themusingsoffritz: 12/6/09

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"No legal tender law is ever needed to make men take good money; its only use is to make them take bad money."
(Stephen T. Byington)

In this post you will find information about the following

Economy
-Dubai or Du-bye, my musings about Dubai and sovereign default risks
-More about Dubai, a comment found on lemetropolecafe
-US commercial property loan defaults soar-reports
-John Williams on the job data: The Economic Downturn Is Ongoing.

Gold
-my musings
- James Turk: Welcome to Stage Two of Gold's Bull Market
- The Federal Reserve Becomes the ‘Buyer of Last Resort’
- Miners say they're running out of gold
- ABX Barrick Gold eliminates all gold hedges and my musings re Barrick

Banks and banksters
- Dinosaurs on the path to extinction II
- Most global banks are still unsafe, warns S&P
- Angela Merkel alarmed by worsening credit crisis
- Arming Goldman With Pistols Against Public
- and a must see video

USD
On it’s path to hyperinflation. Some interesting data from Weimar

Oil
ASPO weekly review

Before going into the information part I'd like to start with last weeks overview from www.prudentbear.com

For a volatile week in global markets, the S&P500 gained 1.3% (up 22.4% y-t-d), and the Dow added 0.8% (up 18.4% y-t-d). The Banks rallied 2.7% (down 0.2%), and the Broker/Dealers jumped 3.9% (up 48.9%). The Morgan Stanley Cyclicals gained 2.8% (up 68.7%), and Transports jumped 4.6% (up 16.0%). The Morgan Stanley Consumer index added 0.8% (up 23.0%), and the Utilities gained 3.8% (up 3.0%). The broader market was strong. The S&P 400 Mid-Caps rallied 2.7% (up 30.4%), and the small cap Russell 2000 surged 4.4% (up 20.7%). The Nasdaq100 increased 1.5% (up 47.9%), and the Morgan Stanley High Tech index gained 2.3% (up 63.4%). The Semiconductors surged 8.2% (up 58.0%). The InteractiveWeek Internet index rose 2.4% (up 70.4%). The Biotechs gained 2.7% (up 40.5%). Although bullion ended the week down $16, the volatile HUI gold index ended the week little changed (up 55.7%).

Economy

Dubai or Du-bye (bye)?
Dubai is certainly not anymore the Dubai as it used to be. Shall we already say goodbye? It does not seem so. Although their brothers from Abu Dhabi stepped in to help them out, the story possibly is not at it’s end yet and the end might not necessarily be a happy one. In April 2008 I wrote about Dubai after having spent some days there and after having done so twice within 3 months. Already then I wrote that the Dubai story will not end well. The real estate bubbly could clearly be recognized. Their ongoing and future plans were simply too exaggerated. My guess is that the mega super airport and other mega projects will never be started or finished. What has the Dubai case shown us? It showed us that we should start to accept the idea of sovereign defaults. It is important to understand that we do not only talk about the sovereign risk of banana republics. No definitely not. There are many countries from the developed world in deep troubles too. So any default of those countries one never thought they could default, should not come as a surprise. This might sound like utopia but it is not much so. 3 years ago I told some of the readers to avoid Fannie Mae, Freddy Mac or even GE. It sounded tremendously like utopia at that time because the 3 had sound AAA ratings and seemed to be in an excellent shape (never mind that some were not even able to keep an accounting according to acceptable standards and furthermore had no idea at all about the risks they hold on their books. Writing this remark I just realized that this sound very much like the situation of the big banks at this precise moment in time). Well they still do exist. However they still are in deep troubles aren’t they? So once again, sovereign defaults will be news soon. The controlled and corrupt media will be happy, as they will have more food to direct the attention of the masses to the reporting of the state of managed chaos.

If you hear that everything is now solved, don’t believe it. It is the screen-play of the authorities. They not only use truths but mainly half-truths and a lot of deception and lies.

This to render as much people as possible hopeless and thus feeling it is pointless to do anything. Dubai in my opinion is just another piece of the screen-play. A crisis here or a crisis there, it is already normal. How lucky we are that there are always some super heroes that kill the bushfires. Great to know that we have so competent leaders, which truly do have only, and nothing else than only, our best in their minds. Sheep do like to be together and need the Shepard or the Shepard dog that bites them from time to time. They like to have a lead. Why care about the bites, right? Well the media without doubt has done an excellent deception job. The sheep do not know that they are on the way to the slaughterhouse. These poor sheep basically are already before the front door of the slaughterhouse and they still do now know what is happening. Is it too late? No it is not, but everybody including the sheep should get ready. The more people are ready the better it is. The mass conscious of all those awakening can change the world and everything that has to be changed. We can do it but we need to do some work. Let’s start. Don't’ accept the lies. Speak up. Inform your fellow man.

