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The Rules Continue to Be Changed

Monday, February 20, 2012, 1:35 PM

One of our core operating principles around here is that when pressed by circumstances, the authorities will simply change the rules. And by "circumstances" we mean anything that could destroy the markets, or perhaps be just politically convenient, or anything in between.

Examples include the NYSE unilaterally and without precedent breaking trades following the flash crash of 2010, the mysterious inability to enforce the rules in the case of the "missing" MF Global client funds, and the avoidance of any and all criminal action against banks and mortgage companies caught red-handed in falsifying documents. 

To this list, we need to add the recent actions of the European Central Bank (ECB):

» Read more


Off the Cuff: A Crescendoing Crisis of Confidence

Thursday, February 16, 2012, 1:56 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish has the week off but Chris digs into:

  • Greece
    • A Depression is here - the question is how protracted will they make it?
  • The US (and what it can learn from Greece)

    • The markets are showing in no uncertain terms what happens when a nation's debt-to-GDP ratio gets out of control
  • What It All Means

    • Tolerance for profligacy is running out. Some important players are beginning to walk away from US debt

With Mish on the road, Chris goes solo this week and delivers a hard message for the US: there are limits to the printing press.

» Read more


The Case for $2,500 Gold in 2012

Monday, February 13, 2012, 10:19 AM

The Case for $2,500 Gold in 2012

by Gregor Macdonald, contributing editor
Monday, February 13, 2012

Executive Summary

  • Is the US indeed returning to growth?
  • The implications of economic growth (or lack thereof) on gold's price
  • Price targets for gold in various fiscal and economic scenarios
  • Why $2,500 is the most probable price for gold in 2012
  • Contingencies gold investors should be wary of

Part I: Gold Gets a Growth Scare

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Case for $2,500 Gold in 2012

In a recent New York Times editorial, Christina Romer, former chair of the Obama's Council of Economic Advisors, essentially dismissed the view that manufacturing was a crucial component to any economy. Readers will recall my most recent essay on the boom in US exports, The Price of Growth, in which I also highlighted the skepticism of the economics establishment toward exports.

Subsequent to that essay, Annie Lowrey, the new reporter covering economic policy at the New York Times, wrote a fine overview piece that essentially echoed my own view: The US has a new industrial policy to bring back manufacturing and boost exports. The two are obviously inter-related. And it's revealing how many mid-career professionals in America are completely oblivious to the newest thinking on the subject. Indeed, we are learning more about the crucial dynamic mentioned briefly in Part I, which is that a relationship between design and manufacturing requires a close physical proximity to flourish.

Here is Alexis Madrigal on the subject as early as 2010, in an Atlantic piece, Key Question: Can the US Innovate Without Manufacturing?

An audience member asked a simple question with deep implications: if manufacturing continues to move offshore, can the United States continue to innovate? The premise behind the question, as Splinter explained, is that manufacturing isn't just where ideas are put into practice, but a key part of the innovation ecosystem. (He should know: he once ran Intel's top chip fab.) It's possible, the question suggested, that the factory itself is a site of innovation because the people closest to the work of building things know how to make them better. That view is a challenge to the simplified idea that research, product development, and manufacturing are discrete steps.


Between you and me, I think I've shown that the US is only at the very start of a long road back to recovery, which will not only establish a New Normal, but will have to include exports, manufacturing, and an economy with less surplus capital. The same holds true for the other two major players in the OECD puzzle, Japan and Europe.

So what does this mean for the financial markets, and in particular, gold?


Off the Cuff: Things Just Aren't Adding Up

Thursday, February 9, 2012, 9:01 PM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish zero in on:

  • Fuzzy Math
    • Why are we hearing a steady drumbeat of upbeat economic news, when looking beneath the surface into the hard data shows exactly the opposite?
  • Malincentives

    • The US is embracing policies that favor corporations over individuals and encourages them to send their jobs and cash overseas. How did we get here?
  • Greek drama

    • The increasingly farcical steps being taken to avoid calling this obvious default for what it is are turning the Greece rescue efforts into Kabuki theatre

Chris and Mish take out their calculators this week and try to make sense of increasingly nonsensical behavior by our governments. Warning: Regardless whether or not you're a math person, this week's podcast is sure to raise your blood pressure. So take an aspirin before listening.

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A Collapsing Trade - Japan in the Crosshairs

Wednesday, February 8, 2012, 3:21 PM

Japan is facing two types of collapsing trade, but the one affecting Sony and Honda is a symptom of the other. 

Japan is currently being harmed first and most by a collapsing carry trade. The effect of this is to drive the exchange value of the Yen higher and higher, which then harms both the volume of exports and reduces the yen value of repatriated profits, a double whammy for an export dependent nation.

For now, Japan is simply making wounded noises, hoping the US will listen and relent. I’ll explain that last sentence in just a minute; first here’s a sample of the wounded noises: » Read more


Surviving a Currency Crisis

Wednesday, February 8, 2012, 10:18 AM

Surviving a Currency Crisis

Wednesday, February 8, 2012

Executive Summary

  • Why hope alone is a terrible fiscal strategy
  • The false security of shifting baselines
  • The key indicators of a currency crisis
  • Plan A (and Plan B) for surviving a currency crisis

Part I: Why Our Currency Will Fail

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Surviving a Currency Crisis

The Biggest Risk

The biggest risk here is not a sudden collapse of the currency that would catch everyone off guard some Tuesday afternoon in a matter of minutes. The biggest risk is in not believing that the collapse is underway. Most people are going to lose most of their wealth simply because they could not mentally and/or emotionally grasp what was actually happening.

