Why Is the 2-Year Treasury Yield Closer to Its Low for This Cycle than Its High?

Please see MarketWatch charts of the 2 year Treasury note, over the past year and 5 years. If the depr(rec)ession is over with, what on earth is the 2-year doing collapsing 30 basis points in one month?

Note the pattern of a lower high in rates in August vs. June.

Also note that the 50-day moving average (solid green line) has turned downward. My research on this over the past 20 years suggests that this has been a bullish indicator for lower 2-year (and 10-year) Treasury rates and a bearish stock market indicator.

Ed Harrison at Credit Writedowns documents more signs of a firming governmental policy toward money: click HERE for his most recent post with links to related recent posts on this topic.

Zero Hedge has a nice post with quotes from the ineffable Albert Edwards of Societe Generale. Herewith are some of his thoughts:

The problem is that after the boom there will be a bust. The issue now is one of deleveraging and the deflation that is starting to unfold. The problem is that Bernanke is a slave to Milton Friedman?s view of the Great Depression (at Friedman?s 90th birthday Bernanke promised that the Fed would never allow another Great Depression to occur). The Australian economist Steve Keen?s observation that "Bernanke?s dilemma is that he is living in a Minskian world while perceiving it though Friedmanite eyes?" explains his actions to date. It also explains why he will fail. . .

But it is collapsing core inflation that poses the greatest risk to the global economy going forward. We highlighted last week that core CPI inflation descends rapidly, with a lag, after the recession ends. If core US CPI inflation falls by around the 3% shown in the chart below over the next year, that will take the yoy rate to minus 1.5%! Hence the growth in nominal quantities (e.g. corporate revenues) is set to see disappointing ?lower highs? in this upturn after lower lows. And that, in our view, is just a prelude to a 2010 collapse into outright deflation.

Clicking to the post will also show a fascinating projection of core inflation using ECRI's data, probably its Future Inflation Gauge (which collapsed to 1958 levels this year before rebounding somewhat).

Technically and fundamentally, the argument for price deflation remains intact. However, if that occurs, it could occur in ways that cause the most pain to the most people; your house could deflate in price while the haircuts, gasoline and food you buy could rise. Or there could be "good" deflation wherein petroleum prices collapse and your dollar in the bank even at 1% interest rate gains buying power.

(Of course, the TIPS markets are pricing in inflation; that's the default solution; this post is to encourage looking at both sides of the issue.)

These are the most difficult markets to either invest in, save money in, or trade I have ever seen. Anything could happen. All the things that might happen but do not occur will simply remain perpetual possibilities that did not come into existence except in alternative universes.

If one wants the tres interessant views of another of the truly ursine economists around, one of the handful who "got it right" pre-2007, I would also recommend Steve Keen's website. (This site is a bit wonkish and is probably not for everyone. Dr. Keen is an Aussie, so a portion of his data is Australia-specific.)

Copyright (C) Long Lake LLC 2009

A Prescription for Health Care as a Source of Job Growth in America

The twin foci of the Obama Administration have been the economy and health care.

It is proposed herein that the latter provides an important part of the solution for the former.

Rather than treating health care costs as a "bad thing" that need to be reined in, why not accept that there is a reason that they are estimated at 15% of GDP or greater and increasing? The reason is that the provision of health care is good for the provider, good for the recipient, and good for society at large. (It's also good for the insurer!) On the other hand, the sale of revolving credit to a credit junkie is good for the seller but bad for the recipient, and probably bad for society as a whole. The promotion of junk foods by supermarkets via prominent placement at the ends of aisles and at check-out counters is good for the market, bad for the shopper and the shopper's family, and bad for society. In the middle are things such as seeing a movie, which is presumably good for the movie industry and the viewer but neutral for society as a whole.

Due to a combination of public health improvements over the past decades and even centuries, and improved medical care, we have an aging society. This is so in Europe, Japan and China. Who will care for the old? No matter what health care bill may or may not pass this year, a failure to train more physicians, nurses and other allied health professionals, and even nurse's aides, will lead to rationing of care one way or another.

The United States is the world leader in medical technology, both devices and biotech. This could be a major growth export industry for the indefinite future.

As part of any health care bill or as stand-alone legislation, increased investment in the education of health care workers is needed; and instead of wasting money subsidizing a home purchase by a buyer who most likely would have purchased the home anyway or subsidizing auto sales often to buyers who didn't really mean to take on all that new debt, the country should double down on its strengths and grow its medical technology industry.

Think the song "Sunrise, Sunset". What are the sunrise and sunset industries for jobs for Americans?