More on Dubai
A contributor to www.lemetropolecafe.com wrote on Wednesday 1st of December 2009 the following
Quote
Today I heard an interview with an economist discussing the situation in Dubai. This guy suggested the $60 Billion dollar debt that has gone off the rails is not a big deal, and it will likely be contained and not spill over into other countries. Well, I find these attempts to reassure the markets to be a bit thin lately. Was it not just 2 years ago that we were told the sub-prime crisis would be contained? Was it not just last year we were told the FDIC had plenty of cash reserves to continue insuring savings in the banks? Are we not hearing right now that the economy is on the mend? I mean I can forgive an overly optimistic outlook from time to time, but this is beyond ridiculous.
The other big thing that I find astonishing is how Dubai is looked at as an isolated hotbed of excess and over investment. This is pure nonsense.
Unquote

and some more
found on the following link http://www.safehaven.com/article-15210.htm
quote
When people think of Dubai the things that come to mind are the massively extravagent 7-star hotels, the towering record breaking skyscraper, palm-shaped island resort complexes etc and forests of new office buildings and apartments etc. What the vast majority don't realize is that the stupendous leverage afforded by derivatives has in addition enabled Dubai to create an immense global empire of businesses, most of the elements of which are broke, having racked up staggering levels of debt. Dubai is the nexus of the derivatives pyramid and it is flat, stony broke. Where did all the money come from to pay for all these things? - why from taxpayers and pension fund contributors the world over of course, but especially in the US, with Wall St acting as a giant conduit sluicing a torrent of cash into Dubai. The interesting thing is that there was never any accountability - countries and companies vied with each other for the privelege of pumping money into the exalted kingdom, seduced by its supposedly limitless oil wealth, and requesting or requiring guarantees was regarded as impolite. Now that Dubai is broke, the Dubai government has suddenly distanced itself from Dubai World, and the attitude towards the Western banks and governments who have poured trillions into Dubai is "Tough luck - you lose, suckers". What this means is that trillions of dollars which are now counted as assets on the balance sheets of banks worldwide and especially in the US are actually liabilities. So what do you think is going to happen to the stock prices of these banks - and stockmarkets generally, when the world wakes up and acknowledges this reality - when the shockwave hits?? Small wonder that the charts for Goldman Sachs and J P Morgan look very like the market charts before the '87 crash, but that was "small potatoes" compared to what is coming down the pipe this time.
uquote

The following news does not seem like an improving economy

US commercial property loan defaults soar-reports
NEW YORK, Nov 30 (Reuters) - The default rate for commercial real estate loans held by banks reached the highest in 16 years and the outlook looks worse, according to a report by a research firm released on Monday.
The picture for loans underlying commercial mortgage-backed securities looks as bleak, according to another report.
The national default rate for commercial real estate mortgages held by banks and other depository institutions reached 3.4 percent in the third quarter, up 0.52 percentage point from the second quarter, according to research firm Real Estate Econometrics.
It was the largest one-quarter increase since quarterly data became available in 2003.
At 3.4 percent, the U.S. default rate for commercial real estate mortgages -- on office, industrial, hotel and retail properties -- held by banks, thrifts and other depository institutions was the highest since 1993, when the default rate was 4.1 percent.
The default rate is the percentage of loans on a dollar basis that are past due 90 days or more or that are in non-accrual status, meaning lenders don't expect to be repaid in full, according to Real Estate Econometrics…

