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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, 6:00 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.

» Read more

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What Should Happen and What Will Happen

Thursday, July 28, 2011, 9:24 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, 4:20 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.

» Read more

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No Way Out

Saturday, July 9, 2011, 3:05 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.

» Read more

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Off The Cuff: Important EU Warning Signs, Post-QE2 Disappointment & Debt Ceiling Drama

Wednesday, July 6, 2011, 9:24 PM

Off the Cuff with Mish & Chris resumes this week, with Mish recently returned from a trip to Europe.

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

  • Europe: Sovereign bond rates are jumping, as rating agencies downgrade the PIIGS countries; bailout risk is growing, with Italy & Spain looking increasingly vulnerable. A successful 'containment' of the crisis appears less and less likely.
  • The end of QE2: Why those expecting a second-half economic pickup are likely to be sorely disappointed. Precious metals will react dramatically if QE3 is announced.
  • Debt ceiling dramatics: A deal is likely, but the odds of a government shutdown are higher than are being admitted. 

» Read more

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How to Play the Greatest Gold and Silver Bull Market of Our Lifetime

Wednesday, June 29, 2011, 8:22 AM

How to Play the Greatest Gold and Silver Bull Market of Our Lifetime

Wednesday, June 29, 2011

Executive Summary

  • The extent and impact of price manipulation on current bullion prices
  • How to build or increase your allocation to gold and silver (how much is right?)
  • The best vehicles and storage options for owning precious metals
  • Exit strategies: what indicators to watch to know when it's time to start selling
  • How high are gold and silver prices likely to climb by the end of the current bull market?

Part I - The Screaming Fundamentals For Owning Gold and Silver

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

Part II - How to Play the Greatest Gold and Silver Bull Market of Our Lifetime 

Market Manipulation

This brings us to the topic of market manipulation. As many of you are aware this is a topic of exceptional controversy. On one side, we might place the Gold Anti-Trust Action (GATA) organization, alleging constant official manipulation to suppress the price of both gold and silver, and on the other we might place Jeff Christian, managing director of the metals research firm CPM, whose position is that all price movements can be explained by ordinary market forces.

I happen to be in the middle of those views. I know for a fact that the price of gold is of official interest, and that gold has been actively suppressed in price in the past in order to affect one policy aim or another. The London gold pool of 1969 is one such example, but there are others.

I reason that anything that has proven to be a useful policy tool in the past is a likely candidate to be a tool in the present. It would be up to the detractors of this view to prove, from time to time, that gold is no longer of sufficient official interest that its price is not a target of official intervention or negligent oversight.

But even if manipulation exists, there's only so long that official intervention can hold back the tide. This puts me in the camp with Erik Sprott of Sprott Asset Management, who recently told me in an interview:

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Likely Outcomes of the Debt Ceiling Drama

Monday, June 27, 2011, 11:02 AM

I've so far resisted really wading into the whole debt-ceiling charade because I am about as certain as can be that it will simply be lifted once again before any real damage is done to the US Treasury markets.

Sure, there will be a lot of posturing and huffing and puffing, and maybe even some last-minute tensions, but it will all be resolved as it always has been: with a hike in the debt ceiling that will last until after the next election.

But what if this is not true? What if this time an impasse occurs and the debt ceiling is not raised in time? Then what? » Read more

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Oil, Greece, and a Bounce in the Markets

Thursday, June 23, 2011, 9:37 PM

As expected, markets are beginning to act as if the world's largest money-printing experiment, QE II (quantitative easing), is really going to end. My views here, first expressed in The Coming Rout (March 8) and reiterated since, is that commodities will get hit first and hardest, then stocks, and then bonds, beginning with weaker issues first before progressing towards the center.

This process is unfolding right in line with my expectations.  The next few months may well prove to be far more interesting than your average summer, although my preferred time for real difficulties remains early fall.

To begin our coverage, the stock market was off to a truly horrible start today, plunging by a couple of hundred points (Dow) before finding a base, and then being 'rescued' by a late day rumor that the Greece situation had been resolved.

Here's the rumor: » Read more

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The Dance of the Big, Round Number

Saturday, June 18, 2011, 3:59 PM

As expected, the "dance of the big, round number" is underway, with the Dow flirting with 12,000 all week, plunging under it, bounding over it, bouncing off of it, and then landing on it to end the week. My view is that a stock market rebound is likely over the next couple of weeks, but this view is based on charts and momentum and liquidity, not economic fundamentals, which are deteriorating.

The macro view here is that much of the value to be found and prices to be seen in various credit markets and the stock market is really just a reflection of the belief that the system will be bailed out. "Too big to fail" is now an operating maxim applied equally to the next Lehman wanna-be and Greece. All of the big players took appropriate notice of the actions of the monetary and fiscal authorities to prevent big institutions from suffering the fate of their poor risk management practices and investment decisions.

The faith that nobody (of any substance) will be allowed to fail is now a pronounced feature of our markets and partially explains the elevated prices we are currently seeing in nearly everything. Another major component of these elevated prices is the excessive liquidity that the Fed, ECB, BOE, and Japanese central bank continue add to the markets

However, we are now less than two weeks away from the end of the second round of quantitative easing (QE II), and everyone should be concerned with the impact that the loss of this liquidity will have on various markets. I think the early warning signs are already in place.

First, the fundamentals.

» Read more

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Ready, Set, Plunge!

Saturday, June 11, 2011, 9:28 AM

The economic data coming out now is really quite dismal. What appeared to be a reasonable, if unspectacular, recovery is now in serious doubt. Even more notable is that the economy remains this weak despite all the trillions in stimulus and Fed balance sheet expansion.

The stock market reacted badly to the news, shedding roughly 1.5% on each index, with the Dow closing below the big, round number 12,000.

Here are my thoughts and observations about the past week's stock market performance and recent economic and monetary news that drove the recent losses.

» Read more