Promotion of good health, and prevention and treatment of disease, provide a path toward a better and more prosperous America. And, by the way, one with plenty of good, clean jobs.

Copyright (C) Long Lake LLC 2009

DoctoRx Comments on the President's Healthcare Speech and Goes Where Few Politicians Have Gone Before

The President has addressed Congress and the American people on health care reform; click HERE for the text of his speech. Also, you may click to see the Republican response (given by a heart surgeon).

One thought I have is on the following quote from the speech:

The only thing this plan would eliminate is the hundreds of billions of dollars in waste and fraud, as well as unwarranted subsidies in Medicare that go to insurance companies – subsidies that do everything to pad their profits and nothing to improve your care. And we will also create an independent commission of doctors and medical experts charged with identifying more waste in the years ahead.

Fraud and waste are not easy to eliminate, and "waste" is not even easy to define. These should be addressed ASAP and need not be part of sweeping health care reform. Medicare's famously low overhead administrative costs are part and parcel of not requiring pre-approval for tests or alleged surgeries, thus allowing fraud to exist on a significant scale. In my part of the country, Miami, Medicare fraud is a major industry. Eliminating it would put a lot of people on the dole!

So far as reducing subsidies to managed care companies: go for it! But once again, legislation on that issue could already have passed Congress. Despite being thwarted on broad healthcare reform, President Clinton moved successfully against Medicare HMOs, saving the taxpayer muchos dineros. Medicare HMOs are parasitic creatures, as are essentially all HMOs. If they are really so efficient, let them prove it by asking for no subsidy.

Regarding "preventive care": This term is often misused. A mammogram is a form of cancer screening; an abnormal mammogram is not designed to prevent cancer but rather to catch it early. In any case, I believe that early detection of cancer, diabetes, high blood pressure, etc., is a very good thing; but I also believe that it is expensive. Long ago, it was taught that long-term treatment of mild high blood pressure added but one year to a person's expected life span. Is this a good thing? Yes. Does it cost more money than it saves? Presumably, yes. I do not believe that the President has been accurately advised when he insists that preventive care is, say, revenue-neutral. I for one would much rather see my government have spent money on preventive health care than huge sums saving stockholders and bondholders of giant financial conglomerates from losses, but you can't always get what you want, and the good things that this President wants to do for the uninsured simply cost money. One reason for skepticism of his plan in certain quarters is the recollection that Medicare was supposed to cost small potatoes when it was created. Whoops!

Whether it's a social program or a war in the Middle East, people remember who promised wrongly at the outset, no matter whether or not the promise was made in good faith.

Now to the main event. Believe it or not, there are more important health care fish to fry than fiddling with insurance plans. Here goes:

The single most important thing that the Administration can do right now in the field of health is to create, support and enhance programs to combat the obesity and overweight problem in this country. The next most important thing is to stamp out cigarette smoking. Perhaps the President will lead the way in that regard. Mr. Obama should use the bully pulpit to aggressively promote health habits that will actually prevent heart disease, smoking-related cancer and lung disease, and the like. If he wants to really get with the DoctoRx program, the President will promote vegetarianism (or modified forms thereof) as part of a program both to achieve/maintain good health and to promote environmental greenness.

None of these initiatives requires a 4-year waiting period. There are numerous specific things that can be done by executive order, legislatively, and rhetorically to fight the good fight to get the pot bellies off Americans, prevent children from growing big bellies, and make cigarettes obsolete.

Those are just some initial goals. What about even tougher laws against drunk driving? What about persuading Hollywood to present getting drunk as unfunny and worse? Etc. and so on.

Where all sides in this debate have missed the main point is that a large portion of the ills that American flesh is now heir to are preventable by life-style improvements that cost both the individuals and the taxpayer less than nothing, but rather pay for themselves financially many times over. Can this unhealthy society change?

Yes. It. Can.

But. It's. Not. Easy.

Fitness first.

Copyright (C) Long Lake LLC 2009

Singing the Post-Labor Day Blues

Please click on the image shown for greater detail.

The basic image is one that Calculated Risk creates periodically. One can see that to date, the current/recent "banana" is the single worst unemployment event in the post-WW II era. The discontinuous magenta line was added by Mike (Mish) Shedlock in today's post on whether this is/was a "depression" (a word scrubbed after the Great D).

EBR presents this because Mish has been projecting unemployment rates when the Fed and ECRI were acknowledging the existence of a mild recession. Even after the Lehman collapse, Mish's unemployment rate projections have been more accurate than that of the Fed, such as those the Fed used in its "stress tests" of bank holding companies.