John Williams on the jobless data
Updated Outlook: The Economic Downturn Is Ongoing. Just in time to boost the confidence of Holiday Season shoppers, the Bureau of Labor Statistics (BLS) announced a 0.2% downturn in the November Unemployment rate, with November payroll employment virtually unchanged. Those results are nonsense, if taken literally. As discussed in Commentary 262, the better-quality series that underlie the government’s employment and unemployment reporting are showing ongoing deterioration, in particular the various help-wanted advertising and purchasing managers surveys.
Important to keep in mind is that the severity and duration of the current economic downturn — unprecedented in the post World War II era — has led to serious data distortions, particularly tied to seasonal adjustments. Such was noted recently by the Federal Reserve for some of its series, where patterns of sharp variations in reporting of activity a year ago — now being built into current seasonal-adjustment factors — are anything but regular seasonal patterns. Giving the BLS the benefit of the doubt on the unemployment rate, October’s above-consensus reported 0.4% surge in the headline unemployment rate likely was spiked by bad seasonals, which reversed in the November reporting. Such was touched upon in Commentary 262 on the outlook for today’s report. The upturn in the unemployment rate should return with December’s reporting.
As discussed at the time, the earlier drop in the reported unemployment from 9.5% in July 2009, to 9.4% in August, was due to a seasonal-factor distortion tied to irregular timing for retooling of automobile production lines. Those distortions reversed in September, with the unemployment rate jumping to 9.7%. Until stability returns to the unemployment-rate reporting, using a three-month moving average makes sense in terms of assessing direction. The seasonally-unadjusted series does not get revised, except for changes to population estimates. The seasonally-adjusted series, however, has its seasonal factors restated annually, and the next revision there likely will smooth out some of the recent variability.

My musings to the job data:
It is certainly interesting to see how the sheep follow eat whatever they get served. With the apparently better than expected job data everybody was happy and markets started to move up. Hey sheep start to wake up. We need enlightened people not blind followers!! As mentioned before, things can be changed but not by following blindly those that should not be followed.

Gold

Up to Thursday last week, we were making new all time highs, however if we include inflation, these highs were still far away from a real new all time high. My year end target of 1,300 USD per ounce of gold and 24 USD for silver still stands although since Friday last week the market has corrected somehow. By the end of September, when the gold exchange rate was still below 1,000 it seem not at all that my year end target could be reached. Well we are now much closer than we were just 2 months ago. As mentioned in one of my posts in September, 1,000 is now the floor. In fact 1,000 is now strong support from a technical point of view. Traders that are on the sidelines wait for any fallbacks in order to buy at lower prices. That again should help to give support. Up until this correction we clearly were in an overbought situation but now with a price a couple of dollars lower that is not the case anymore. Being for a long time in an overbought situation does not mean much as markets can stay overbought for a considerable time. Why has the market or the precious metal prices come down? On one side the commercials which have increase their short positions had certainly their day. It is the paper and not the physical market that makes these swings. Once the price moves all those speculators being on the wrong side have to cover at some point. The expetion are the commercials, which are the bullion banks helping the Central Banks to control the explosive upside potential of gold and silver. As the Central Banks just can print money as they like, the bullion banks have an endless pool of funds and therefore can add to their positions as long as they like. However piling up more and more short positions increases their risk of a short squeeze. If we have a short squeeze prices will shot up significantly. If not we might see a more significant fallback than last two days. My guess is that we are not yet at the point of decision. To me it looks like the actual prices are excellent to buy. Those having waited on the sidelines will be happy with the opportunity to buy at lower prices.

James Turk: Welcome to Stage Two of Gold's Bull Market
Bull markets are marked by three distinct stages, and when gold climbed above $1,000, it only entered its second stage. In other words, gold has much further to climb in the months and years ahead.
So don’t be misled by what you may hear or read in the mainstream media and even much of the alternative media. After all, how many commentators have correctly identified gold’s bull market, now a decade old?
http://www.kitco.com/ind/Turk/turk_oct232009.html

The Federal Reserve Becomes the ‘Buyer of Last Resort’
While the debate continues whether inflation or deflation will be the dollar’s eventual fate, the Federal Reserve is pursuing a pernicious policy that is insidiously debasing the dollar. This policy has generally been met with indifference, if it has even been noticed at all.
The inflation/deflation debate focuses only on the ‘quantity’ of dollars and completely fails to address an equally important monetary facet, the ‘quality’ of the dollar. The Federal Reserve is debasing the dollar by purchasing inferior assets of poor quality. These assets are mortgage-backed securities issued by federal agencies like the insolvent and for all practical purposes bankrupt, Fannie Mae.
http://www.fgmr.com/federal-reserve-buying-mortgage-backed-securities-debases-the-dollar.html

