled that it wishes to keep rates at record lows well into 2013!----the recovery must be more fragile than they first thought.

Overall, I would refrain from any risk taking at the moment and would look to hedge gold positions. In the medium term, I expect gold to continue to be volatile in a price range of $1550 to $1780(New all time high as of today).

Will come back with some market specific ideas soon.

S&P 500 vs The FED's BALANCE SHEET

Investment Guru David Rosenberg in recent writings has commented on the positive correlation of the rally in the US Equity Markets and the size of the Balance Sheet of the US FED.

Here is yet another article from Jim Sinclair's Mineset website that supports Rosenberg's view.
This is some excellent research by Trader Dan Norcini and is worth a read.

S&P 500 Versus The Fed’s Balance Sheet

(LINK FOR CHART FROM JIM SINCLAIRS WEBSITE)

C.R.B. vs. B.D.I.

Below is a rather curious chart of the CRB Commodity Index vs the Baltic Dry Index.

It's interesting to note, that as commodity prices continued to trend upwards in recent weeks, the Baltic Dry Index has continued to drift downwards.

The ongoing activities of global Central bankers are once again boosting asset prices, including prices of USD denominated commodities. As speculators and hedge funds latch on to rising prices, it's quite possible that prices could rise still further.

Longer term however, this diversion in the CRB & the BDI will have to correct itself.

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Given that the rise in the CRB is not purely end user driven, CRB prices could see a sell off if the global economy faces a double dip.

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As Central Banks in Asia continue to raise interest rates to combat food & energy inflation, Asian economic growth could slowdown in the second half of 2011.

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Also, let's not forget the troubles with Club Med, unemployment issues in the developed world, the troubles with state/municipal finances in the USA and the Debt and Fiscal issues of the US government.

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If the world economy slows, the CRB Index is going to turn downwards.

Investors and speculators in the commodity markets must realise that at current prices, most commodities are trading in 'overbought' territory and leave the investor with little or no margin of safety at all

Caveat Emptor!

U.S. Bank Failures 2009 : The Credit Crisis continues

Links:

2009 list of failed banks

FDIC: Bank Failures in Brief ( details of bank assets and deposits)

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For an economy that's on the road to recovery, the number of bank failures just continues to increase!

It's not a topic that gets covered on CNBC or most international business news networks either.

The Credit Crisis -> It's not over yet!

Reserve Bank of Australia raises rates again!

Australia's Central Bank repeated its October 2009 comment when it raised rates for a second time by 25 basis points to 3.5%; saying that it is -

"'prudent to lessen gradually the degree of monetary stimulus.'"

Australia Central Bank Raises Rates Again - WSJ.com:

Here's a chart of Interest rates before today's hike:

Let's take another look at the Central Bank's comment:

"'prudent to lessen gradually the degree of monetary stimulus.'"

Are these guys worried about Inflation, Deflation, Stagflation, Asset bubbles or just ADDICTION to monetary stimulus ?

While I do think that rollback of stimulus packages is impossible ( imagine how the stock markets would react!), longer term this free lunch policy is going to cause more imbalances and instability.

Can the Central Banks really start hiking rates aggressively when the 'real economy' is still struggling? - NO

Can rates go up drastically when governments have so much more borrowing to do? -NO

As Marc Faber famously said -its time for Central Bankers to shut the 'Bar' down -its way past last orders anyway!

........only question is........just how are they going to do it??

USDX : US DOLLAR REBOUND FOR REAL ??

It's been a good week so far for the USD.

After sliding against most currencies since the start of the year, there are now calls for a USD bottom. Over the last few weeks, I cautioned Gold bugs about taking fresh positions in Gold, given that the USD was considerably oversold at the time.

Reasons for the USD rebound?

The USD has been quite oversold for a while, as money was flowing out of the USD to riskier assets - and equity markets everywhere got their fair share of this fund flow. Is the party over and will we see fundflow reversing back to the USD?

US Consumer confidence continues to stumble: Clearly the guys on Main Street aren't having as good a time as the suits on Wall Street. Could it be that this recovery is built on a foundation of sand!

Almost ironic that poor economic news and data is causing a stampede back into the USD.

