When contrarians become contrarian indicators

It looks like all the contrarians have turned bullish on stocks, for various reasons. But when contrarians draw the same conclusions as mainstream, they are not contrarians anymore, they become merely contrarian indicators for true contrarians. And there aren't so many of this latter kind left (Robert Prechter and Jim Rogers being the mainstream contrarians not to have fallen into the trap so far).

- Marc Faber, my hero, is forecasting Armageddon but still suggesting to buy stocks (though for his defense, his forecast is for the next 5 to 10 years, not short term).

- Bill Fleckenstein (who I highly respect) is extremely bullish on Gold and also thinks super-inflation is around and hence he doesn't want to fight Bernanke's printing presses.

- Jim Grant (highly notorious, but I don't like he's positions) has turned from a perma-bear to a bull after a 60% rally in the markets

As Bill Bonner put it in a recent post, "even before the rally began, Prechter foretold its story" :

“Regardless of extent, it should generate feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the fed will appear to have saved the banking system and investors will be convinced that the bear market is behind us.”

It's just a matter of waiting and holding now...

35+ million Americans on food stamps, 52% of 16-24 year olds jobless

Remember, the recession is over, Bernanke and Obama saved us, the banks are again paying multi-million dollar bonuses and everything is just fine...

... Except that to me, it all looks like the Great Depression on a grander scale: the Greater Depression.

WASHINGTON (Reuters) - More than 35 million Americans received food stamps in June, up 22 percent from June 2008 and a new record as the country continued to grapple with the worst recession since the Great Depression of the 1930s.

The food stamp program, which helps cover the cost of groceries for one in nine Americans, has grown in step with the U.S. unemployment rate which stood at 9.4 percent in July.

The Labor Department will release August employment figures on Friday.

June was the seventh straight month in which food stamp rolls set a record. The average benefit in June was $133.12 per person.

And also:

The number of young Americans without a job has exploded to 52.2 percent — a post-World War II high, according to the Labor Dept. — meaning millions of Americans are staring at the likelihood that their lifetime earning potential will be diminished and, combined with the predicted slow economic recovery, their transition into productive members of society could be put on hold for an extended period of time.

The number represents the flip-side to the Labor Dept.'s report that the employment rate of 16-to-24 year olds has eroded to 47.83 percent -- the lowest ratio of working young Americans in that age group, including all but those in the military, since WWII.

C-SPAN has posted the HR 1207 hearing in its entirety

DailyPaul reports that C-SPAN has posted the HR 1207 hearing in its entirety. You can view it from this link.

Thomas E Woods, a great libertarian and Austrian economist and senior fellow of the Mises Institute also testifies. He posted a message on his blog for the C-SPAN viewers.

Contradictory signals regarding the British Pound

I have been very bearish about the British Pound for the past two years, and I am currently short the GBP vs the EUR, which turned out to be quite a profitable trade, I was rethinking my position a couple of days ago.

There are a few things to take into consideration:

The UK was the most debt-addicted country on the planet, worse than the US. So when the credit contraction begins, it will be highly deflationary (and hence bullish for the GBP)

Let's not forget that the even when BoE rates were at 5.75% people were borrowing like crazy and banks pushing ARM interest only mortgages to unbelievable levels, so the British are probably more addicted to debt than any other people I have heard of. This is inflationary and bearish for the GBP.

Interest rates have dropped from 5.75% to 0.50% and are unlikely to rise for the foreseeable future. This is inflationary, at least in the short term, for as long as the debt addicted people can keep on borrowing. This is inflationary and bearish for the GBP.

Mervyn King and Alistair Darling are probably bigger fools than Bernanke and Obama, the deficits are huge, even compared to the US ones, and recently, Mervyn King tried to print £200 billion... This is inflationary and bearish for the GBP.

The GBP has already lost about 25% to 30% of its value against the Euro and the Dollar (paper currencies...), I'm unsure about how much it can drop in the short term (on the long run, paper currencies fall to their intrinsic value: zero). So we might have hit the bottom or be close to hitting it — at least in the short term. This is then bullish for the GBP.