Miners say they're running out of gold
http://www.brisbanetimes.com.au/business/miners-were-running-out-of-gold...
Gold production will continue to fall, despite a brief boost in 2009 and soaring prices, as deposits are exhausted and new discoveries remain elusive, say miners.
In terms of production, "2009 is the outlier as far as the trend," Omar Jabara, spokesman for US-based Newmont Mining, the second-largest gold producer in the world, told AFP.
Overall, "It's a fact that gold production from mines has been in decline since 2001 and has gone roughly from 85 million ounces to about 75 million ounces a year," said Vincent Borg, spokesman for No. 1 producer Barrick Gold. "It sort of goes down about 1 million ounces every year and our forecast is that it will continue to decline despite the higher price" for gold nowadays, he said.
Almost everywhere, mineral deposits are being exhausted and new deposits are not being found fast enough to replace them, these experts explain.
South Africa, which was once at the vanguard of world production, saw a 9.3-percent drop in production year over year in the second quarter, according to its Chamber of Mines.
Globally, "it's just that the assets are not there anymore," Tonya Todd, a spokeswoman for Goldcorp, Canada's second biggest gold mining firm.
"Just because gold reached a new high today doesn't mean we can send a message to our 26 mines saying produce as much gold as you can today because they are already," said Borg. "It's not like a water tap you can turn on and it comes right away."
Barrick and Newmont expect nevertheless to continue increasing production next year by 7 percent and five to 10 percent, respectively. But long-term, it's downhill.
Omar Jabara explained that it takes from seven to 10 years to start production of a mine after finding an economically viable gold deposit.
And "no significant new discoveries have been found in recent years, despite the higher gold prices and despite higher exploration budgets," said Borg.
What is already happening and is likely to continue is that the grade or quality of deposits industry-wide will be "on average lower than deposits discovered in the past," opined Jabara.
The global gold mine production is forecast to rise by 3.7 percent in 2009 to about 2,500 tonnes, but will satisfy only two-thirds of demand, which soared this year amid the global financial crisis to 3,800 tonnes, according to the World Gold Council.
Historically, gold recycling or the sale of central bank stockpiles made up for supply shortages.
But during the latest financial crisis, banks have been buying up gold in large quantities to protect monetary reserves against weakness in the US dollar.
Since the start of November, for example, India's central bank has scooped up 200 tonnes of gold from the International Monetary Fund, at market value for about 6.7 billion dollars.
Amid uncertainty in the stock market, small investors and hedge funds are also coveting gold, driving up demand for the precious metal.
With mine production sloping downwards, an increasing supply of gold must come from existing supplies -- such as coins, bullion, or jewelry -- but it will be very limited.
"All the gold ever produced through history amounts to about 165,000 tonnes, which would barely fill two Olympic-size swimming pools," said Jabara.

ABX Barrick Gold eliminates all gold hedges ($42.69) The company announced that it has completed the elimination of all of its Gold Hedges and now has full leverage to the gold price on the industry's largest gold production and reserves. In September, the company announced its plan to eliminate all of its Gold Hedges within 12 months and a substantial portion of the liability related to its fully participating Floating Contracts. To fund the elimination of the Gold Hedges and a substantial portion of the Floating Contracts liability, the company issued new equity in September for net proceeds of $3.9B and in October issued $1.25B in new long-term debt securities for total net proceeds of $5.1B. The subsequent change in the MTM of the Gold Hedges of $0.3B that occurred prior to elimination will be recorded as a charge to earnings in Q4. There will be no further charges to earnings related to changes in the MTM of Gold Hedges now that they have been fully eliminated. For 2010, the company expects gold production to grow to 7.7-8.1M ounces at lower total cash costs than 2009.

Didn’t they tell us again and again that they have gone out of their hedges already? Hey, why should I believe them now? Once thing for me is crystal clear, Barrick is a stock I will never own. I simply do not trust them. How could I?

Banks and banksters
Dinosaurs on the path to extinction II

Most global banks are still unsafe, warns S&P
Every single bank in Japan, the US, Germany, Spain, and Italy included in S&P's list of 45 global lenders fails the 8pc safety level under the agency's risk-adjusted capital (RAC) ratio. Most fall woefully short.
The most vulnerable are Mizuho Financial (2.0), Citigroup (2.1), UBS (2.2), Sumitomo Mitsui (3.5), Mitsubishi (4.9), Allied Irish (5.0), DZ Deutsche Zentral (5.3), Danske Bank (5.4), BBVA (5.4), Bank of Ireland (6.2), Bank of America (5.8), Deutsche Bank (6.1), Caja de Ahorros Barcelona (6.2), and UniCredit (6.3).
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6638922/Most-global-banks-are-still-unsafe-warns-SandP.html

