Don't Panic About the Economy

U.S. President Barack Obama

Unlike many of my colleagues in the mass media, I am suffering from outrage-deficit disorder. It's not that I'm not angry. I am, in fact, frustrated that we've civilized ourselves out of really satisfying scapegoat rituals: The ancients would have staged a mass immolation of the AIG casino pigs in their private jets or crucified Bernie Madoff on the 18th hole at the Palm Beach Country Club, preceded by a public show trial with Jon Stewart as chief magistrate. You probably need an over-the-top catharsis or two like that to get the popular rage under control. As it is, guilt and anger are being splashed about chaotically and inefficiently--and people like Barack Obama, who had nothing at all to do with the creation of this mess, are being blamed. That is very dangerous at a moment when there is a desperate need for patience and rationality.

Over the course of too many years in this business, I have discovered that my two worst sins are anger and impatience. Anger is a double-edged sword--sometimes it is entirely justified (as when directed against the shameless torture-enabler Dick Cheney, who persists in fouling our public airwaves). Impatience, though, is a subtler problem, and it is chronic in the mass media. Indeed, it comes with the territory. There are columns to fill, commentaries to spew even when a new Administration has just begun its work and it is way too early to make definitive judgments about its policies. The worst judgments I've made as a journalist were the result of impatience. In early 1993--a moment not unlike this one--I joined the mob jumping all over the unseemly sausage-making that attended Bill Clinton's economic plan. Firmly fixated on twigs and branches--not even trees!--I missed the forest: Clinton's budget discipline led to the economic boom of the 1990s.

And so, older and marginally wiser, I'm taking the path of least crankiness in the early days of this new Administration. Sure, I'm worried that Obama isn't dealing decisively enough with the banking crisis--but, on the other hand, this is uncharted territory and maybe a cautious, case-by-case strategy will prove to be the right one. And yes, I'm worried that Obama is deferring a bit too much to the snails and toads (of both parties) in the Congress--but, on the other hand, savvy aides like Joe Biden, Rahm Emanuel and congressional liaison Phil Schiliro will focus and massage the legislative packages that will be forthcoming. It is entirely possible, as this magazine surmised last week, that Obama has taken on too much, too soon. Or maybe not. The public hasn't even seen the benefits of the tax cuts that were embedded in the stimulus bill yet. The shovels are barely ready for the new infrastructure spending.

Patience requires a bit of distance, so let's stand back for a moment. Barack Obama was elected President because the governing philosophy of the last 30 years, arrant Reaganism, had proved itself bankrupt. Reaganism was distinguished by four characteristics--at least, according to its own mythology: the belief that government was "the problem" and so less of it was better, tax-cutting (for the wealthy), deregulation and an insistence on military strength as the primary projection of American authority overseas. These were, in some cases, fantasy attributes: After lowering taxes in 1981, Reagan raised them in 1982 and 1983. In many cases, especially deregulation--I'm talking about you, Lawrence Summers--Democrats were complicit in the excesses. In almost every case, a mild form of Reaganism was a plausible corrective for the Democratic excesses that had gone before. In a few cases, like Reagan's toughness toward the Soviet Union and in some forms of deregulation, it actually worked.

What Barack Obama pledged to do during the campaign--what he is trying to do now--is to change course on every one of these Reaganite assumptions. He believes that government must be part of the solution in areas like health insurance, education and energy policy. He will, eventually, restore Clinton-era levels of taxation on the wealthy. He will re-regulate the financial markets. Overseas, he has restored the primacy of diplomacy over the use or threat of military force.

Actually, Obama's foreign policy is illustrative of his overall philosophy. It is comprehensive and complicated. In the case of Pakistan, for example, it involves diplomatic suasion, economic aid, military aid and the discreet use of military force. It will not yield results overnight. It isn't as dramatic or easily judged as an invasion. It may not, in the end, prove the right course. But, as with Obama's economic policies, it will take time to assess fairly. And so, patience, please! We can feed Obama to the Limbaugh lions if he fails ... Or maybe not, should he succeed.