Lots of mainstream papers have started to print article about a collapse of the Pound below the Euro. This is, on the short term, a contrarian signal that the GBP is about to hit bottom and is hence a bullish news for the GBP.

A study by Unbiased.co.uk (I don't know them, so don't know if the results are trustworthy or not) shows that borrowing has been increasing again in the UK. This is inflationary and bearish for the GBP in the short term. But it also means that the Brits are struggling to pay their everyday expsenses and the default rate is going to rise once everybody has loaded their credit card with the 12 months interest-free loans credit card companies are promoting.

Conclusion: All in all, I think the GBP is likely to decline on the very short term (next few weeks maybe) before rebounding. I am hence keeping an eye on it and will look for an exit of my position if GBP/EUR gets close to 1.00 or manages to break that floor.

Dead cat bounce: yet another statistically improbable result

Hussman as published another very interesting statistical data about the current bear trap:
This graph shows that the current rally is the biggest one in the recent history (past 100 years) and also the one driven by the smallest and decreasing volumes.

IMF announces 400 tonnes gold sales

ZeroHedge has been on top of things and been the first to post. Here is the Official press release:

The Executive Board of the International Monetary Fund (IMF) today approved gold sales in a volume strictly limited to 403.3 metric tons, with these sales to be conducted under modalities that safeguard against disruption of the gold market. This decision is a central element of the new income model for the IMF that was endorsed by the Executive Board in April 2008 and will also increase the Fund’s resources for lending to low-income countries [...]

So the 403.3 metric tons of gold, "which is one-eighth of the Fund’s total holdings", or about 13,000,000 tr. oz are worth about $13 billion.

While I do not know how the gold market is going to react to this, here are a couple of interesting facts:

• $13 billion is a drop in the ocean of US dollars the Fed is printing, and a drop in the currency reserves of China. Let's hope that the Chinese Gov will be clever enough to just buy the whole lot in one shot.
• 13 million troy ounces represent about 130,000 gold futures contracts, which is the volume of one day of trading on the futures exchanges.
  

Peter Schiff Announces Bid for US Senate

At last, Peter Schiff announces his candidacy:

Weston, Connecticut., September 17, 2009 - Today, Weston Republican Peter Schiff formally announced his candidacy for the U.S. Senate. Over the past few months, Mr. Schiff, a successful entrepreneur and well-known proponent of fiscal responsibility, has been inspired by his fellow citizens urging him to bring his principled approach to Congress. As he enters this campaign, Mr. Schiff’s priority is to serve the American taxpayer. Years of reckless federal spending have placed an immense burden on every American that Mr. Schiff vows to ease.
[...]
To date, 10,000 individuals have convinced him to run for Senate with telephone calls and letters of support; additionally, they have raised over $1,000,000 on his behalf. Schiff now believes a run for the Senate is absolutely necessary to give a voice to the majority of Connecticut taxpayers who are misrepresented.

Mr. Schiff says, “I plan to bring my dedication and experience to the taxpayers of Connecticut. I may make mistakes in this campaign—but I will not make mistakes in representing you in the Senate. I look forward to an exciting race where I can share my vision with the people of Connecticut.”

The Nikkei had four 50%+ rallies since the top in 1990 and yet the index is down 74%

I am quoting David Rosenberg (even though I would like to avoid getting into the habit...) because it's amazing how much sense his making in just such a small number of sentences.