Sceptics, contrarians and some conspiracy theorists find the timing of the USD rally and bad economic data quite convenient, given the on going mega USD Bond auction.
Its great to have a USD rally when you're having a humongous debt sale!

USD Carry trade: It seems that the USD has recently become a favoured borrowing currency for carry trade. You can thank Bernanke for his almost zero interest rate policy!
It's always risky when the borrowed currency is oversold. (Look at the 3rd chart)
As the stock markets start to correct and carry trades are unwound, we could see the USD rally still further.

Lastly, could this all be a movie trailer of the 'strong USD ' policy of the USA, before the G 20 meets next month. I mean the Chinese and the Europeans aren't too happy with the performance of the 'strong USD' policy of the US Treasury so far.

CONCLUSION:
It's too early to say if the USD has turned the corner for now.
For the record, I continue to be a long term USD Bear. Bear market rallies in the USD should not be confused with any significant improvements in the fundamentals of the USD!

Stock markets globally have been searching for reasons to continue their upward rise, and did look rather overbought! A USD rally has almost become a reason to sell stocks!
Unwinding carry trade is USD positive.

GOLD: It too was looking for a reason to correct. I think that any consolidation in the PM space is good. Its better to see a stable and sustainable rise rather than an unsustainable short term spike. A rallying USD could see gold drift downwards, as punters and traders close speculative positions in gold.

EDIT: US Dollar Future and a World Currency - by Chris Laird of 'The Prudent Squirrel Newsletter'. He's one of the 'experts' I pay close attention to

TRACKING GOLD & THE USD

A hectic day in the markets today.

The US Equity Markets + USD +Treasuries + Crude Oil = were all down.

Gold has rallied steadily upward, just getting over the $950 level as I write this. Is the weak USD causing some forced short covering in gold?

Meanwhile, former Federal Reserve Chairman - Alan Greenspan was in the news again , saying that the financial crisis is not yet over!! Hahaha!

Green shoots not green enough I guess?

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It's getting quite choppy out there.

Are we going to see the USD rebound, if this bear market rally in global equities starts to stumble?

This is going to be critical, as the US Bond market desperately needs some massive inflows, in order to keep rising Treasury yields in check. A USD rebound led by a flight to safety could just help the US Fed's cause.

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Is the unemployment rate of 9.2- 9.6% projected by the US Fed far too optimistic?

Mish seems to think so :Fed's Economic Forecast Worsens; Still Ridiculously Optimistic

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The guys at S&P are getting concerned about the AAA sovereign credit rating of the UK.

Is the US next in line for a AAA rating with a negative outlook?

Well it's about time someone started to get concerned about the "intervention and stimulus" strategies of the leaders of the developed world.

Just imagine if Asian central banks started buying their domestic government debt by printing money. The rating agencies would be slamming them with downgrades and junk ratings!

THE BAILOUT MASCOT

Hat tip to The Cranky Banker for this one. Do visit the blog, I'm adding it to my blogroll.

I still don't know who came up with this, but as the cartoon says.......its 'damn accurate'

Excellent work!

Capitol Hill Marathon : Just smile and wave, boys. Smile and wave !

Listening to Bernanke and Timothy Geithner on Capitol Hill yesterday, I was reminded of Skipper the Penguin from the movie Madagascar (2005)


Private the Penguin: Skipper. Shouldn't we tell them that the boat is out of gas?
Skipper the Penguin: Nah! Just smile and wave, boys. Smile and wave. [all four penguins waving]

While they promised to take any action to prevent systemic failure and talked of a ‘deep loss of faith’ in the financial system, they said that actions must be as large as the problems we face!!!

More promises of fixing, addressing, and facilitating….and so on.
A housing market strategy is also due in a few weeks.

Here are Breaking News Flashes from CNBC of the Q&A session on Capitol Hill with Ben Bernanke.


Fixing ‘too big too fail’ problem should be a top priority.

Should work hard to restore ‘fiscal balance’ as soon as possible.

Credit markets no longer frozen by subprime problems.

Current financial crisis worst since the 1930’s.

Need strong action to boost economy.

We can’t expect immediate results.

95% of Fed’s Balance Sheet in very safe assets.

Doesn’t expect Fed will lose money on AIG & Bear Loans.

Concedes ‘too big to fail’ is not fair to smaller banks.