By Joe Klein

Source www.time.com

The Currency War May Have Just Gone Nuclear

The Daily Gold Report by Peter A. Grant

Mar 19 a.m. (USAGOLD) -- Gold rebounded sharply from intraday losses on Wednesday, spurred by unprecedented action from the Fed to monetize debt. The yellow metal surged from an intraday low of 883.72 to an intraday high of 948.12.

There had been talk for months that the Fed was considering quantitative easing -- printing money and buying Treasuries -- as a means to support the long end of the yield curve. Such talk ramped up last week when the Bank of England took the debt monetization plunge and had some success in driving down gilt yields. It was reported that the Fed had taken notice.

With interest rates effectively at 0% and the economy still struggling, there was no doubt that the Fed was going to grow its balance sheet. However, in advance of the announcement, the market seemed to think the Fed would simply buy more mortgage backed securities (MBS) and agencies, holding off on buying Treasuries for the time being.

The Fed did indeed announce that it would seek to buy up to an additional $750 bln in MBS, bringing the total projected purchases of such assets up to $1.25 trl. They also announced that they would buy up to an additional $100 bln in agency debt, bringing that total up to $200 bln.
On top of all that, the FOMC decided that late next week the Fed would begin purchasing up to $300 bln in longer-term Treasuries, with emphasis on the 2 to 10-year segment of the yield curve. Purchases will be conducted by primary dealers two to three times per week through competitive auctions.

If recent history is any indication, one might assume that this $300 bln is merely an opening salvo. The Fed's "non-standard" measures have had a tendency to escalate rather dramatically in both size and scope over fairly short periods of time during this financial crisis.
I don't see why this instance would be any different. You don't make a policy move of this magnitude to dabble and just see if it will work and then retreat. Quantitative easing is the A-bomb of monetary policy. Once it's unleashed, it becomes tough to de-escalate.
The FX market in particular seemed to be caught completely off guard and the dollar plunged in reaction to the FOMC announcement. A colleague that I used to trade currencies with back in Chicago said it was "near-panic" selling of dollars, particularly against euro although greenback losses were broad-based.

We have said all along that the recent dollar rally was tenuous at best, with no real fundamental underpinning. It wasn't so much dollar strength as more pronounced weakness in other currencies. Suddenly all that has changed and the dollar will likely play catch-up with the rest of the weak fiat currencies of the world.
In the dollar index, nearly 50% of the Dec to early-Mar rally has already been retraced. The DX -- which set a new 3-year high near 90.00 just two weeks ago -- suddenly seems destined to retreat to the 80.00 zone in fairly short order. An eventual break of the Dec-08 low at 77.68 would put the all-time dollar low from last Mar at 70.70 back in play.
So the world's largest economy has resorted to printing money and buying it's own debt. How do you suppose the rest of the world is going to react to that? The SNB just intervened last week to devalue the Swiss franc; how will they feel about USD-CHF suddenly being lower then where they intervened?

Will they intervene again to weaken CHF? How will the BOJ, ECB and BOE respond? Might the currency war just have been taken to a whole new level? Has the competitive currency devaluation that we all feared, now begun in earnest?

The truth is, as we discussed in our most recent USAGOLD RoundTable discussion, it is becoming increasingly difficult to predict just what might happen next. This uncertainty is just the circumstance that calls for a safe-haven asset. Something solid, something that has withstood the test of time. A place to store at least a portion of the wealth you have accumulated until the dust settles and some semblance of normalcy returns to global markets.

I surmised in my last report that SNB intervention effectively took the Swiss franc off the table as a viable safe-haven. I would now argue that the safe-haven appeal of the dollar has been severely eroded as well.

What's left? The yen? I think the BOJ is going to do whatever is necessary to prevent safe-haven flows into the yen in an all-out effort to protect their export market.
Gold. Gold is what's left.

Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Pete Grant is the Senior Metals Analyst and an Account Executive with USAGOLD - Centennial Precious Metals. He has spent the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's. In 1988 Mr. Grant joined MMS International as a foreign exchange market analyst. MMS was acquired by Standard & Poor's a short time later. Pete spent twelve years with S&P - MMS, where he became the Senior Managing FX Strategist. As a manager of the award-winning Currency Market Insight product, he was responsible for the daily real-time forecasting of the world's major and emerging currency pairs, along with the precious metals, to a global institutional audience. Pete was consistently recognized for providing invaluable services to his clients in the areas of custom trading strategies and risk assessment. The financial press frequently reported his personal market insights, risk evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief Metals Trader for a Denver based investment management firm.

Anglo breaks its links to gold

Sale of AngloGold Ashanti ends era

ANGLO American’s $1.28-billion (R12.6-billion) sales of its residual 11.3 percent holding in AngloGold Ashanti came sooner than some analysts had been expecting.

The group no longer has any interests in gold and the sale of its last-remaining interest in AngloGold means that its exposure to South African mining is largely in coal, platinum, iron ore and, indirectly through De Beers, diamonds.

The group has been reducing its exposure to gold, particularly as South Africa’s production of the metal is in an irreversible decline.

The AngloGold shareholding has been bought by Paulson & Co, a US investment firm that has been successful in hedge fund operations during the current recession.
Inevitably, perhaps, the sale to a leading hedge fund manager is seen by pro-gold commentators as a bet against currencies, particularly the dollar.

Mark Cutifani, AngloGold’s chief executive, has expressed his pleasure that a company of Paulson’s status has chosen AngloGold as a means of increasing its exposure to gold. As for Anglo , the group said the sale proceeds will be used for “general corporate purposes”.
The total amount will have to be repatriated to South Africa in terms of the country’s exchange control regulations, though this is a technicality as it means the future investments here will require less foreign funding.

At the end of 2008, Anglo had borrowings totalling $2.4-billion and an average interest rate of 12 percent in South Africa out of a total global net debt of $11-billion.
The debt was largely racked up in the purchase of Brazilian iron ore interests, whose prospects are currently less promising than at the time of acquisition.

As a result, Anglo has been scrambling to reduce its gearing, with the sale of AngloGold the only real immediate prospect. Dividend payments have been halted and capital spending projects deferred, underscoring the pressure on the group’s balance sheet.

Company insiders have insinuated that management would like to get rid of the currently cash-guzzling 45 percent interest in De Beers, but that presupposes a buyer with the cash and stomach for a diamond market that is falling rapidly as the recession bites.

Is Gold Really the Safest Investment?

Gold is on the move. As the price of gold threatens to push permanently above $1000 per ounce, it raises questions about why gold is becoming such a hot commodity and whether it truly is a safe harbor.

There is no question that gold's price run up is purely speculative. Since the beginning of 2009, the number of outstanding shares in the SPDR Gold Trust (NYSE: GLD), the most popular exchange-traded gold fund, has already climbed about 33%. Demand for gold has increased significantly.

But why? At such high prices, gold ceases to have much practical use. There is no theoretical rationale why anyone should even want to invest in it. Gold has value only because we believe that it is valuable. It is a collective hallucination.(See "What Sells in a Recession: Canned Goods and Condoms.")

There is something else which we use every day that, like gold, has no inherent value: cash.

Of course, there's a major difference between gold and cash: Unlike the dollar, the United States government is not going to impact the non-dollar value of gold significantly — only its price in dollars via the government's impact on the dollar.

And currency explains why gold has not yet made a clear jump above the historic high set a year ago — in U.S. dollars, that is. The dollar has appreciated enormously during the global economic slowdown. All else being equal, this lowers the price of gold for U.S. investors buying with dollars.

Independent of the dollar, gold has actually increased considerably in value. Indeed, the prices of gold in Euros, British pounds, and Canadian dollars set their all-time highs, by a large margin, in 2009.

The supply of gold is also a factor in pricing. Many investors holding gold reserves have faced losses in their other assets, which would have led them to sell their gold. Ordinary people, too, have motive to sell their gold jewelry during a recession, which should increase the supply of gold on the open market and impede a price hike.

As a parallel, much of oil's decline in prices since the summer arose from speculators' unwinding their positions, as they needed to liquidate to cover losses. But gold prices have not followed oil prices downhill. It is clear that new money has entered the gold market. Many who sold their stocks and other assets have reallocated into the gold market, instead of leaving it to cover losses.