If he's correct again, we have another 2 years to go to get back to where we are now; but of course the labor force is expanding each year, so a true reversion toward a healthy economy would be some ways off. The only way to get "organic" inflation out of this sort of projection is either to literally drop bills from helicopters; command and control stuff such as massive Government spending much greater than from the "stimulus" package; or a boom elsewhere in the world.

In that vein, David Rosenberg cuts to the chase in his last Breakfast with Dave for a week:

M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure — off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend — contracting at an epic 9% annualized pace over the past four weeks.

So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.

(Emphasis added)

Dr. Rosenberg continues:

In case you are wondering how it is that the housing market has suddenly sprung back, it’s because the era of free money is back, courtesy of the benevolent U.S. government. The FHA’s share of the mortgage market has ballooned from a residual 3.0% in 2006 to 23.0% currently as the government moves in to replace the private subprime lending industry. So now we are back to the thought process that insuring mortgages with a 3.5% down payment is a good thing for the economy — little surprise that the FHA delinquency rate has soared to nearly 8.0% from 5.4% a year ago, and the taxpayer is on the hook. How is it that there is no public outrage for a government policy of giving another shot of scotch to the drunken sailor is totally beyond our comprehension.

Finally, just in case you're not depressed enough, here is Bruce Krasting from Zero Hedge on the Social Security Trust Fund (SSTF) in SSTF Shocker - $6B August Deficit:

Based on the past twelve months performance I now estimate that the Net Present Value of future committed liabilities is in deficit by $7 trillion. To plug this sized hole would require a significant increase in payroll taxes. That isn’t going to happen. Raising payroll taxes by 4% would kill the economy. No White House economist would advocate that. The alternative of cutting benefits would be very unpopular. There are currently 52 million beneficiaries of the system. A lot of them vote. To shore up the fund would require across the board cuts greater than 20%. While that may not be a hardship for some it most certainly will be for others. The only way to address this inequity will be a means test.

The August deficit reconfirms that the Funds foundations are wobbly. Some observations:

-In August the US Treasury had to borrow an additional $6 billion in the public market to finance the cash shortfall of Social Security. We already have too much paper for sale to fund the budget deficit. SS added to the supply problem last month.

-The 2037 Future Value of the August deficit is -$17b based on a 4% return. What this means is that there will be a very significant revision in the 2037 drop-dead date. Based on current trends the go broke date is closer to 2025.

-This is not just a bad month. The net decline in the Funds assets for June/July/August comes to $7 billion. In 08 that period was in surplus by $5 billion, In 07 it was +$7b and in 06 it was +$13b.

-The decline in payrolls is hurting the Funds’ top line. January-July 2009 payroll tax receipts were down from 2008 by $5 billion or 1%. While the monthly declines in payrolls will fall over the next six months it is unlikely that there will be much net increase either. It will be a very long time before we see monthly gains of 250k. Without that kind of growth the Fund will quickly fall into annual deficits.

-The expense side is exploding. The September monthly benefits cost will be $56.6b up from $51.5 in 2008, a 10% increase.

-In 2007 the SSTF produced a surplus of $191b that it invested in the US economy. This year it will be closer to $100b. Based on the current trends that surplus will be gone by 2012. Six years earlier than the Trustees forecast in June of this year.

SS is the mother of all systemic risks. Even the debate on this topic brings risk. It will expose an additional $7trillion unfunded liability. Another reason for holders of dollars to worry.

There is no fix to this. Raising taxes is a dead end. Age warfare is a possible social consequence. The really bad news is that no one will touch this for another year. By then it might be too late.

Your humble blogger has no interest in predicting the course of the U. S. dollar vs. other fiat currencies. The stock market would be very attractive to one such as me who agrees with John Mauldin about a "muddle-through" outlook, except that it appears that the lower the dividend yield, the better the performance: too much like 1999 to suit me. "Cash is trash" but reasonably secure; 5-10 year Treasuries make sense; well-chosen Ginnie Maes make even more sense (discuss with an expert if you don't understand mortgage-backed securities as investments); nothing has really changed in the comments made here all year regarding gold.

Gold has endured as a store of value for, say, 5000 years. Much as I love democracy, I don't think that government allocates capital as well as private enterprise; and governments have printing presses that private borrowers and lenders lack.

The more the stock and credit markets "normalize" a la 2002-4 on a sea of Fed and Federal credit creation, the more gold has pushed upward in price. Other than price volatility, gold reminds me of the NASDAQ in the 1990s before it got truly crazy: the Force was with it.

There are numerous ways to invest in gold. These include physical ownership of bars or coins; exchange-traded funds (see, GLD and GTU); custodial accounts (see, Bullionvault and Goldmoney). In a crazy bull market for gold, gold stocks should be the best performers, but look at the performance of Newmont Mining the last four years: unchanged in price while gold bullion has doubled.

