Daily Digest

Daily Digest 11/25 - Betting in the Endgame, China, Russia Quit Dollar, U.S. Gas Exports

Thursday, November 25, 2010, 11:00 AM
  • The Beginning Of The Ponzi End:  The Biggest Holder Of US Debt Is Ben Bernanke
  • Outside the Oval / The Case Against the Fed
  • Tumbling Tuesday - China, Korea and Europe, Oh My!
  • Betting In The Endgame
  • China, Russia Quit Dollar
  • Putin Says EU Gas-Market Rules May Lead to Energy Crisis, Seeks Swap Deals
  • Booming U.S. Gas Industry Becoming an American Energy Exporter

Learn all about gardening, food preservation and storage in our 'What Should I Do?' guide

Economy

The Beginning Of The Ponzi End: The Biggest Holder Of US Debt Is Ben Bernanke (tom a)



Well, folks, it's official - mark November 22, 2010 in your calendars - today is the day the Ponzi starts in earnest. With today's $8.3 billion POMO monetization, the Fed's official holdings of US Treasury securities now amount to $891.3 billion, which is higher than the second largest holder of US debt: China, which as of September 30 held $884 billion, and Japan, with $864 billion. The purists will claim that the TIC data is as of September 30, and that as the weekly custodial account shows UST buying continues the data is likely not correct.

Outside the Oval / The Case Against the Fed (hucklejohn)



Prior to about 1995, the lowest yield ever observed on the S&P 500 was 2.65%, and then only at the three most extreme valuation peaks in history - August 1929, December 1972, and August 1987. But in the mid-1990's, valuations broke free of their prior norms. As the bubble continued and yields fell further, investors observed that poor dividend yields were actually accompanied by high returns over the following decade anyway. By the time the market reached its peak in 2000, the dividend yield on the S&P 500 had declined to just 1.07%, and dividend yields were almost universally discarded as a measure of stock valuation. The intellectual case was seemingly reinforced by the idea that stock repurchases had made dividend yields an obsolete measure of valuation, even though the calculations made by Standard and Poors for both the level and the growth rate of index dividends for the S&P 500 properly reflect the impact of repurchases.

Tumbling Tuesday - China, Korea and Europe, Oh My! (ilene)



Of course, yesterday's insane market moves served to reinforce our "take the money and run" sentiment as we got a drop on the Dow all the way to 11,060 at 12:48 yet the Dow recovered 120 points into the close on weak volume that gave us the que to move in short - despite our bullish expectations for HPQ earnings (we sold puts earlier in the session).   The Nikkei was up 1% this morning but the rest of Asia had a rotten day with the Hang Seng falling 627 points (2.67%) and the Shanghai off 56 points (2%) and the BSE down 265 points (1.33%).  This knocked the FXI below support and down to the 22 DMA at 42.67 (see David Fry's chart) and breaking that would be - BAD.  China is experiencing runaway inflation and Wen Jiabao's price controls are doing nothing to reign in the 54% increase in the money supply over the past two years - an amount our own Fed calls "a good start."  

Betting In The Endgame (john howerton)



The endgame of capitalism is a uniquely different environment where investors find themselves faced with increasingly dangerous options. In the endgame, proven strategies are improvident, buying and holding becomes a time bomb and speculators are favored over investors because of excessive liquidity and volatility.   Capitalism, a system of credit and debt that produced 300 years of growth is now dying. The bankers’ debt-based money has created such levels of debt that even 0 % credit can no longer induce growth. In the endgame, the problem is not the lack of credit—it’s the excessive amount of debt.

China, Russia Quit Dollar (vilanodavis)



Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies. "About trade settlement, we have decided to use our own currencies," Putin said at a joint news conference with Wen in St. Petersburg. The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.

Energy

Putin Says EU Gas-Market Rules May Lead to Energy Crisis, Seeks Swap Deals 



Putin said in Sofia on Nov. 13 that the EU’s plan to create independent gas-pipeline management that secures access for third parties would result in price increases for consumers and hinder development of Europe’s energy infrastructure. The rules would affect OAO Gazprom, Russia’s gas export monopoly, which meets about a quarter of European gas needs. The European Parliament in April approved legislation forcing EU nations to choose one of three options to ease access to the power and gas grids. The choices are to force the companies to sell or spin off the transmission business; require them to hand over management of the grid to an independent operator; or oblige them to make the unit more independent through internal actions.

