The positive story

The problem with socialism is that you eventually run out of other people’s money.

–Margaret Thatcher-

Well dear reader in this post you will find the following:

The positive story

Economy:
34,4 Mio US citizens receive food assistance
Baltic Dry Index shows deflation
GEAB Report
John Williams on Unemployment reports
banking holidays

Silver ETF's

Bank and Banksters
AIG worse than you think
Fannie Mae needs more capital
Max Keiser and Orlov
Banks still getting sicker

Equity
comparison DJ vs Gold and Silver
inflation adjusted prices
Russell about Market Manipulation
1929

USD
Contrarian view

Bonds
Foreign central banks don"t buy anymore

Before starting with the positive story let's have a look at the overview from last week from www.prudentbear.com

For the week, the S&P500 rose 2.3% (up 11.9% y-t-d), and the Dow gained 2.2% (up 6.8%). With AIG up 107%, MBIA 41%, Ambac 39% and Citigroup 21% - all this week! - some may question the quality of the rally. The S&P Homebuilding index jumped 13.4% (up 43.0%) this week, and the Morgan Stanley Retail Index rose 7.5% (up 62.9%). The Banks surged 12.4% (up 2.6%), and the Broker/Dealers jumped 2.9% (up 44.6%). The Morgan Stanley Cyclicals ran another 5.7% (up 51.9%), and the Transports jumped 4.7% (up 6.0%). The broader market remained strong, with the S&P 400 Mid-Caps jumping 4.3% (up 21.7%) and the small cap Russell 2000 advancing 2.8% (up 14.6%). The Morgan Stanley Consumer index increased 2.2% (up 8.5%), and the Utilities added 0.2% (down 1.5%). The Nasdaq100 added 1.0% (up 33.7%), and the Morgan Stanley High Tech index gained 1.2% (up 46.3%). The Semiconductors slipped 1.1% (up 40.7%), while the InteractiveWeek Internet index gained 1.2% (up 52.2%). The Biotechs declined 1.1% (up 33.2%). Although Bullion was down about a buck, the HUI gold index increased 1.6% (up 21.1%)

The positive story

Well dear reader what is the positive story? Well the positive story is gold and silver. Any surprise? Of course you can now say that that is what I have been writing about all the time. Right? But wait, there is more to say. The positive story about gold is, that there is a positive story about it. Sounds strange? Well not so much. It is important dear reader, that in the case you buy gold or silver you are NOT and I repeat "NOT" buying gold because is a perfect hedge for a doom situation. That is not the story at all. The story is simple. First of all gold is NO, and I repeat, NO liability of anybody, it is real value. This is important because unlike gold and silver, what you might regard as safe investments, basically all have a liability of some institution or somebody implied. Secondly Gold is NOT an investment, I repeat, NOT an investment. Gold is money. This again is important, because Gold (and if I write about Gold I mean Silver too) is the only currency that existed for more than 6,000 years. Yes that is correct, 6,000 years. The people in Babylonia already used Gold and Silver as a currency. Why so? Because to start with, it is a real value. It is easy to transport. Gold is rare, durable and easily divisible with a high per unit value and therefore cannot be debased by the same authorities printing paper currencies like crazy (it cannot be produces out of thin air). It is a limited good (if you put all the gold that in history has been mined together, it fits in two Olympic size swimming pools). The value of Gold is recognized globally and is traded in a continuous market and it is produced for accumulation mainly. Finding gold and mining gold is not easy at all and that is why the supply is and will be limited. The major gold producers have already difficulty to produce more as the easy to produce gold (open pit mining) has already been produced. Thirdly, and that is important too dear reader, the gold price does not fluctuate at all!!! Yes that is correct. Well I guess that now you really wonder how I could say something that stupid, as we all know that the gold price is fluctuating. Well dear reader, I like to let you know that my statement is absolutely correct. Yes it is. The gold price does not fluctuate at all. What fluctuates are all the paper currencies in relation to gold. The gold price remains stable (maintains purchasing power). Well you might say, this of course is just an easy excuse or a strange way to justify something that is not as I say. Is it really? No, I am sorry to let you know, but my letting you know that gold does not fluctuate at all, is absolutely correct. Following I will show you a chart from James Turk from www.goldmoney.com which shows you very clearly that gold and silver compared to real values, in the example it is the price of oil per barrel, is stable and does not fluctuate.