Consider that in Greece the banks are under a tremendous run, losing up to 25% of total deposits. Sounds extreme, but let's look at it another way: Just what are the 75% of remaining depositors thinking? How could they leave their money in a Greek bank for another minute? What are they thinking? Probably that somehow things will get better, or some other rationalization that supports their decision to hunker down and hope.

In reading When Money Dies, a historical account of the events leading up to and through the Weimar hyperinflation in Germany, one sees anecdote after anecdote of families and individuals impoverished by their own disbelief and inaction. Most just sat numbly by waiting for the currency to come back, or buying government bonds because they were asked to as a matter of patriotism, or just trusting that the government would figure something out, hoping that things would soon turn around. 

In Argentina, the same dynamic occurred. We've heard in detail on this site from Fernando "FerFAL" Aguirre how those who lost most were the ones who hesitated to acknowledge the reality of what was happening until it was too late.


Fuzzy Numbers

Monday, February 6, 2012, 10:10 AM

At this (late) stage of the game, we can expect almost anything and everything in the way of statistical miracles to be used in order to sustain the illusion that everything is fine.

One of the pieces that I have long been critical of is the Bureau of Economic Analysis’ (BEA) use of their own measure of inflation, the so-called "GDP deflator," to subtract from nominal GDP growth (giving us the reported ‘real’ growth). Of course, you have to subtract inflation from the measured goods and services, or else you are actually reporting inflation as growth. 

The BEA does not use the CPI (consumer price index), which, flawed as it may be, is at least a consistently flawed measure. The deflator, on the other hand, either suffers from some sort of design flaw or is the most politically manipulated number on the planet. » Read more


Off the Cuff: Some of Us (The Banks) Are More Equal Than Others (The Taxpayers)

Thursday, February 2, 2012, 7:54 PM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish debate:

  • Rewarding Moral Hazard
    • The President's announced Mortgage Relief Plan has little help for underwater homeowners, lots for the banks, and none for those who where prudent
  • Europe

    • France is weakening
  • 0% Interest Rates

    • We are bumping up against the limit of what additional liquidity can do. And it will almost undoubtedly result in a currency crisis.

Are you one of the responsible ones who didn't overextend yourself economically during the boom, only to watch the risk-takers rewarded with bailouts? If so, there's lots to be irritated by this week.

» Read more


Understanding the Silver Market

Wednesday, February 1, 2012, 2:45 AM

[We invited David Morgan, noted silver expert and proprietor of, to provide our enrolled members with periodic updates on silver (which is up nearly 20% from the start of the year). He begins this week with an explanation of the mechanics of how it is bought and sold, and details how the dynamics of the physical and paper markets for the metal differ. -- Adam]

Revisiting the Case for Silver

Silver is one of the most compelling commodities to own, solely based on the industrial component and supply-demand fundamentals. Yet this isn’t the most important reason to invest in the metal; the monetary aspect is what makes it imperative, given that the fiat money house of cards could come crumbling down, bringing the entire global system to its knees. Along with gold, silver has been the preferred money of choice for thousands of years, as chosen by the market. It is not the barbarous relic that many who fail to understand honest money proclaim; rather, it possesses characteristics that the market finds the most ideal.

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Prepare for the Collapse of the Dollar

Monday, January 30, 2012, 1:39 PM

Prepare for the Collapse of the Dollar

by Gregor Macdonald, contributing editor
Monday, January 30, 2012

Executive Summary

  • The decision whether to export its commodities will become increasingly strategic to the US
  • Understanding why Washington has decided to kill the dollar
  • What's driving the dollar now
  • What to expect from a coming secular decline of the dollar
  • Why the deflation risk is ending and grand quantitative easing (QE) is now underway

Part I: The Price of Growth

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Prepare for the Collapse of the Dollar

The just-released GDP report, which wraps up the 2011 performance of the US economy, made for unhappy reading.

While the headline number was stronger in the fourth quarter, after adjusting for inflation, the reading for the entire year came in at 1.7%. As Business Insiders Joe Weisenthal put it, that is the "final, pathetic growth number for 2011."

Many writers over the past year, including me, have hammered away at the idea that the performance of the US economy in real terms was statistically indistinguishable from a flatline in the aggregate.

No one disputes that some sectors of the economy, like exports and shipping, are growing. At issue is whether the economy as a whole is operating for the majority and not just segments of the populace. (Again, in real terms.) At a growth rate of 1.7%, we can at least conclude that no meaningful headway can be made in employment. Since the 2008 crisis, the US has been building a multi-million sub-population of people who are unemployed long-term. Only monthly job growth that first utilizes all new workers coming into the labor force will be able to eventually cut into this labor pool. Hence the revelations from the Federal Reserve this week related to targeting inflation, maintaining a zero-interest rate policy through late 2014, and conducting further quantitative easing (QE).

Before we dissect this week’s Fed meeting, let’s take a look at the recent trend in exports.