Booming U.S. Gas Industry Becoming an American Energy Exporter 



Last month the Chinese government owned energy company CNOC (you will recall CNOC's failed bid to take over Unocal in 2005) committed over a billion dollars to take an important stake in the Eagle Ford, shale gas acreage in Texas. In doing so they joined the Norwegian state oil company, Statoil, that had made an earlier investment in the Eagle Ford field as well. Major oil companies such as Exxon, Shell, Chevron and myriad other foreign entities have joined American gas producers such as Chesapeake Energy to invest tens of billions of dollars these past years to develop a stake in what is becoming a treasure trove of natural gas ranging from Texas and Louisiana to the vast Marcellus field of Western Pennsylvania, Ohio, West Virginia and upstate New York. With new drilling techniques the proven gas reserves of the United States have skyrocketed from bare subsistence levels by a factor of five and counting, with the shale play still in its infancy.

Article suggestions for the Daily Digest can be sent to [email protected]. All suggestions are filtered by the Daily Digest team and preference is given to those that are in alignment with the message of the Crash Course and the "3 Es."

10 Comments

Doug's picture
Doug
Status: Diamond Member (Offline)
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Re: Daily Digest 11/25 - Betting in the Endgame, China, ...

Interesting take on China, inflation, commodities, silver and the USD.

http://www.kitco.com/reports/KitcoNews20101125DC.html

Quote:

(Kitco News) - Puru Saxena is watching China closely these days. The founder of Hong-Kong based Puru Saxena Wealth Management said that China, a substantial user of commodities and natural resources, impacts the direction of precious and base metals’ prices.

“Well China is probably the second most important economy in the world after the United States – whatever the Chinese do in terms of the monetary policy affects everybody else,” he told Kitco News.

On Thursday, The Shanghai Futures Exchange, where the world’s top three metals contracts are traded, announced it will increase margins and daily price limits. This marks the latest move by China to curb speculation and cool inflation. Margins on copper, aluminum, steel wire, gold and fuel oil will rise to 10 percent, the Exchange said in a statement.

This follows last Friday’s move when China raised interest rates for the fifth time this year; the move added some fresh selling pressure to the commodity markets, including precious metals. Beijing raised the amount of money that lenders must keep in reserve from 17.5% to 18%.

“I just believe in this leveraged world you have to watch monetary policy very closely,” said Saxena from Hong Kong. “I think interest rates are going to go up in baby steps but more importantly the Chinese are tightening the credit growth via hikes in the banks’ minimum reserve requirements.”

The Chinese are extremely worried about inflation and increases in food prices, said Saxena. “They are also extremely nervous about property speculation on the mainland and also in Hong Kong where I live –recently the Hong Kong monetary authority has also taken many steps to make sure this speculation stops dead on its tracks and it doesn’t get any bigger.”

Inflation pressures are growing in China. The nation's consumer price index rose 4.4 % year on year in October, well above the government's full-year target of 3%, with the prices of 18 types of vegetable rising by more than 60%.

“Because the bubble is already very inflated, the Hong Kong government has increased the down payment required for new properties to 50% - they have imposed a 15% stamp duty on profits if you buy a property and flip it within six months,” said Saxena.

“They have taken a number of measures to make sure this property bubble doest get any bigger and I suspect interest rates are going to go up,” he said.

Saxena said that the U.S. Federal Reserve’s decision to drop interest rates to zero and print more money is forcing investors to look for higher yields elsewhere.

“As a result of this surplus liquidity in the system, money is pouring into China and Hong Kong and in Asia in general,” he said.

Metals’ Correction

Saxena said that the correction suffered by commodities and precious metals a few weeks back was long overdue.

“We lightened up our positions in precious metals – we were expecting some sort of pullback…low and behold we had a nice little correction over the past few days” he said.

Comex gold futures prices ended slightly lower Wednesday. December gold last traded down $5.20 at $1,372.40 an ounce. Spot gold last traded down $3.40 at $1,373.50.

Saxena does not think the correction in precious metals has run its course.  “If you look at the direction of the U.S. dollar index, it has rallied quite sharply over the last week or so.  If you look at the chart, it is hitting the overhead treadline resistance around the 79 level.  I suspect if the 79 level will continue on the upside, then we can see precious metals correcting further.”

Silver Matters

Of all the precious metals, Saxena said silver is the single most overbought and overextended precious metal.