Angela Merkel alarmed by worsening credit crisis
The German government is rushing through a fresh package of measures to shore up ailing banks and prevent a second wave of the debt crisis suffocating large parts of manufacturing industry.
http://www.telegraph.co.uk/finance/economics/6695364/Angela-Merkel-alarmed-by-worsening-credit-crisis.html

The goldmans become gunmans. The following information is certainly an interesting read
Arming Goldman With Pistols Against Public
“I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.
http://www.bloomberg.com/apps/news?pid=20601039&sid=ahD2WoDAL9h0
Isn’t that information interesting? These guys very well know that they are not really loved by the masses.

The following is a must watch video about the connection of some advisors and wall street
http://www.zerohedge.com/article/matt-taibbi-exposes-obamas-wall-streets-inner-circle-pays-particular-homage-robert-rubin

Equity

Although 2 weeks ago I mentioned that from a technical point of view the DOW should head higher, I must say that the S&P500 did not yet confirm. As long as the S&P500 does not confirm and as long as volume stays low, I am very cautious. As mentioned before, just in case, I would work with stop loss orders. For the moment being I have not changed my opinion of being on the sidelines and therefore not being invested in stocks. I prefer to wait until the trend is clear.

USD

The USD on its path to hyperinflation. At the end of September, ladies and gentlemen, I mentioned James Turk presentation and conclusion. According to James the tipping point possibly will be reached by the end of 1st quarter 2010. From then on it will take 6 to 9 months until the USD is in hyperinflation. John Williams from Shadowstats.com believes as well that the US will enter hyperinflation by 2010. In his last Report he mentioned a book from Ralph Foster about hyperinflations. In the book Foster closes his preface with a particularly poignant quote from a 1993 interview of Friedrich Kessler, a law professor whose university affiliations included among other, Harvard and University of California. From firsthand experience, Kessler desribed the Weimar Republic hyperinflation:
“It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money”
Hyperinflation indeed hit rapidly, annual inflation in January 1922 already was more than 200% up from as low as 6% in April 1921. The then existing currency was abandoned at the end of 1923.

Following two charts that show how fast things changed. The left hand scale shows amounts in trillions.

Milton Friedman and Anna Jacobson Schwartz noted in their classic A Monetary History of the United States that the early stages of the Weimar Republic hyperinflation was accompanied by a huge influx of foreign capital, much as had happened during the U.S. Civil War. The speculative influx of capital into the U.S. at the time of the Civil War inflation helped to stabilize the system, as the foreign capital influx into the U.S. in recent years has helped to provide relative stability and strength to the equity and credit markets. Following the Civil War, however, the underlying U.S. economy had significant untapped potential and was able to generate strong, real economic activity that covered the war's spending excesses.
Post-World War I Germany was a different matter, where the country was financially and economically depleted as a penalty for losing the war. Here, after initial benefit, the influx of foreign capital helped to destabilize the system. "As the mark depreciated, foreigners at first were persuaded that it would subsequently appreciate and so bought a large volume of mark assets ..." Such boosted the foreign exchange value of the German mark and the value of German assets. "As the German inflation went on, expectations were reversed, the inflow of capital was replaced by an outflow, and the mark depreciated more rapidly ... (Friedman p. 76)."
Well dear reader how about paying USD 21,500,000,000 for sending a letter? Impossible? Maybe not. That was the amount that posting a letter has cost when the currency in Weimar collapsed. Get ready, be prepared.
The difference maybe to Weimar and the upcoming hyperinflation in the USD is that the people investing in the old marks did not know that they were doomed to take a hit, while today Central Banks and major investors know that the USD will lose. It seems that all hope that they can get out of the dollar before the others do. A risky game indeed for all dollar holders.
As long as the US keeps on spending money like there is no tomorrow and does not make a U turn, what in my opinion is very unlikely, we will see hyperinflation in the US. The bad news is that other paper currencies are on the same path. Not only the US government is spending like crazy but many others too. Not only the US is printing new monies like crazy but others too. The question is what are the better currencies. The best currency is without doubt Gold and Silver. The paper currencies I like most are CHF, AUD, NOK and NZD. Australia and New Zealand produce goods that China needs. Norway has a lot of reserves and Switzerland still seems to be the country the is most disciplined regarding printing of new monies.