David Rosenberg wrote today:

Speaking of Japan, and we say this because the U.S. is following a very similar post-credit collapse pattern, we note that the Nikkei posted six 20%+ rallies since its bubble burst in 1990 and no fewer than four 50%+ rallies. Indeed, you can count 423,000 rally points from all the up-days since the secular bear market began in 1990 and yet the index is down 74% since that time. So actually there is nothing in this flashy move off the lows in the S&P 500 that is inconsistent with a pattern of a bear market rally — this is not the onset of a whole new sustainable bull market. These are rallies [...] purely technically-motivated and momentum-driven. They are not premised on improved fundamentals, despite data that are skewed to the upside by rampant government intervention. Just remember, nobody built more bridges or paved more river beds to skew the economic data than the LDP did in Japan for much of the 1990s. With U.S. T-bill yields close to zero, as they were in Japan, we have at least one market — the money market — that sees what we see, which is an economic outlook fraught with fragility, as is typically the case after a secular credit expansion moves shifts into reverse.

Now, the S&P 500 is all the way back to where it was in early October 2008. Back then, the consensus was looking for $26 for this quarter’s EPS. That number is now down by almost half, to just over $14. So again, the market has gone ahead and priced in some very good news for the future because there can be little doubt that the economy and earnings have a much deeper hole to climb out of than the consensus had been factoring in the last time equity prices were at current levels. Moreover, as it pertains to consumer credit quality, we just saw Citi and BoA reported their highest credit card default rates since the recession began (BoA’s charge-off rate rose to 14.54% from 13.81% in July; Citi’s rose to 12.14% from 10.03%; Discover’s rose to 9.16% from 8.43%).

Audit the Fed bill obtains 2/3 majority and is now guaranteed to pass

ZeroHedge writes:

In a critical development for the future of the Federal Reserve, Ron Paul has confirmed that today HR 1207 has garnered the elusive one vote to bring it to a total of 290, or a two-thirds congressional majority. At this point passage of the bill is guaranteed

As a side note and coincidentally, End the Fed, the new book by Ron Paul, has been released today. You can order at Amazon.com or Amazon.co.uk. Please help spread the word.

Ghost Towns in Ireland

Sept. 15 (Bloomberg) -- The skeleton of an eight-story Dublin office block lays deserted on the north bank of the River Liffey, just next to the financial district that less than two years ago was the heart of Ireland’s economic boom.

[My Comment: we all know now it was just a credit expansion, not an economic boom]

Four cranes stand idle at the site, one of at least 35,000 unfinished or empty new offices and homes that dot Ireland’s landscape after the collapse of its real estate market.
[...]
Ireland is suffering the worst economic slump of any developed nation since the Great Depression, according to the Economic & Social Research Institute in Dublin.
[...]

[My Comment: probably because it was the country relying the most on credit expansion, the financial industry, and the real estate bubble]

“We are familiar with the specter of the ghost village that have seven or eight housing developments but hardly a house sold,” said Joan Burton, finance spokeswoman of the opposition Labor Party.
[...]

[My Comment: Reminds me of all the unfinished buildings in Bangkok...]

Short interest at lowest since Feb 2007

This is quite an interesting piece of information, reported by Bespoke:

So, we are now in a situation where:

• Sentiment is more bullish since Feb 2007
• PER are at historical high levels
• Short interest is the lowest since Feb 2007
• We have reminiscences of '87
  

All these signals are extremely bearish, but of course, nothing could prevent the markets from bubbling like the Nasdaq in 2000.

Dubai's Wealth Fund collapses

Bubble-economy correspond 100% to the definition of Dubai's economy. If you thought the US, the UK, Spain and so forth were bubble economies, well, wait to see Dubai!

Probably the biggest real estate bubble in history after Japan's end of '80s bubble was Dubai's real estate market (who wants to buy a flat in the middle of the desert for the price of luxury houses in NYC, London or Paris??) well, it now appears that their sovereign funds were investing as wisely as Cerberus and are as leveraged as private equity funds (10 times leverage, meaning that a 10% loss wipes out the fund).

The bad news is that with 10 times leverage, the sovereign wealth fund gets wiped out, but also the creditors (i.e. major banks who were stupid enough to finance those LBOs).

Here are reports from Bloomberg which are very much worth reading.

Sept. 11 (Bloomberg) -- Istithmar World, the Dubai sovereign wealth fund, is halting investments as part of a restructuring effort after spending more than $25 billion this decade on stakes ranging from a yacht marina to luxury retailer Barneys New York, according to people familiar with the plan.