December silver futures closed down 7.2 cents at $27.50 an ounce Wednesday. Prices closed nearer the session high.

“There is still a lot of froth in the (silver) market. So I wouldn’t be a buyer of silver at these prices. If it does come back down again, then I would look at buying back into this market,” he said. 

In the latter stages of the rally, the price of silver starts jumping leaps and bounds, he said. “This is what we saw up until a week ago when silver was going up significantly day after day. If you look at the price of silver at one point, it was roughly 45% above the moving averages and that is a symptom or sign that silver is extremely overextended,” he said.

Having bailed out of physical silver positions 10 days ago, Saxena said he is waiting for a reversion back to the mean.  “I think it still has further to go on the downside, simply because the U.S. dollar is rallying, and the price of silver looks overextended,” he said.

Saxena also disagrees when silver enthusiasts say the world is running out of silver. “The monetary policy in the world dictates silver prices and all the other asset prices.  As long as the dollar is weaker, then precious metals rally. So I don’t analyze silver as a supply-demand story,” he said. 

By Daniela Cambone of Kitco News [email protected] 

I may regret the silver I bought this week.Cry

Doug

Johnny Oxygen's picture
Johnny Oxygen
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Re: Daily Digest 11/25 - Betting in the Endgame, China, ...

Of all the precious metals, Saxena said silver is the single most overbought and overextended precious metal.

Doug.

This person couldn't be more wrong.

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jpetr
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Re: Daily Digest 11/25 - Betting in the Endgame, China, ...

"So I don’t analyze silver as a supply-demand story"

 

This one line says it all. What drives prices - somebody's world view or supply demand?

The new Commitment of Traders reports shows the big commercials like JP Morgan are starting to unwind

their short contracts. Short and long term gold and silver will be strong as long as fiat currencies are weak.

 

 

 

 

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saxplayer00o1
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Re: Daily Digest 11/25 - Betting in the Endgame, China, ...

"The U.S. should cut its government spending and sell some gold reserves to balance its budget and fund its recovery, the People’s Daily overseas edition reported, citing Xia Bin, an adviser to the People’s Bank of China.

The U.S. has to resolve its “twin deficits” in the government budget and the current account, Xia was quoted as saying. Three ways that may help the U.S. achieve that target include reducing military expenses, selling part of its gold reserves and relaxing some export limits on technology, he said.

“The U.S. has more than 8,000 tons of gold reserves; why can’t it sell some of it since the country wants to raise funds for economic recovery but doesn’t want to add more burden to the fiscal deficit,” Xia told the newspaper. He didn’t mention whether China would be willing to purchase any gold from the U.S. "

"Hungary failed to sell the planned amount of debt at an auction today as the forint weakened and bond yields climbed to higher than in June, when the country roiled world markets by raising the spectre of default.

The state debt management agency sold 30 billion forint ($144 million) of 12-month Treasury bills, 10 billion forint less than planned, as the average yield rose to 6.05 percent from 5.94 percent at the previous auction on Nov. 11. Bids fell to 64.5 billion forint versus 89.3 billion forint at the last sale, according to results on the government’s Bloomberg page."

"Nov. 25 (Bloomberg) -- Italy’s borrowing costs rose at a sale of 8.5 billion euros ($11.3 billion) of six-month treasury bills as fallout from Ireland’s debt crisis sent financing costs higher in other nations in the region.

The 182-day securities were priced to yield 1.483 percent, compared with 1.203 percent at a sale on Oct. 26, data from the Bank of Italy showed today. The treasury also sold 2 billion euros of zero-coupon bonds due in August 2012 to yield 2.307 percent, more than the 1.767 percent at the October auction."

"Fears have been raised about the future of the Belgian economy after market traders pushed the cost of insuring the country's debt to record levels.

The rising cost of Belgium's debt is now 100% of annual national income, raising concerns the country could join Portugal, Spain and Italy on the growing list of countries that could be heading for a financial crisis.

Traders are also worried Belgium's broken political system, which has left it without a government since April, is distracting it from tackling its worsening economic outlook."