We’re not trying to prop up the price of housing.

Fed is trying to get lending going again.

Bank of America’s failure would have had bad consequences.

Fed watching AIG to make sure its expenditures are proper.

Foreign demand for U.S. Treasuries remains strong.

Feels comfortable Fed not facing large losses.

Eventually economy will recover & Fed will raise interest rates.

Thinks Fed would have a role in more systemic oversight.

Federal Reserve already has ‘substantial’ systemic responsibilities.

Doesn’t think earlier monetary policy was main source of Credit Crisis.

Credit markets now frozen due to economic concerns.

We have no ‘nefarious’ scheme; just trying to help economy recover.
Opposed to releasing information on overnight loans to banks.

Federal discount window borrowing shouldn’t be stigmatized.

Important to also get credit flowing outside the banks.

There was‘confusion’ over how to spend first $ 350 Bn of TARP.

Credit markets no longer frozen by subprime problems.

Congress should consider liquidity facility for municipalities.

Actions we’ve taken have prevented a much worse situation.

Inflation becomes more of a problem as the economy recovers.

Main risk of ‘Stagflation’ is if banking system is not fixed.

TALF program will be up and running in a couple of weeks.

Fed’s Balance Sheet is ‘profit center’ not a ‘loss center’.

Fed makes money by loaning at higher interest rates than it borrows.

GOLD : BACK AT $900

Trader Dan Norcini at Jim Sinclair’s MineSet has an interesting take on Gold's latest move.

*****

“The battle for Helms-Deep is over; the battle for Middle Earth has begun”!
So says Gandolph the Wizard in the second of Lord of the Rings trilogy, “The Two Towers”.
Gold has beaten back the Orcs and Uruk-Hai to regain the critical $880 level and must now deal with the Ringwraiths (the bullion banks) and Sauron (the monetary lords) as they attempt to defend Mordor (the unbacked paper money system – the root of all economic woes in the global universe). If Frodo can just make it to the fires of Mt. Doom and throw the golden ring of power into the volcanic flow (reintroduce gold into the monetary system), the system will topple freeing the masses from the tyranny of the money masters!

*****

While the $880 level is technically important, its encouraging to see Gold rise even as the USD has continued to strengthen. Gold has been extremely volatile recently, but the worsening crisis gives support to prices everytime they threaten to break down.

GOLD : THE FRIDAY REBOUND

Even as the US Equity markets rallied late on Friday, the Gold rally seems to have gone unnoticed on CNBC (big surprise!!!).
Short covering by Hedge Funds, Bullion Banks or naked short sellers...........who knows!!
The US Stock markets have been all over the place and are impossible to trade. They can be up or down 2-4% a day without any major newsflow.
Equity markets everywhere appear extremely oversold, something that becomes especially evident on long term charts. Maybe another market bounce, post a CITIGROUP or GM bailout/rescue package.
GOLD
Over the past few weeks there have been rumours of Saudi Arabia and then Iran purchasing GOLD.
Rumours that the COMEX might default on deliveries of its DEC2008 gold contracts.
http://meltdown2011.wordpress.com/2008/10/22/warning-comex-may-default-on-december-gold/
Rumours that CITIGROUP could collapse!
Whether panic buying or short covering, the move after stabilizing in the $ 700- $ 750 range is encouraging.
Here is Mish's take on it.
http://globaleconomicanalysis.blogspot.com/2008/11/i-like-gold-here.html

I hope people are finally beginning to realise, that the guys running things are no longer in control, but are just confused bystanders, whose opaque policies and inconsistent decisions are doing more harm than good.

MANIC MARKETS – THE BLIND LEADING THE CLUELESS!

It’s been a while since my last post. Here’s the market roundup.

Not in a long while have I seen so many Financial Market Analysts absolutely puzzled by the current state of markets. Incredible intraday volatility and a total loss of confidence have resulted in a very lackluster dead cat bounce and then continued unrelenting selling.

With due respect to Warren Buffett and some other cash rich value investors who recently came up with ‘BUY’ calls; these are dangerous times in the investing world. Even prior to this crash, most investors were either fully invested or overexposed to equities. Many investors especially those nearing retirement may now realize that large exposures to the equity markets was a grave mistake!