The process may result in a sale of the fund or its assets, they said. Istithmar, run by David Jackson, said this week that co-chief investment officers John Amato and Felix Herlihy would leave the firm. Jackson’s job is under review, the people said.

Sept. 14 (Bloomberg) -- Dubai investment firm Istithmar World may be the first sovereign wealth fund to liquidate after a $27 billion spending spree financed largely with borrowed money, people briefed on the matter said.

Unlike government-controlled funds in Kuwait and Abu Dhabi, flush with cash from oil production, or in China, backed by export earnings, Istithmar fueled purchases such as the takeover of Barneys New York by borrowing as much as 90 percent of the money, the people said. Istithmar’s parent, Dubai World, tapped Middle Eastern and European banks including Barclays Plc, Royal Bank of Scotland Group Plc and Deutsche Bank AG, leaving those three with combined debt holdings of at least $1.5 billion, the people said.
[...]
Istithmar contributed about $2.5 billion of its own cash to back $27 billion of purchases since 2003. [...]
Many of the deals have soured.[...]
“They realized they had defined the top of the market,” said Peter Slatin, editorial director at Real Capital Analytics Inc.[...]
One example of risky investing, according to Turner, came in 2007, when Dubai World bought about $5.5 billion of MGM Mirage stock at between $82 and $95 without any hedge. The stock now trades at about $12.

“The attitude there was: We’re a private equity firm and as such we don’t need to hedge our investments because we understand the inherent risks and believe in our decisions,” Turner said.
[...]
Refinancing Dubai’s debt became more difficult with the onset of the global credit crisis as lending froze. It has about $80 billion of outstanding corporate and government debt, according a report by Moody’s in February. That almost matches the emirate’s $82 billion gross domestic product in 2008, the report said.

“We’ll be more careful now,” Sheikh Mohammed told reporters in Dubai on Sept. 9.
[...]

Previous related posts are available here.

Let the trade war begin (US vs China)

The move was anticipated and obvious, but what wasn't obvious was the speed at which it came: It took only two days for the Chinese government to come with their retaliation against the US after Obama imposed tariffs on tires imported from China.

Sept. 14 (Bloomberg) -- China announced a probe into the alleged dumping of American auto and chicken products, two days after U.S. President Barack Obama imposed tariffs on imports of tires from the Asian nation.

It's all déjà-vu.

Stocks Cheapest since '89

This is yet another reason to be bearish even on the short term: the consensus that stocks are not only cheap, but the cheapest since '89 is just another rush of irrational exuberance.

As you know if you have been following my blog, stocks have been the most overvalued since the creation of the S&P 500 (in 1936) and probably even more overvalued than any time in history.

Sept. 8 (Bloomberg) -- Never before have Wall Street stock analysts diverged more with economists at their own firms over the outlook for earnings in the Standard & Poor’s 500 Index.
[...]
Concern that profits won’t measure up to estimates may limit returns after the S&P 500 rose 50 percent since March, the steepest rally in seven decades. While shares trade close to the cheapest levels relative to earnings since 1989, based on next year’s projections, forecasts for the economy by Goldman Sachs Group Inc.’s Jan Hatzius, Morgan Stanley’s Richard Berner and Bank of America Corp.’s Drew Matus show equities are no bargain.

The Greater Depression starring Obama [update]

Whatever you call it: déjà-vu, remake of the Great Depression starring FDR, or a bad sequel, one thing is for sure, billions of people will be forced to live the Greater Depression starring Obama (and of course Ben Bernanke).

We are leaving step by step the Great Depression: Crash, followed by money printing, destruction of productive goods (cash for clunkers), and now, tariffs:

BEIJING (Reuters) — China on Saturday denounced a decision by the United States to impose a 35 percent tariff on Chinese-made tires, saying that the move sent a dangerous signal before a Group of 20 summit meeting and could set off a global chain reaction of protectionist measures.