Here is a quote attributed to Mark Twain, namely that a mine is "a hole in the ground owned by a liar".

In the real world, a gold bar in the hand (or vault) should be worth many in the ground.

Copyright (C) Long Lake LLC 2009

The contents herein do not constitute investment advice. Neither the author nor the site is an investment adviser.

On Insider Buying and IBM

From E*Trade:

Insider Sentiment

Over the last five years there has not been an insider stock purchase at IBM.

There have, however, been many insider sales there, including a few within just the past month at $118-120/share, which is (slightly) above today's closing price.

Perhaps if IBM, which regularly buys in 4% or more of its outstanding shares each year while paying continuing shareholders only a modest dividend, would instead stop with the share buybacks and pay a large dividend, which might be north of 6%, its insiders would buy the stock instead of selling.

Why should the public buy the stock when no insiders buy? Why should not shareholders sell when insiders often sell?

Other stocks without insider buys in the last 5 years include stocks I own or have owned and that have strong charts with recent highs in stock prices, such as Teva and Ross Stores.

Bristol-Myers, with a long-depressed share price but a high dividend rate, has a decent insider buy complement; and Eli Lilly, with similar share and dividend characteristics, reports no insider activity at all in the past year save for granting modest amounts of stock options to directors at around the current stock price.

On the other hand . . .

Much has been made by some observers of the very high sell-buy ratio recently amongst insiders. This is not a "good thing" but also may be too soon in the cycle to be very worrisome. After a prolonged bull market, this ratio may be much more of a warning sign, however. Let us say that 2 years ago, your company's stock was $50, then within the past year it fell to $20, and now it has rebounded to $35. When it was $50, you may have been bullish and made personal plans as if it were going flat to higher. Now you may sell simply because you have been hit in the head with reality, because you need the money, because you're getting more options anyway, etc. My inexpert reading of history is consistent with this idea, which is that coming out of a recession, insider selling means less than after a prolonged bull market. Not all insiders are necessarily zillionaires, after all.

The above comments notwithstanding, I believe that IBM has been such a vocal bull on its own business prospects, and has gone to such great lengths to beat its own numbers, that it is upsetting to see NO insider buys over an entire 5-year period, including when the stock was far below today's price. Based on stock price:free cash flow, IBM appears to be a screaming buy in view of current high-grade fixed income yields; why is the stock not higher, and why are insiders not buy-buy-buying?

Copyright (C) Long Lake LLC 2009

Can Losing Jobs Be a "Good Thing"?

As Labor Day approaches and the media try to spin or ignore the fact that of the two surveys on employment reported yesterday by the BLS, the "establishment" survey that gave the better results was still 400,000 jobs short of what is necessary merely to maintain the unemployment rate stable. With that in mind, and the S&P 500 index up 50% in 6 months as millions of jobs have been lost and as GDP is lower now than 6 months ago, consider the following headline:

U.S. Recovery Leaving Workers Jobless May Spur Company Profits.

Orwell's 1984 put it well:

"From where Winston stood it was just possible to read, picked out on its white face in elegant lettering, the three slogans of the Party:

WAR IS PEACE
FREEDOM IS SLAVERY
IGNORANCE IS STRENGTH."

The title also recalls Dr. Pangloss of "Candide" that "all is for the best" and that we live in the "best of all possible worlds".

After all, if the S&P can get to 1000 with 10% unemployment with surging profits (allegedly), then why not project S&P 1100 with 11% unemployment and a record S&P 1600 with 16% unemployment? Why should anyone ever answer a phone anymore in corporate America, anyway? Voice systems will do. We can have a virtuous cycle of unending prosperity as unemployment rises. Fewer commuters mean less demand for gasoline, less wear and tear on the roads, less time lost in traffic, etc. There will more time to shop, and the government can print as much money as needed to allow these non-workers to keep the engines of profitability working. Plus as people sit around with little to do, they can spend more time eating, thus enriching drug manufacturers, manufacturers of prosthetic hips, and the medical establishment.

Meanwhile . . . as Woody Allen said to Christopher Walken's semi-psychotic character in "Annie Hall": back on Planet Earth . . .

The news out of Gallup matches that out of Discover Financial (see EBR's People More Hopeful But Can't Spend the Hope) from August. Click HERE for Gallup's latest 3-day moving average poll of people as to whether their employer is hiring, firing or standing pat. Click HERE for what they are spending (3-day and 14-day moving average data; the 3-day data is skewed by extra spending on weekends). EBR to Earth: there has been no real recovery in the real world of real people. These results are back to levels of S&P 700, not 1000.