What fluctuates or loses value versus the real values such as oil, gold and silver are the paper currencies!!! Any surprise? Well a good that can be produced out of thin air, by putting a couple of more zeros on a computer screen or by cutting a couple of trees in order to make paper and put some ink on it, cannot and never really will increase in value. On the contrary the more is printed the more the existing paper currency loses value. Some might feel like holding more money in their hands or accounts, but the fact is it's an illusion and nothing else. Gold is money. As mentioned in a previous post Gold is the money of kings.

That is the positive story dear reader. That means if you buy gold, and you possibly should, you buy real value. You buy into a positive story. By the way, a fact that makes the whole story even more positive is, that gold from 1980 to 2000 lacked to adapt to inflation. As history shows us, gold over time adapts to inflation. Therefore all the buyers of gold do not only buy a solid currency, but buy as well into a growth story. How much should the growth be? As per information in a past musings, according to www.shadowstats.com an excellent service I can recommend, the gold price should go to 2,370 using the official inflation numbers and more than 7,000 using real inflation numbers. That is not bad at all.

So dear reader, my message is, that a buyer of gold and silver is in fact a buyer into a very positive story and not a buyer into a doomsday story. Don’t buy gold and silver as a doom hedge. It is a positive story anyway. Buy physical not paper. Paper has no value. Physical does.

Well I think I made my point regarding the positive story. In case a doom situation really should arise, I assume that those having bought gold and silver because of the positive story most probably will not regret having done so.

By the way dear reader, the market behavior of gold and silver over the past 3 months show me that both are ready to move up considerably. It would not surprise me at all (well in fact I expect it) if we would move this month through the 1,000 level and would move on up to a price above 1,300 per ounce by the end of the year. Hope you have fastened your seat belts.




Economy

Bloomberg on last Friday mentioned a statistic that says a lot. The US Department of Agriculture announced that 34.4 million people received food assistance in the month of May in the United States. To put that into some sort of perspective, that is equivalent to the entire population of Peru and Bolivia combined, and it’s more than the entire population of Canada.

US food stamp list tops 34 million for first time
For the first time, more than 34 million Americans received food stamps, which help poor people buy groceries, government figures said on Thursday, a sign of the longest and one of the deepest recessions since the Great Depression
http://www.forbes.com/feeds/reuters/2009/08/06/2009-08-06T152646Z_01_N06328040_RTRIDST_0_FOODSTAMPS-USA.html
That does not look like the consumer returning to consume soon.
Well dear reader to me that does not look really like green shoots sprouting.

Baltic Dry Index Has Worst Week Since October as Demand Slows
The Baltic Dry Index (have a look at the chart
http://www.bloomberg.com/apps/cbuilder?ticker1=BDIY%3AIND),



a measure of shipping costs for commodities, had its worst week since October as Chinese demand for shipments of coal and iron ore slowed.
The index tracking transportation costs on international trade routes today slid 135 points, or 4.6 percent, to 2,772 points, according to the Baltic Exchange. That took its weekly drop to 17 percent, the most since the end of October

Well dear reader the article you can find on the following link, does not show at all a stronger world economy and does clearly indicated that we should expect lower commodity prices too.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOkYkh3CsUFg



GEAB report
When China prepares its « Great Escape » from the dollar-trap for the end of summer 2009
http://www.leap2020.eu/when-china-prepares-its-great-escape-from-the-dollar-trap-for-the-end-of-summer-2009_a3582.html

Well dear reader the US economy and many other economies are not yet fine and possibly will not be OK for some time. Of course so far the soup lines that as per Great Depression have not yet appeared but that does not mean that the situation is much better. The difference of today with the Great Depression is that the US Government has another way to feed the poor.



“great” unemployment reports.
Is the reporting from last Friday regarding unemployment really great? Well let’s see what John Williams from www.shadowstats.com has to say about it:
Auto Industry Turmoil Distorted Key Reporting. The economy remains in a deepening downturn, irrespective of the better-than-expected news out of today’s (August 7th) employment and unemployment reporting from the Bureau of Labor Statistics (BLS). As suggested as a possibility in the SGS Newsletter No. 51 and in the July 31st Flash Update, heavily distorted seasonal adjustments that artificially reduced the levels of new claims for unemployment insurance appear to have flowed through not only to July unemployment and payroll reporting, but also to the July purchasing managers manufacturing survey.
July usually sees a regular pattern of planned automobile production line shutdowns to accommodate retooling for the new model year, but recent disruptions to the auto industry have changed pattern this year. Without the usual pattern of shutdowns, the government’s computers nonetheless responded by creating the usual offsetting boost in jobs, not only in the auto industry, but in supporting industries as well. The auto industry itself was alone among durable goods manufacturing industries in showing a reported, seasonally-adjusted monthly gain in July, up by 28,000 jobs.



