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Steady As She Goes

Friday, August 26, 2011, 9:05 AM

The recent pullback in gold and silver have not fazed me in the least. I consider the pullback to be a buying opportunity for those who got caught watching the meteoric rise in gold (and to a lesser extent silver) over the past month and a half. I would not advise selling any of your physical holdings into this engineered decline.

As I predicted, (not really a prediction; more of an observation over time), both metals are performing especially poorly in the US Comex paper markets, but do reasonably well in all the other world markets. So far that pattern has held true. I firmly believe that if gold did not trade in the US markets, it would already be well north of $2,000 an ounce.

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Off The Cuff: We're Likely Entering A Financial Crisis That Will Spawn A Monetary Crisis

Wednesday, August 24, 2011, 8:56 PM

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

  • Gold: with today's sharp pullback after an amazing run upwards in the previous two weeks, how concerned should precious metal investors be? Are its fundamentals still strong? 
  • Banks: are we staring at another, and possibily larger, 2008-style bank insolvency crisis?
  • Europe: will the PIIGS pull the Euro apart?
  • China: what impact would economic weakness in China (and signs of stress there are mounting) introduce into the equation?

At this point, confidence is high both a fiscal crisis and susequent monetary crisis are inevitable - and neither is far away. The debate now is: what is going to be the trigger that sets them off? » Read more

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Eye of The Storm

Friday, August 12, 2011, 10:14 AM

If the behavior in the financial markets have not scared off all of the average, normal investors, it’s only because some of them have not been paying close enough attention or have failed to appreciate what they were seeing.

These are markets without a clue, forced into unnatural positions by too much thin-air money for so long that all sense of equilibrium has been lost. Tottering about, seeking the occasional nearby lamp-post, the stock markets are close to setting records for consecutive high-percentage whipsaws.

Even with Thursday’s 400+ point gain in the Dow, allegedly on the basis of improving initial claims statistics (yeah, right), we saw poor market internals such as only five new highs in the NYSE along with 121 new lows. Reverse those numbers and we’re in business for a rally, but instead, with the data we're seeing, it’s not terribly likely that we’re ready to trot off into a new future of rising markets and economic growth.

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STRIPPED: What the Credit Downgrade Means

Sunday, August 7, 2011, 3:08 PM

I wrote about a possible credit downgrade on July 28th and split the probable reactions and consequences into what should happen and what (most likely) will happen. Lately, and with good reason, we’ve all become conditioned to the idea that what actually happens in the financial markets is not what should be happening.

Take this latest move. Nothing that the S&P has done by downgrading US long-term debt obligations from AAA to AA+ has done anything to change the fundamental math of the equation. The US is just as insolvent after the downgrade as it was before the downgrade.

But in a fiat money system, faith is very important, and what just took a big hit was the perception of safety that surrounds US Treasury debt. Further, the downgrade came at a rather awkward time for the financial markets. I suppose there’s never a great time, but some times are a little worse than others, and the financial markets are already highly unsettled after a few weeks of piss-poor economic data signaling the arrival of another downturn and a rising debt crisis in Europe that is still devolving rather than healing.

Here’s a good reader observation and question to which I’d like to respond:

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The Rout Is On!

Friday, August 5, 2011, 7:00 AM

On Thursday, August 4th, the stock and commodity markets took a turn for the worse, the dollar and US bonds went up, and gold held firm.

This pattern is exactly what we have been expecting around here since early March. It still has quite a ways to run, and I remain convinced that it will result in a third round of quantitative easing (QE III).

I laid out this general thesis for what is now occurring in my report, The Coming Rout:

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Off The Cuff: The Message of Rising Gold; Time To Get Defensive

Wednesday, August 3, 2011, 7:41 PM

The latest Off the Cuff with Mish & Chris is out!

In this week's podcast, Chris and Mish tackle:

  • Gold: The yellow metal is up $180/oz since July 1, fueled in part by expectations of quantitative easing around the world. While likely not imminent in the US, speculation of a future announcement by the Fed is growing as the swoon in the financial marktes deepens. And news like that from the Swiss National Bank - which has announced it will take steps to ease in order to weaken the fast-appreciating Swiss franc - are signaling to investors that there are no paper options for those looking for "safe" currencies. Add to this the negative real rates offered by traditional 'safe havens' like T-bills, and gold is increasingly becoming the only option for the risk-averse crowd
  • Market risk: Crash risks go up when the market is oversold. Mix in weakening economic data in the US and Europe. Add increasingly reckless and poorly-conceived intervention by central planners. At some point, market participants may decide their self-preservation outweighs their faith in the status quo. If they do, it will happen under conditions like we're seeing now - and fast. 