In the face of appreciation of the dollar and a financial meltdown, dollar denominated gold has still managed to hang in there, near its high. Speculation remains rampant.

But the speculation in the gold market is nothing like speculation in other markets. Unlike oil, gold is not consumed, and even when it is used in products like jewelry, it is recoverable and thus maintains its value as the gold that went into it. In other words, the total supply of gold is increasing with gold mining.

Most speculation is motivated by the desire for profit. It seems that recent interest in gold is instead motivated by the desire to maintain value. After all, the price of gold in dollars has not shown a steady return. As the government continues to enact costly but what many believe to be inadequate solutions to the financial crisis, investors fear the worst for the future of the economy and the future of the dollar. Thus, the price of gold has become a measurement of confidence in the government to handle the crisis.

Traditionally, gold has been a store of value when citizens do not trust their government politically or economically. In Asia, ordinary people —not investors by any means — have historically held tremendous amounts of gold in jewelry. Now that same concept has extended to more sophisticated investors, who do not hold gold in jewelry, but instead in bars and derivative contracts.

Gold, then, can be considered a currency, unique in that it is not directly tied to any country's economy. With a global recession that is bound to continue to shake up the purchasing power of all foreign currencies, gold is safer than cash from political and economic instability.

So is it time to put all of your money into gold? That depends on your appetite for risk. The sheer amount of speculation in gold and uncertainty in the foreign exchange market will keep gold prices as volatile and unpredictable (i.e., risky") as ever. Like any financial market, the gold market is susceptible to manipulation.

But a small percentage of your assets in gold could serve as a hedge against an exacerbated crisis. At the very least, hold onto your jewelry .

Falling In Love with the Sucker Rally

The market rise of the last two weeks has been described as a "sucker" or a bear market rally. One means about the same as the other. The premise is that the long term trend of the indexes is down. Once in awhile, investors will stir from their depressions to watch the dead cat bounce. In this case, the Dow is up 10% since March 9.

The last long rally the market had ran from March of 2003, when the DJIA was 7,740 to almost 14,100 in October 2007. An investor in an index fund doubled his money and did even better if dividends were factored in. No one calls the long leg up in the market a sucker rally, but it was for those who did not sell their stocks until early this month when the Dow dropped below 6,600. (See pictures of the Top 10 scared traders.)

What defines a sucker rally is simply a matter of perspective, and, more importantly, when investors buy and sell. Someone with the fortitude or foresight to buy Citigroup (C) earlier this month at $1 would have had a return of two-and-a-half times in a matter of days. It is pointless to figure out what that would be on an annualized basis. Citi is not going to $5,000 in the next year, so doing the math doesn't matter. (See pictures of TIME's Wall Street covers.)

A well timed investment in GE (GE) could be worth a 71% return, also in less than a month. Sirius (SIRI) is up 7x from its low of $.05 which was set only a month ago. Even Apple (AAPL) has moved up 27% in a very short period of time. There really is not any such thing as a sucker rally. There are only suckers. In the long bull market that stretched over nearly four years, many investors who made five or six times their initial investment did not cash out in 2007. Some did not take even a small part of their gains and put them into CDs or yen futures. They just let the money ride which means that they assumed that the market was due to double again.

The last two weeks of explosive movement in the market will not continue. The market may have made a turn, and it may trade much higher in a year than it does now. But, a 10% return every two weeks is less probable than the Republic of Madagascar putting a man on the moon during the next decade.

People who give investment advice make their living getting other people to gamble their money away. These advisers want people to listen to predictions which could cause them to lose their life's savings. Owning a stock that is up by a factor of three or four times in less than a month is a blessing, perhaps not a celestial one, but it is a sign, at least, that fate has been kind. Even the most fabulously gifted investor in the world could not have predicted that Citigroup shares would rebound so far, so fast. (See the Top 10 TV feuds.)

Someone will sell Citigroup tomorrow, and someone else will hold it while it goes to $5 or back to $1.

— Douglas A. McIntyre

Source TIME