The seasonal-factor distortions also appear to have played through to the Institute for Supply Management’s (ISM) purchasing managers surveys, where a reading below 50.0 in the diffusion indices indicates contracting activity. The seasonally-adjusted employment index for manufacturing rose from 40.7 in June to 45.6 in July, still in contraction but a better reading. In contrast, the nonmanufacturing employment index, which would have reflected minimal impact from the auto industry distortions, fell from 43.4 in June to 41.5 in July. There is the possibility that these distortions also may impact the reporting of July industrial production (see below).
As further noted in SGS Newsletter No. 51, the severity of the ongoing economic contraction has started to generate other distortions in data reporting: (1) Year-to-year comparisons will begin to see a flattening in annual declines, as year-ago numbers used in comparisons were in severe contraction. (2) Extreme economic disruptions have distorted patterns of regular activity and related seasonal-adjustment processes. (3) The birth-death model overstates payroll levels during recessions. (4) Short-term discouraged workers begin to disappear from the broader BLS unemployment measures as their "discouragement" extends beyond one year (those discouraged for more than a year — since July 2008 or before — have disappeared from the rolls of the government’s "alternative measures of labor underutilization," but are estimated in the SGS-Alternate Unemployment measure).
While Wall Street likely will hype the July employment results as confirmation that economy has turned the corner, such hype and resulting overly optimistic expectations should be slammed in the months ahead, when the positive reporting distortions reverse out in a normal catch-up process.

I have read several reports by the venerable Harry Schultz along with Bob Chapman and Jim Willie that state a "banking holiday" is scheduled for Sept. They say that U.S. embassies across the globe have been instructed to purchase and stock up on foreign currency (enough to last a year) prior to this time frame. It does make sense to me, as you all know since late last year, I suggested that such a "bank holiday" scenario might very well happen. In case it will happen, it certainly helps if you have sufficient and easily accessible (not in a bank) cash and gold coins hidden somewhere and if you have stored sufficient food supply for at least 3 months. Please take note that access to bank safe deposit boxes might not be possible for some time.



Silver ETF’s



Well dear reader I mentioned a couple of times in my last posts that I do not trust certain Gold and Silver ETF’s. Following a report about the iShares SLV managed by JP Morgan, and the London-based ETF Securities funds, informing about anomalies. Multiple anomalies were found. They detected numerous duplicate bar entries within both lists, which comprised 11.88% and 0.4619% of the SLV and ETFS bar totals, respectively. My guess is that the same is true for GLD, please read on
http://www.zerohedge.com/sites/default/files/SilverETFs_1_PDF.pdf



Banks and Banksters

AIG Is Even Worse Off Than You Think
Remember the fairy tale about AIG being an otherwise healthy insurance company that just got a little crazy selling credit default swaps? Well, it's time to put that one to rest.
The New York Times has reviewed state regulatory filings and discovered that "AIG's individual insurance companies have been doing an unusual volume of business with each other for many years — investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect."
http://www.businessinsider.com/aig-is-even-worse-off-than-you-think-2009-7

Fannie Mae
Fannie still needs billions to cover losses
Fannie Mae to Tap $10.7 Billion in Treasury Capital
Fannie Mae, the mortgage-finance company taken over by the government, asked the U.S. Treasury for a $10.7 billion capital investment as an eighth straight quarterly loss drove its net worth below zero once again.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAoMEkN9lWGA


Max Keiser's Latest With Dmitry Orlov and Dr Housing Bubble
http://www.zerohedge.com/article/max-keisers-latest-dmitry-orlov-and-dr-housing-bubble

US Sen Bunning: FDIC's Bair Said Up To 500 More Banks Could Fail
http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=200907161103dowjonesdjonline000753&title=us-sen-bunningfdics-bair-said-up-to-500-more-banks-could-fail

Banks still getting sicker
The economy may have turned, but banks will be cleaning up after their lending mistakes for years. Several big banks may already be doomed to fail.
http://money.cnn.com/2009/08/05/news/economy/banks.gruesome.fortune/index.htm?postversion=2009080514


Return (gains) inflation adjusted

Well dear reader inflation is a very important factor if you want to find out what you have or would have earned with your investments. In order to really find out if your investment value has gone up in purchasing power, one must include the inflation numbers in the quotation. Only if prices are adjusted to real inflation one can find out if the investment really has gone up in value. Well if we talk about inflation adjusted I prefer to use the numbers calculated by John Williams from www.shadowstats.com and not the official numbers. Let’s have a look at what www.shadowstats.com says regarding inflation in the last years.
Now let’s see what the S&P500 did since 2000 and what gold and silver did. Interesting indeed.