A White House spokesman said the decision on Friday was “to remedy the clear disruption to the U.S. tire industry” from cheap Chinese imports.

In a statement issued on his ministry’s Web site, China’s minister of commerce, Chen Deming, called President Obama’s decision “a grave act of trade protectionism” that violated rules set by the World Trade Organization.

The Chinese Ministry of Commerce spokesman, Yao Jian, said the move could set off a “chain reaction of trade protectionist measures that could slow the current pace of revival in the world economy,” according to the ministry Web site.

This is probably just the beginning, the foot in the door for more tariffs of all kind (as usual...).
And yet again, Chinese 'communists' are the voice of reason where American 'capitalists' are doing the exact things that Marx would recommend.

Update on 2009-09-14: Mish writes:

To date, Obama is repeating the same mistakes Roosevelt and Hoover made during the Great Depression. Cash-For-Clunkers was a horrid policy decision that led to the destruction of productive assets much the same as Roosevelt's policy of illegally burning crops hoping to force up prices. See Government Bailouts and the Stock Market - The Seen and the Unseen for more details.

Now, Obama's tire and steel tariffs will strongly encourage more unions and labor groups to seek relief under "Section 421" of U.S. trade law. That misguided law does not require petitioners to prove unfair trade practices.

If Obama keeps this foolishness up, which right now seems highly likely, he risks a global trade war similar to the global trade crash kicked off by the Smoot-Hawley Tariff Act signed by President Hoover in the early stages of Great Depression.

Reminiscences of spring and summer of ‘87

Here is an interesting video of Art Cashin, director of floor operations at UBS Financial Services. I hadn't heard about him before, but he's making sense in this interview.
The most important quote is:

“There’s just some eerie things about this—it’s reminiscent of spring and summer of ‘87 when nobody believed the rally and it kept going up despite skepticism, people shorting into it. It ate them alive until it suddenly turned.”

Inflation or Deflation? - 7

Here's a very simple idea that I had. Use Google Trends to see what people are looking for and compare the number of searches for inflation vs. deflation.

Although I believe that we will see super- or hyper-inflation in many countries in the next several years, and include the US among the countries which will be impacted, I still think that the current environment is highly deflationary, because of all the credit destruction. The money printing that has occurred doesn't compensate for the mortgage industry collapse, the total disappearance of HELOC, and the drop of the credit limits on credit cards yet.

This chart shows searches for inflation/deflation and is restricted geographically to the US. Click for bigger image.

So I would assume that people are still in denial when it comes to deflation.

The same comparison on YouTube.com gives the following results:

• inflation: about 15,900 results
• deflation: about 2,830 results
  

Related posts:

1. Inflation or Deflation - 1 (07/12/2008)
   
2. Inflation or Deflation - 2 (10/12/2008)
3. Inflation or Deflation - 3 (24/01/2009)
4. Inflation or Deflation - 4 (26/01/2009)
5. Inflation or Deflation - 5 (15/02/2009)
6. Inflation or Deflation - 6 (2009-07-14)

Real estate in France

To follow up on my previous post on the subject, and after what seems a very long wait, French Notaries finally decided to come back to work after 3 months of summer holidays and publish the real estate price levels for June 2009 (3 months lag...)

The collapse is real, but denying persists (click on images for sharper view):



Their conclusion:

Entre lèger redressement des volumes de ventes et baisse sensible des prix, y compris à Paris, le marché immobilier montre des signes d'amorce de sortie de crise selon les chiffres (volumes et prix) des Notaires de Paris-Ile-de-France.

Roughly translates into:
After a slight increase in volumes and quite a drop in prices (including Paris), the real estate market shows signs of improvements and according to the figures of the notaries of Paris (volumes and prices), the crisis is about to end.

Looks like they still believe in Santa. These are ugly figures, and have probably never shown so much weakness in modern history (except of course, in previous 2009 months):

Robert Prechter hour interview on Financial Sense

Financial Sense interviewed Robert Prechter yesterday, and the interview is very interesting.