In other words, this has been a faith-based stock rally. The economy is sick. The bearish economists got the economy right. The P/E ratio ("profit-to-earnings" per the President!) from Fed money-printing and Governmental gimmicks such as cash-clunkers or $43,000 per first-time home buyer is minimal.

It's time for a change. The change that is needed as Labor Day approaches is the creation of jobs that fulfill a legitimate economic function. The resurgence of profits at Big Finance is the wrong trend. Better that Vegas boom again. At least Vegas didn't put the world into the "Great Recession" the way the Big Finance gamblers did.

One thing that can be stated with certainty is that an 8% "health insurance" tax on all labor will inhibit both hiring and creation of small businesses.

EBR believes that the President needs to settle for bipartisan health insurance reform, hope to do well in the midterm elections, and then, with the economy presumably stronger in 2 years, "do healthcare" in a more sweeping fashion.

Copyright (C) Long Lake LLC 2009

Physicians Comment on Health Care Reform

In advance of the President's speech to Congress a few days from now on health care reform, it may be interesting to consider a point of view generally lacking from the debate, that of a practicing physician, in this an academic cardiologist. While I do not agree with every specific point or implication in this WaPo op-ed, I am sympathetic to the overall message. Additionally, I would ask the lawyer-in-chief and the lawyer-heavy Congress whether they and their practicing-lawyer colleagues would trade places with doctors both under the current system or under the proposed health care reform. The answer is--not many. Lawyers value their professional independence too much and insist on the ability to set their own rates. Yet access to courts, not physicians, is a Constitutional right. Sauce for the goose . . .

You may click HERE for the link to Dr. Feldman's op-ed (note I "hate" the title, which likely was added by a staffer to help "sell" the op-ed in cyberspace).

Copyright (C) Long Lake LLC 2009

Unemployment, the Fed, and the Markets

On August 24, following comments from Fed officials, I blogged in The Fed Is Blowing It Again:

My take from what the Fed is saying is: buy gold; buy gold; also don't forget oil, silver, copper, etc., et al., ad infinitum.

In the two weeks through the close of trading Fri. Sept. 4, gold is up over 5% in price. Treasuries sold off Friday despite a truly dismal household survey of (un)employment. How dismal? See Mish's quote from Dave Rosenberg's Friday note. Another analysis of the data can be found at Dr. Ed Harrison's Credit Writedowns.

The index of average weekly hours worked for most workers dropped from 99.2 to 98.9 from July to August, where 2002 represents 100. This is despite an approximate 7% increase in population. Adjusted for population growth, this is about an 8% decrease. Here is a link to the BLS report itself; click HERE.

In the meantime, the Economic Cycle Research Institute is more and more bullish:

A weekly measure of future U.S. economic growth rose in the latest week, while its yearly growth rate surged to a 38-year high that suggests the recovery is on track. . .

The index's annualized growth rate rose to 20.8 percent from 19.6 percent a week earlier. The latest reading was the index's highest yearly growth rate since the week to May 21, 1971, when it stood at 21.3 percent.

Perhaps as part of the dispute between ECRI and Drs. Rosenberg and Roubini, the Reuters report on the ECRI data also included the following:

"With WLI growth rising to a new 38-year high, U.S. economic growth is poised for a stronger snap-back than most expect," said ECRI Managing Director Lakshman Achuthan.

Last week, Achuthan said a double-dip recession in the fourth quarter is "out of the question."

I went back to the data. Six6 months after the above-mentioned date of May 21, 1971, the Dow Jones Industrial Average had fallen about 10%, and the ten-year Treasury had fallen about half a point in yield despite the Viet Nam War and the secular bear market in Treasuries that began around 1965 and continued until 1982. Past may be prologue.

The DoctoRx thinking is that since the government is borrowing at minimal interest cost for now and has been financing immense amounts of transfer payments to people and businesses, there has to be a technical recovery. Yet I have no reason to doubt Dr. Rosenberg's analysis that the Q2 GDP would have been down at an annualized rate of 6% without stimulus, and that Q3 would be down at a mild 1% annual rate without stimulus.

So from an economic basis, it would appear that the bears who were bearish last December and this past January were correct. Now, if government were doing innovative things such as Eisenhower's new system of interstate highways, or the successful handoff from the Dept. of Defense to the private sector of the Internet, I would say that taxpayer funds were being well used.

As in Japan in its post-bubble phase, there were two trends.