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Off the Cuff: The US Debt Ceiling Drama Will End with a Whimper; the EU Credit Crisis with a Bang

Thursday, July 28, 2011, 7:00 PM

Off the Cuff with Mish & Chris is back!

In this week's podcast, Chris and Mish tackle:

  • Debt Ceiling Thrash: All the current brinksmanship is just theatre: A deal will be done. None of the plans on the table - including whatever will be agreed to - has any real viability. The final deal will be a "limp-ahead" solution designed to kick the can down the road a year or two, and it will be full of fantasy projections and back-ended cuts, designed more to please the financial markets than the populace.
  • The implications of a US default: A true default is VERY unlikely. It would be a true disaster if it happened, which is why all parties are motivated to avoid it at all cost. While austerity is sorely needed, it's unlikely that the markets (e.g., bond vigilantes) will force any anytime soon, due to the strong intervention of central planners.
  • Europe: Europe is in a much different situation, and much more precarious than the US at present (mostly because the ECB has no taxing authority). The bond buyers are already in revolt in the credit markets for several countries, and they are now targeting the bigger players (Spain and Italy), which is injecting real fear. Expect increased austerity to be forced across all of Europe.

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What Should Happen and What Will Happen

Thursday, July 28, 2011, 10:24 AM
Thursday, July 28, 2011

Executive Summary

  • How stocks, bonds, precious metals, commodities, the dollar and, real estate will most likely fare post-August 2nd
  • Why August-October will be a period of particularly high stress for the Treasury market
  • What the "big picture" endgame is beyond today's debt ceiling histrionics and how it is now accelerating towards its inevitable conclusion
  • Why it's now time to hedge your bets

Part I - Debt Ceiling Dilemma: The Foul Choice Facing Investors

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

Part II - What Should Happen and What Will Happen

As always, we can easily describe what should happen, but that’s not what will happen. Deflationists sometimes fall into the “what should happen” camp and find themselves mystified, if not disappointed, when those events fail to materialize. So do inflationists, just in the other direction.

My view is that what should happen almost always never does. There’s no such thing as a free market defined by willing, free-thinking participants. Instead, far too many market prices are managed, influenced, and/or manipulated, and this distorts both the timing and the severity of what actually happens.

For example, right now market participants should not be buying ten-year US Treasury bonds at 2.5%. Looking at the rates of inflation and the fiscal train wreck approaching the US government, a fair rate might be closer to 7.5% or higher. Where Treasury interest rates actually are and where they should be are very different propositions.

The thing that will most impact the world financial system will be if the US suffers a credit downgrade, which would be a near certainty if and/or when the US defaults on its obligations, even briefly.

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Understanding the Budget/Deficit Fiasco...

Wednesday, July 20, 2011, 5:20 PM

On one hand, I am glad that Washington DC is finally (!) talking about the unsustainable borrowing and spending habits of the United States. It had to happen sooner or later; better now than never.

On the other hand, the tenor and substance of the dialog and proposals reveal just how far up the creek we really are and just how hopeless it really is to plan on something sensible emerging. After trying to make sense of the various proposals I think I can summarize them all with a single phrase: You'd better be ready. We'll get into the 'for what?' down below.

The most aggressive of the proposals seeks to reduce the overall deficit by an impressive-sounding $4 trillion over the next ten years. Of course, this merely trims $400 billion each year, which only reduces the deficit to something close to a trillion dollars a year, or double what it was at the beginning of the crisis.

A trillion a year is still far too much to carry, and the message has not been lost on gold, which is now performing the Dance of the Big Round Number at the $1,600 mark.

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No Way Out

Saturday, July 9, 2011, 4:05 PM

It's time to face a few facts. The recovery, such as it is, was bought at a very high price, too high, really, and it is both false and unsustainable.

Politicians are essentially and effectively clueless at this juncture, posturing over the wrong issues and proposing the wrong sorts of responses. For example, even if one did not know anything about Peak Oil, promoting the highway bill as a legitimate means of promoting economic growth when oil is near $100 per barrel is perhaps not the best use of a couple hundred billion dollars.

Central banks are no better punishing savers and the prudent with zero and/or negative interest rates as they attempt to bail out the reckless banks and get credit flowing again like it once did.

The debt problems of the United States and Europe are almost exactly the same. Both regions drank the Greenspan Kool-Aid offered up in the 1990's and 2000's, and both are now saddled with too much debt and promises that are too large to keep.

Three simple words are all we need to understand the economic malaise: Too much debt.

That's the fundamental problem here, not a failure to tax enough, or tweak a few policies, or print some more thin-air money, or even to get credit flowing again (read: growing again).

That's the long and the short of it. Anybody with a calculator and a modicum of common sense could tell you that such a state of affairs was not sustainable, nothing can grow forever yet, and believe it or not, that was the plan.

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