  • Other news, headlines and opinion:

ECB May Delay Exit Again as Ireland Rescue Fails to Stem Contagion Spread

Ruble Set to Become Regional Reserve Currency, Ulyukayev Says

China, Turkey may trade in yuan soon, says US banker

Spanish, Irish Bonds Decline on Higher Trading Costs as Stocks, Oil Gain

European Banks 'Nearly Bust' If Euro Collapses, Evolution Says

Hungary Follows Argentina in `Nightmare' Pension-Fund Ultimatum

Irish Banks May Need Up to $40 Billion in Extra Capital, CreditSights Says

US muni bond funds lose another $2.3bn

Cash-strapped Bank of Ireland sells off its art

Greece Pressure Points Keep Default Risks Alive: Euro Credit

Ireland plans to lift sales tax to 23% by 2014

Moody's Cuts New Brunswick, NJ, Rating On Debt Guarantee

Foreclosed Homes May Flood Spanish Market as Banks Offload Unwanted Assets

UBS Sees State Firms Doubling Dollar Bond Sales on M&A Plans: China Credit

The Day the Dollar Died (InflationUS video)

Ken C's picture
Ken C
Status: Platinum Member (Offline)
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Posts: 753
Re: Daily Digest 11/25 - Betting in the Endgame, China, ...

"The U.S. should cut its government spending and sell some gold reserves to balance its budget and fund its recovery, the People’s Daily overseas edition reported, citing Xia Bin, an adviser to the People’s Bank of China.

The U.S. has to resolve its “twin deficits” in the government budget and the current account, Xia was quoted as saying. Three ways that may help the U.S. achieve that target include reducing military expenses, selling part of its gold reserves and relaxing some export limits on technology, he said.

“The U.S. has more than 8,000 tons of gold reserves; why can’t it sell some of it since the country wants to raise funds for economic recovery but doesn’t want to add more burden to the fiscal deficit,” Xia told the newspaper. He didn’t mention whether China would be willing to purchase any gold from the U.S. "

 

Don't you know that China would love to trade some US treasuries for Fort Knox gold.

Good luck with that.

Ken

 

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investorzzo
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Re: Daily Digest 11/25 - Betting in the Endgame, China, ...

As long as the dollar is weaker, then precious metals rally. So I don’t analyze silver as a supply-demand story,” he said.

With all do respect to Mr. Saxena, and I do think the man is sharp. The Silver story is the supply-demand. So I just don't think he gets it. Dollar strengh or weakness. Silver is going to go up bigtime in the next few years because of the supply-demand and the monetary factor is just icing on the cake.  Jon

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rjs
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Posts: 445
Re: Daily Digest 11/25 - Betting in the Endgame, China, ...

isnt silver something you'd want to have & hold in lieu of fiat currencies? if so, why would anyone worry about someone else's opinions about short term fluctuations of the value of those fiat currencies vis a vis silver or any real asset?

Doug's picture
Doug
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Posts: 3125
Re: Daily Digest 11/25 - Betting in the Endgame, China, ...

JO, jpetr, investorzzo

I agree with you guys, but I'm rather wary in my financial prognostications.  I've been burned a time or two.  The crowd seems to be getting on board with silver, and I also have a contrarian streak that keeps me nervous.  Not that I'm selling my silver any time soon, but it does give me something else to worry about.Frown

Thanks for your feedback.

Doug

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pinecarr
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Re: Daily Digest 11/25 - Betting in the Endgame, China, ...

Great catch with the article "China, Russia Quit Dollar", Villanodavis.  This caught my eye in reading it:

"...the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.

Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.

Not good when you read other countries writing stuff like this about the US Dollar!

Now, add the talk about China and Turkey trading in the Yuan (per Saxplayer's link above), wih the China-Russia deal to stop using the US Dollar in their trades, and it seems like bad news for the US dollar!

Ken C's picture
Ken C
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Posts: 753
Re: Daily Digest 11/25 - Betting in the Endgame, China, ...
pinecarr wrote:

Great catch with the article "China, Russia Quit Dollar", Villanodavis.  This caught my eye in reading it:

"...the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.

Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.

Not good when you read other countries writing stuff like this about the US Dollar!

Now, add the talk about China and Turkey trading in the Yuan (per Saxplayer's link above), wih the China-Russia deal to stop using the US Dollar in their trades, and it seems like bad news for the US dollar!

Yes and I am reminded of a recent article I read (sorry I can't remember the source) where it was indicated that when fewer dollars are required for FOREX then many of those excess dollars would find their way home to the USA. This means that we have more dollars sloshing around here chasing the same amount of goods. This sounds like inflation to me. I think we are seeing the beginning of this trend for other countries to move away from the dollar. This can only spell more trouble for us.

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