One was debasement of the currency vs. the dollar. Recently, of course, as the U. S. has led the Western world in economic mismanagement, of course the yen has been forced to strengthen against the dollar. Thus, the parallel here is that the dollar has fallen against gold every year since, and including, 2001. This year is looking like no exception. How high could gold go if the stock market and financial markets stayed stable? Based on average ratios of the price of gold following
its manic run-up of the late 1970s that led to aggressive high-interest rate policies of the Fed, gold could very easily go to 2-3X the S&P price, or let us say 2500/ounce. The future is of course wildly unpredictable, but the Fed and stock market appear to be following the 2001-3 and beyond pattern, so why should not gold continue to go from strength to strength? After all, a $700 gold price in 1980 would translate in buying power to over $2000/ounce today.

The other trend, unpopular though it is to say, is toward lower long-term Treasury rates.

It is felt here that so long as one is willing to buy and hold a certain number of Treasuries, they can play a valuable role both for income and possible capital gains as part of a diversified portfolio. Tactically, it is easy to see that the Fed would want sustained low market rates a la Japan for it to make money off of its purchases of Treasuries and mortgage-backed securities. Remember that the economic recovery that is either beginning or will come at some point (if for no other reason than the law of averages and random fluctuations) and that may be a "fake" recovery could well be followed by the totally surprising events of 2008, meaning yet lower lows in Treasury rates. Similar things happened after the economic recovery of FDR's first term, after which long-term Treasury rates did not bottom till at least 1940.

Stocks are churning, in general offer insufficient income to be an attractive asset class and are manipulated or greatly affected in price by Big Finance according to self-serving metrics. Stocks that are liked here are some individual names, including Teva, McDonald's, Bristol-Myers, and National Presto (which is primarily a defense company now, though it is best known for crock pots and the like).

Currently the most interesting momentum and "fundamental" plays appear to include gold either via "GLD" or "GTU" or bullion; and TEVA and NPK in the stock market. Even if ECRI is correct about a very strong period of growth, as occurred in 1972, the general stock market could well be due for a rest.

Copyright (C) Long Lake LLC 2009

More Bullish News for Gold

While the U. S. stock and bond markets allegedly respond to the Labor Dept. unemployment report, gold continues on its merry way upward. One of the data points that is new news to me and is unequivocally bullish is the following, titled India July gold imports up 7.6 pc y/y to 41 tonnes: WGC:

MUMBAI: India imported 41 tonnes of gold in July up 7.6 per cent from 38.1 tonnes imported a year earlier, the top official of World Gold Council (WGC) in India said on Friday. "The trend started changing in May this year, after the Akshaya Tritiya festival," Ajay Mitra, managing director for Indian subcontinent of WGC, told Reuters. "Even August is showing a rise on year, though we are still compiling the figures," he said.

I had read recently that India's gold imports were down sharply from their highs. This report does not contradict that, but it suggests that buying interest has picked up despite rising prices.

Another Economic Times article describes gold in rupees hitting an all-time price high:

The bullion in the national capital today shot up to an all-time high of nearly Rs 16,000 per 10 gram on last minute heavy purchases by traders to build up stocks before the start of the inauspicious 'Sharad' tomorrow.
The surge in the gold rates was led by heavy demand from jewellers and stockists before Shradh, a inauspicious fortnight for making any fresh purchases, marketmen said.

Gold, and not the churning U. S. stock market, remains the main story.

I will discuss the (un)employment numbers with comments on the stock market in a post later today or this wekend. There is too much to digest to do it rapidly. Hint: look at the household survey, not just the "headline" establishment data. For a link to the report, click HERE.

Copyright (C) Long Lake LLC 2009

On Unexpected U-Turns and Priorities

The headline you thought you would never see, absent another Pearl Harbor: Obama Urged to Rally Support for War.

This within a few days of an address to Congress to rally support for healthcare reform, or health insurance reform, or whatever.

And both of the above when the economy is still apparently losing jobs, which to the average person is the only definition of "recession". If you have any doubts about that, ask George H. W. Bush and Bill Clinton ("It's the Economy, Stupid) circa November 1992, which turned on the economy about a year-and-a-half after the recession officially ended.

A reminder: It's still the economy, Mr. President.

Copyright (C) Long Lake LLC 2009

In Which I Disagree With a Nobel-Winner

In Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’ , Bloomberg.com reports on the Nobel-winning economist as saying almost nothing that makes sense to this blogger. Here are some quotes (taken out of order as they appear in the writeup) in italics, with my comments in plain text.

Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.