Click here to listen/download in MP3 format.

Related posts on Robert Prechter.

China to diversify out of the USD, buy gold

Another interesting story from the Telegraph:

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".
[...]
"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
[...]
Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.
The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.
[...]
Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China. "The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."
Yet the consequences are not symmetric.

"He who goes borrowing, goes sorrowing," said Mr Cheng. It was a quote from US founding father Benjamin Franklin.

Mr Cheng is far from being an idiot. Too bad the Chinese have Mervyn King, Gordon Brown, Ben Bernanke, Tim Geithner and Barack Obama facing them...

China restricting rare metal exports, looking to ban them?

UK Telegraph:

A draft report by China’s Ministry of Industry and Information Technology has called for a total ban on foreign shipments of terbium, dysprosium, yttrium, thulium, and lutetium. Other metals such as neodymium, europium, cerium, and lanthanum will be restricted to a combined export quota of 35,000 tonnes a year, far below global needs
[...]

No replacement has been found for neodymium that enhances the power of magnets at high heat and is crucial for hard-disk drives, wind turbines, and the electric motors of hybrid cars. Each Toyota Prius uses 25 pounds of rare earth elements. Cerium and lanthanum are used in catalytic converters for diesel engines. Europium is used in lasers.

Blackberries, iPods, mobile phones, plams TVs, navigation systems, and air defence missiles all use a sprinkling of rare earth metals. They are used to filter viruses and bacteria from water, and cleaning up Sarin gas and VX nerve agents.

Reuters:

Concerns are mounting that Beijing could further restrict rare earth exports and even impose an outright ban on shipments of some key metals.

Here are few interesting facts about rare earth metals:

• China produces about 97 percent of world's rare earth metals.
• The country wants to use its resources mainly for its domestic consumption while getting global companies to set up high-tech operations in its regions such as Inner Mongolia.
• China regulates its exports with quotas and duties. Since 2004, exports from China have shrunk by about 10 percent each year. Analysts say the export quotas for this year could range between 32,000 tonnes to 34,000 tonnes.
• Demand for rare earth metals is likely to increase between 10 percent and 20 percent each year, on back of growing demand for metals such as neodymium, used to make hybrid electric vehicles and generators for wind turbines

Hank Paulson exposed by the New York Times

This is not from today, but I just ran into this report from the NYTimes and I think it's a very good job and seriously worth reading.
Here are some quotes:

Before he became President George W. Bush’s Treasury secretary in 2006, Henry M. Paulson Jr. agreed to hold himself to a higher ethical standard than his predecessors. He not only sold all his holdings in Goldman Sachs, the investment bank he had run, but also specifically said that he would avoid any substantive interaction with Goldman executives for his entire term unless he first obtained an ethics waiver from the government.

But today, seven months after Mr. Paulson left office, questions are still being asked about his part in decisions last fall to prop up the teetering financial system with tens of billions of taxpayer dollars, including aid that directly benefited his former firm. [...]

Mr. Paulson did not say when he received a waiver, but copies of two waivers he received — from the White House counsel’s office and the Treasury Department — show they were issued on the afternoon of Sept. 17, 2008.
[...]
While Mr. Paulson spoke to many Wall Street executives during that period, he was in very frequent contact with Lloyd C. Blankfein, Goldman’s chief executive, according to a copy of Mr. Paulson’s calendars acquired by The New York Times through a Freedom of Information Act request.

During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives.

On Sept. 17, the day Mr. Paulson secured his waivers, he and Mr. Blankfein spoke five times. Two of the calls occurred before Mr. Paulson’s waivers were granted.
[...]
Mr. Paulson was closely involved in decisions to rescue A.I.G., according to two senior government officials who requested anonymity because the negotiations were supposed to be confidential.

And government ethics specialists say that the timing of Mr. Paulson’s waivers, and the circumstances surrounding it, are troubling.