Chart from Williams CPI




And the markets:

10 years ago today

DJ 10 707 9320 minus 13%

Gold 255 966 plus 278%

Silver 5.13 14.65 plus 185%






Equity

A reader and friend has sent me a note from an analyst who claimed that stock markets will head much higher (which of course is a possibility) following my answer to the mails a received and to his question about my opinion:
There are different opinions about the stock market. In general terms one can say that the stock market is still expensive. DJ has a PE ratio of 51 and the s&P500 of above 30. That, by historical terms, is way too expensive. A stock market is cheap with PE ratios are around 6 to 8. Therefore I do not see much potential for stocks. On the other side we have to admit that many companies, especially banks do make a lot of money because they receive money from the government for nothing. Of course somebody or some entity will have to pay for that. Those who pay are on one side the taxpayers and on the other side the USD holders, as the USD will lose more and more value.

So yes these companies will make money but still the PE ratio is too high.

Receiving money from the government and making money with it is artificial. Everything that is artificial will get back to normal some time but getting back to normal means getting rid of the artificial fat and that means a lot of workout or with other words a lot of pain. Will we see this getting rid of the fat soon? Well I do not know, but I know that with every day we get closer to it.

Well anyway, what is really interesting with prices of investments is what I have tried to explain in my musings. The question is, what value does a DJ or any other investment really have. In order to find out if an investment really has gone up, we have to take into the picture the inflation numbers. Without including inflation we do not really know if the value of the investment has in fact gone up, with other words if the purchasing power of the investment really has increased. Well let’s have a look at the numbers comparing the values we had 10 years ago with today. Taking these values, we can clearly see that the stock markets, especially the US stock market has lost value. With an anual inflation rate of between 8 to 14% the USD, which means in other words that the USD has lost more than 60% of its purchasing power, the stock markets should be at least 60% higher, just to make up for loss of purchasing power due to inflation.



Let's have a look at the numbers


10 years ago today

DJ 10 707 9320 minus 13%

Gold 255 966 plus 278%

Silver 5.13 14.65 plus 185%

Well the numbers above show clearly what was the better investment over the past 10 years and it shows as well which investments have in fact done better than inflation. Stocks unfortunately are not amongst them. Of course if I look at the period of 1980 to 2000 the picture is completely different. The difference is that today we are in another cycle. If one looks at a 200 year chart it is clear that bull or bear cycles lasted normally between 15 to 20 years. Being since 2000 in a bull cycle for what I call “real values” I think it is relatively save to assume that we will see much higher gold and silver prices for at least another 10 years.

So with other words it could be that the stock markets head higher. However it does not mean that you will be able to buy more with the value of stocks in the case that we will see ongoing high inflation. Right now we have a real inflation in the US of above 6%, which still is high.

With all the money printed or injected into the economies and especially into the US economy, we should already see hyperinflation. Why do we not yet see it? Well the problem is that up to a year ago, banks and many companies have created income that did not exist at all by creating papers that represented only fantasy. This is a huge bubble that has not yet burst. As long as there are still trillions or quadrillions of these phony papers without value, all the money that is injected is needed to cover losses from papers that have no value. Once that is done, which I believe will take some time, we will see hyperinflation.

Again it is difficult to know exactly what the short term future will be. What is clear in my opinion, is that the real value (purchasing power) of stocks will fall versus gold and silver and that we will see the bull market in gold and silver running for at least another 10 years or maybe more.

Personally I believe that we could go higher in the stocks for maybe maximum another 20 days or so, maybe less and that we will go below the 6,000 mark in the DJ. Why do I believe that? Because in September/October/November we will see again problems popping up because of this huge load of worthless paper that still have to be written down. I am convinced that we will see that happen soon. They talk already about changing the accounting rules again, in the sense that companies will have to show a truer picture than what they show today. That will be an awakening for many.

By the way I am convinced that it is already a taken decision by the powers to bring the stock market down. They needed a rally in order to lure some "suckers" (that's why some call it a suckers rally) to buy in order for the powers to get rid of the worthless paper. Insider selling is at its highest in history. My understanding is that this plan was discussed an approved at a recent meeting of people in power. An observer that has apparently inside information and was many times correct in the past, does report this.

Therefore I believe that the risk of betting on higher stock prices does not make much sense. If I am not correct and stocks will head much higher, the ones not invested in stocks will not lose money, however they will lose an opportunity to make money. On the other side, if I am correct and stock markets will head lower, an investor is invested in stock this will lose real money and that, according to my experience, hurts a lot more than (only) losing an opportunity.