His history is way off. The U. S. was the world's leading industrial power and leading exporter by World War I. Forget the fall of the Berlin wall: the U. S. has dominated the world scene at least after the events of June 6, 1944 and then the dropping of two A-bombs on Japan in August, 1945. Stiglitz sets up a straw man re "triumphalism". The dominance of the U. S. was demonstrated last fall, when the Great Financial Crisis that began here led to the strengthening of the U. S. dollar. The U. S. will dominate the world scene for years to come.

Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said “the logic is compelling” for a new global currency.

“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”

What are "most quarters"? Dollars to donuts not many of those "quarters" are found within the US of A. Unless it is bringing gold into a more prominent role in international finance, what would most Americans say to a world currency? Perhaps fuggedaboutit?

As far as what to do with the Fed's manic actions, that's an internal matter. Going to a global currency wouldn't affect that.

With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said.

Assuming the paragraph represents Dr. Stiglitz's views accurately, they appear to show that he has missed at least half a year and perhaps a year. Disinflation has been here since mid-2008 and is a good thing, not a "threat". Deflation (price declines) is here and now. It is incorrect to say that wages may decline; government statistics show that they are declining, through small wage increases combined with a decreased workweek and numerous cuts of wages to zero via layoffs and firings.

Stiglitz, 66, said that while $787 billion in federal government stimulus is propelling growth this quarter, there’s no guarantee the economy will maintain its momentum. On whether the U.S. needs another injection of stimulus, Stiglitz said it’s best to “wait and see.”

“We did have a very big stimulus, and that stimulus has added to economic growth and will be adding in the current quarter,” he said. “But the question going forward in 2011 is the stimulus is coming off, and that’s a negative.”

This expresses the typical distorted view of Keynes' thinking. We barely understand the economy at mid-year (did the "recession" end in June or not?), and the good doctor is already worrying about 2011?

Has any Keynesian ever thought that perhaps businesses are not investing in growth because they have enough capacity? Have they ever tried to reconcile being good to Mother Earth and not continuing to tear raw materials out of her, spend energy making things, etc., when maybe there's enough of those particular things? Have Keynesians forgotten that Lord Keynes was not advocating unending "stimulus" and debt without end?

Thus in the final quote from Stiglitz here, please ask yourself if we need to "consume" more and more autos and gasoline, cheeseburgers, etc., in a society with more motor vehicles than people and an obesity epidemic? (The second sentence in the paragraph is unobjectionable though speculative and is presented for completelness.)

Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn -- an occurrence that economists call a “W-shaped’ recovery.

There really only was a paragraph or two of "news" in this lengthy article that taught no one any new facts.

The U. S. consumer is being force-fed autos on credit that many buyers already regret taking on. Home-buyers are back to 3% down mortgages and may use taxpayer money to use an $8000 per first home tax credit as a down-payment. In other words, the Merchants of Debt think they have won. I wouldn't touch their stocks, and neither would I short them. They are Sauron or in a more modern sense the Dark Lord Voldemort.
The times, however, may be a-changin'.

The more the dead hand of government "stimulates" the economy in whatever ways it wants, with minimal economic multipliers, the more it crowds out entrepreneurship and innovation. The tragic part of this is that a truly reformed financial system could be part of an economic rebirth rather than an agonizing coda to an era that ended with GM's bankruptcy and that should have ended with AIG's and Citigroup's bankruptcies. Instead the U. S. has gone the path of Japan a decade ago, with zombie banks and massive Fed money-printing that is not truly Zimbabwean printing of currency (which is inflationary) but which instead is debt that accrues rather than getting written down to realistic levels and therefore has proven deflationary to date. If you have not, please read when you have several minutes the now-classic Simon Johnson article titled The Quiet Coup from May 2009. It's the single most important article-length read of the entire past two years that I have seen.

There will be no willing reform in the U. S. Therefore there will be much more volatility and crises, but with a pattern that Big Finance will hide. Is resistance futile?

I think not. Traders should go with the flow and not fight the tape or the Establishment; investors should ignore all the chatter that is meant to distract them and get them to over-trade and doubt their decisions no matter how well-thought-out they are.

Copyright (C) Long Lake LLC

The East is Silver and Gold?

One of the best arguments bears on gold have had is that India has drastically cut its imports of gold. That argument may be undercut by the following report titled China pushes silver and gold investment to the masses:

We are indebted again to Paul Mylchreest's Thunder Road Report for news that will bring big smiles to gold and silver investors everywhere. Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!

The report notes that China's Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment. On silver investment the announcer is quoted as saying " China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in."

What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity. This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled. Now, the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.

If true, the above report could in the short term be more important than future Chinese purchases in inducing people in the rich countries to buy gold and silver in advance of Chinese buying.