TO BUY OR NOT TO BUY?
While I would say that there has been a panic led forced selling across world markets (including gold bullion), many stocks are now trading at attractive valuations. I would think that we will see more downside before an uptrend emerges.

Firstly, forced liquidations and realignment of risk profiles could intensify the sell off.
Secondly there is currently a great threat to the earnings growth momentum ( albeit propelled by cheap money) that the world has seen over the last 5 years. If earnings begin to stumble, cheap stocks could get cheaper.

I have been a Bullish Bear for over a year now, and although I have been conservative in my investment decisions and cautiously adding to gold positions on declines, the current crash has been incredible. I clearly wasn’t bearish enough.

GOLD & the USD
Gold has tanked over the last week on forced liquidations, margin calls and panic selling as gold was sold to raise cash. After finding support near $680, it has stabilized at $734.30.
I continue to maintain my stance on adding to gold positions on declines, buying in stages as the sell off intensifies. The rate, at which EVERYONE is being bailed out, clearly indicates that we are headed straight into a financial hurricane! AC-DC said it best; we are on the highway to hell!

Coming to the USD, as the global sell off intensifies, investors pile into the USD, and the currency has appreciated against almost all currencies excluding the Japanese Yen (which is rallying due to the unwinding carry trade).

The Litmus test of the current USD strength will occur in January next year, when USD Holders must ask themselves if they are actually safe in the currency of a ‘bankrupt nation’ whose Asian creditors are perplexed and now annoyed by the chaotic manner in which the US Leadership has let their ship run aground.

ACTIONS & CONSEQUENCES

• The US is dealing with a toxic combination of record high debt, rising unemployment and rapidly slowing growth.
• Can you really have a recovery not led by savings and investment?
• Is it not weird that the FED is asking banks to lend aggressively (even as asset prices are collapsing) to people who are already way too indebted? Weird or just crazy?
• Can the FED keep buying toxic assets at their face value – given that no one in the private sector is willing to step up to the plate. How come the Sovereign Wealth Funds are not value buying even after this crash? Do they know of coming government actions that we are not aware of?
• The fallout from the Financial and Real Estate Sectors is spreading like a cancer to the broader economy. Bailouts and rescues for Auto Loans and Credit Card loans will be next on the agenda. Basically guarantee and back stop all liabilities and defaults, so that we can get back to normal.
• Bailout after bailout; the inflationary impact (albeit with a 6-12 month time lag) of all the money supply growth currently occurring will be disastrous.

More updates on specific markets in coming posts.

POPULAR STOCKS & MARKET MELTDOWNS

Given all the turmoil in global Equity Markets, I thought I would look at some stocks that until recently were popular holdings of Foreign Institutional Investors, Traders, Hedge Funds and the investing public.

US STOCKSUntil recently Fertilizer stocks were skyrocketing ( Potash & Mosaic), as fertilizer demand and food grain prices rose sharply. You had to buy coal stocks(Peabody Energy), as Chinese demand was growing exponentially and crude oil prices were going to $200. The bankers/finance people and their BlackBerries (RIM)were taking over the world, as were the Apple iPhone & iPod. And last but not the least you had to own Goldman Sachs- the one firm that could survive and thrive no matter how bad things got.

INDIAN EQUITIES Punter favourites like Jaiprakash Associates ( which rallied despite no significant change in its fundamentals) are now back to square one. Real Estate Developers like HDIL and DLF have crashed over 73% from their 52week highs - These were a must own at one stage, as India needed housing, and surging property prices appeared to have no effect on end user & investor demand. Anil Ambani's Reliance Industrial Infrastructure ( and other group companies like Reliance Power) tanked- as irrational valuations were pricing in projects to be executed years down the line. ICICI BANK is down over 65% from its 52week highs!! MTM losses from its International operations and solvency fears are driving the stock price still lower. Analysts had prevoiusly valued the sum of parts valuation of its Asset Management + Insurance + Banking businesses at well above the current stock price.

MORAL OF THE STORY : Avoid investing in the most popular sectors, without doing your own research first, and do check that valuations leave you with an adequate ''margin of safety''. Markets have the tendency to overshoot both on the upside and the downside, so buying stocks that are expensive market favourites is never advisable.