And a remark from the guru Richard Russell
August 5, 2009 -- I guess I should come clean and admit it. After reading all about Goldman Sachs and studying Paulson and Geithner and former NY Fed Chairman Friedman, I have become almost hopelessly cynical about the markets. Is anyone ethical? Is anyone honest? I'm starting to wonder. Where money is concerned, is there anything Wall Street or the bankers won't try?

Rumors of manipulation have been around ever since I started writing Dow Theory Letters in 1958. I always pooh-poohed those rumors, believing that it was the losers who always blamed their losses on manipulation. But now I'm not so sure.

For instance, I watched yesterday's close on the NYSE minute by minute. The Dow was fluctuating back and forth -- up 5 points one minute, down 3 points the next minute. But with one minute to go, the Dow suddenly spurted 33 points higher. I stared at my computer screen in surprise, and I asked myself, "What the hell was that?" It seemed apparent that "somebody" wanted a noticeable higher Dow at the close.

The market can be manipulated on a daily basis or maybe for a week. But in the big picture, as to the primary trend, I don't believe the stock market or the economy can be manipulated. Although heaven knows that Washington is trying -- throwing unprecedented trillions of dollars at the US economy. It's never been tried before, but won't trillions of dollars be enough to manipulate the great tide or the primary trend of the market? Maybe for a few weeks or even a few months, but I still don't believe that the primary trend can be halted or reversed, no matter who tries and no matter with how many Federal Reserve dollars.

I've worked for over 50 years with the Dow Theory. A basic tenet of Dow Theory is that it is not infallible. The good and the bad (frustrating) part of Dow Theory is that it requires interpretation. Robert Rhea wrote that "those who demand least from the Dow Theory gain the most from it." I might add that those who demand most from the Dow Theory are the ones who will be most frustrated by it…..

1929
In order to understand what can happen, it’s always good to know what happened during previous crisis. In 1929 the Dow topped at 381.17 on September 3rd and then slid all the way down to 200 just seven weeks later. From there we saw a rebound back up to 290.00, recovering almost half of the previous loss, prompting calls “that the worst was over”. From there the Dow fell all the way down to the July 1932 low of 41.22 before the worst was truly over. Many folks were sucked into the reaction, thinking that stocks were cheap, and lost everything when the wheels finally came off.
Might it happen again?


USD/Currencies

The dollar index rallied 0.8% this week to 78.97. For the week on the upside, the Brazilian real increased 2.5%, the Mexican peso 1.9%, the New Zealand dollar 1.7%, the Swedish krona 0.3%, and the South Korean won 0.3%. On the downside, the Japanese yen declined 2.9%, the South African rand 2.8%, the Swiss franc 1.3%, the Euro 0.6%, and the Canadian dollar 0.5%.

Another reader and friend too, has send me an analyst note about the USD whereas the analyst mentioned that everybody is already USD short and that he as a contrarian believes that the USD rather will go up over the coming months. Following my answer:
I can agree with the person regarding the contrarian point of view. Contrarian point of view does have its merits, especially short term. However following a contrarian point of view against major trends is in most cases not favorable. The long term trend of the USD is down. There is simply too much debt and increasing every day. That is not healthy for any currency. Therefore the long term trend is down and I am a strong believer that the USD will disappear in 2011.

However short term he might very well be right. Especially if we get into another situation as last year, which as you know I do expect. In such a situation many of those having taken credits in USD will be forced to pay back the credits, which again (like last year) will have the effect of an artificial USD demand. I say artificial because it is not because the want the USD because the believe in this currency but because they need to buy it in order to pay back credits.

So yes it is a possibility.


Bonds

Although it is known that the previous foreign buyers (Central Banks) of the Treasury are not keen to buy US Treasuries anymore, the numbers of the last week auction suggested that this is not true. Well, last week I included some information in my post with a link to an essay about the Fed indirectly (via the Primary Dealers) buying the Treasuries. Using this form of buying, it seemed that the demand from international investors still is high. Well dear reader, the writer of the essay was right saying that the Fed is buying the treasuries in a camouflaged way. Please read on to find out why
http://www.zerohedge.com/article/feds-ust-pomo-pyramid-scheme-exposed

Well dear reader there is no real demand for these papers that are becoming more and more worthless. On the contrary foreign investors want to get rid of the papers and the dollars but have to be careful doing it in order not to let fall the complete house of cards. Well it seems that higher USD bond yields can be expected soon.