Gold's short- and long-term charts are picture perfect. Gold's 150- and 200-day moving averages recently hit all-time highs, even though the price has not done so. If you go to the linked Kitco technical charts on gold, you will see that ever since the Fed pressed on the monetary accelerator in 2001, gold has had periods of 18 months of consolidation following a new high. Psychologically, portents are positive for gold: if tomorrow's unemployment numbers are weak, that will trigger fears of yet more deficit spending; if they are strong, that can trigger fears of the Fed being behind the curve and stimulating too long (as through 2005); either result could therefore be good for those who want to push the price higher.

Silver is not as strong technically on the long-term charts as gold, but will likely outperform if the economy has a sharp snapback.

Governmental credit creation is fueling a "recovery"; the precious metals market has sniffed out that it now takes a huge amount of incremental credit to cause incremental economic activity.

No one's listening to the sane ones who wonder what good it does to destroy good used cars, thereby pushing up the price of used cars, so that a random small number of people can get deals on a new car that they likely would have bought anyway. No one in America or Britain is promoting net savings, so that we can stop with all the manic lending, guaranteeing, transfer payments, etc.

The times call for price decreases. The Government is fighting this tooth and nail. Large-cap stocks with solid and significant dividend payouts and significant free cash flow make sense. Gold is the bulwark right now and is almost certainly under-owned by individuals in the U. S. (who already own lots of stock, though probably too much of the speculative kind). Treasury bonds have had a significant move upward in price (down in yield) since EBR spoke well of them in the past few months. Short-term they are hostage to the perceived speed of recovery from depression; longer-term their bull market is intact for now but this bull market may or may not be its last one for many years.

Copyright (C) Long Lake LLC

People More Hopeful But Can't Spend the Hope

Discover Financial sponsors a large poll of consumers. The upbeat title of its August survey is unfortunately misleading. Discover® U.S. Spending MonitorSM Rebounds in August, Rising 3.5 Points as More Consumers Gain Confidence in the Economy is the title, but the rise is all in the expectations. Here are some of the facts:

For the third straight month, over 50 percent of consumers plan on cutting discretionary personal spending in the month ahead. In August, 52 percent planned on spending less on going out to dinner, movies, or sporting events. Other than May 2009, this number has stayed at or above 50 percent for the last 18 months.

Despite the recent improvements in the housing market, more consumers, 53 percent, plan on cutting home improvement expenses in the month ahead, a 3-point increase from July. Nearly half, 48 percent, are also planning to cut major personal purchases, like vacations, out of their budgets.

The following is telling:

Improved economic and financial confidence did not lead to more consumers having money left over after paying the monthly bills. Only 46 percent reported money left over in August, a Monitor-low and 5 points lower than a year ago. Furthermore, of those who did have money left over, 22 percent reported having less money left over than the previous month, a 3-point rise from July and the highest this number has been since December 2008.

Here's the only real "sort-of" good news:

Only 46 percent of consumers feel economic conditions are getting worse, a Monitor low and 6 points less than July. In August 2008, 65 percent of consumers felt economic conditions were deteriorating.

An improved economic outlook also correlates with less consumers feeling their finances are getting worse. In August, 46 percent of consumers felt their finances were headed in the wrong direction, a 5-point improvement from July and the lowest this number has been since December 2007.

Regarding the above two paragraphs, the first can be discounted because most people have only a vague grasp of the general economy. Even "experts" don't know much! Re the second paragraph, it's not clear how to square that with the personal data showing only 46% of respondents having money left over after paying their bills, a Monitor-low number.

Overall, this poll of 8200 people polled nightly throughout August is consistent with the Gallup data that shows that people are more optimistic about the future than they are actually seeing improvement in the here and now. I would posit that this explains the stock market rise and that there has been a positive feedback loop therein. A falling stock market and some downbeat talk out of "authorities" could similarly feed on itself, given the reality of year on year aggregate loss of wages and therefore buying power.

Further unfortunately, many profitable companies such as IBM and P&G have no or negative tangible net worth, so if stock prices start falling, they are in the same boat as consumers: lacking reserves to cushion bad times. No one can know where the bottom is if their business prospects turn down because they have become so leveraged.

Copyright (C) Long Lake LLC 2009

The Green Shoots Skipped a Year

The Census Bureau is out with its Full Report on Manufacturers' Shipments, Inventories and Orders for July.

Despite sequential growth, new orders over all manufacturing industries were down 23% year on year (see Table 5). This data point was omitted from the Summary. And of course if the recent depression were a typical post-WW II recession, the recession would have already been ending around then.

Just in case you were feeling too ebullient from enjoying the green shoots.

Copyright (C) Long Lake LLC 2009