“I think that when you have a person in a high government position who has been with one of the major financial institutions, things like this have to happen more publicly and they have to happen more in the normal course of business rather than privately, quietly and on the fly,” said Peter Bienstock, the former executive director of the New York State Commission on Government Integrity and a partner at the law firm of Cohen Hennessey Bienstock & Rabin.

He went on: “If it can happen on a phone call and can happen without public scrutiny, it destroys the standard because then anything can happen in that fashion and any waiver can happen.”
[...]
Mr. Paulson helped decide the fates of a variety of financial companies, including two longtime Goldman rivals, Bear Stearns and Lehman Brothers, before his ethics waivers were granted. Ad hoc actions taken by Mr. Paulson and officials at the Federal Reserve, like letting Lehman fail and compensating A.I.G.’s trading partners, continue to confound some market participants and members of Congress.

“I think it’s clear he had a conflict of interest,” Mr. Stearns, the congressman, said in an interview. “He was covering himself with this waiver because he knew he had a conflict of interest with his telephone calls and with his actions. Even though he had no money in Goldman, he had a vested interest in Goldman’s success, in terms of his own reputation and historical perspective.”
[...]
Adding to questions about Mr. Paulson’s role, critics say, is the fact that Goldman Sachs was among a group of banks that received substantial government assistance during the turmoil. Goldman not only received $13 billion in taxpayer money as a result of the A.I.G. bailout, but also was given permission at the height of the crisis to convert from an investment firm to a national bank, giving it easier access to federal financing in the event it came under greater financial pressure.

Goldman also won federal debt guarantees and received $10 billion under the Troubled Asset Relief Program. It benefited further when the Securities and Exchange Commission suddenly changed its rules governing stock trading, barring investors from being able to bet against Goldman’s shares by selling them short.

Now that the company’s crisis has passed, Goldman has rebounded more markedly than its rivals. It has paid back the $10 billion in government assistance, with interest, and exited the federal debt guarantee program. It recently reported second-quarter profit of $3.44 billion, putting its employees on track to earn record bonuses this year: about $700,000 each, on average.
[...]
But according to two senior government officials involved in the discussions about an A.I.G. bailout and several other people who attended those meetings and requested anonymity because of confidentiality agreements [...] Mr. Paulson played a major role in the A.I.G. rescue discussions over that weekend and that it was well known among the participants that a loan to A.I.G. would be used to pay Goldman and the insurer’s other trading partners.

On Sept. 16, 2008, the day that the government agreed to inject billions into A.I.G., Mr. Paulson personally called Robert B. Willumstad, A.I.G.’s chief executive, and dismissed him. Mr. Paulson’s involvement in the decision to rescue A.I.G. is also supported by an e-mail message sent by Scott G. Alvarez, general counsel at the Federal Reserve Board, to Robert Hoyt, a Treasury legal counsel, that same day.

The subject of the message, acquired under the Freedom of Information Act, is “AIG Letter,” and it contains a reference to a document called “AIG.Paulson.Letter.draft2.09.16.2008.doc.” The letter itself was not released.
[...]
Mr. Paulson’s schedules from 2007 and 2008 show that he spoke with Mr. Blankfein, who was his successor as Goldman’s chief, 26 times before receiving a waiver.
[...]
On the morning of Sept. 16, 2008, the day the A.I.G. rescue was announced, Mr. Paulson’s calendars show that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson received the ethics waiver regarding contacts with Goldman between 2:30 and 3 the next afternoon. According to his calendar, he called Mr. Blankfein five times that day. The first call was placed at 9:10 a.m.; the second at 12:15 p.m.; and there were two more calls later that day. That evening, after taking a call from President Bush, Mr. Paulson called Mr. Blankfein again.

When the Treasury secretary reached his office the next day, on Sept. 18, his first call, at 6:55 a.m., went to Mr. Blankfein. That was followed by a call from Mr. Blankfein. All told, from Sept. 16 to Sept. 21, 2008, Mr. Paulson and Mr. Blankfein spoke 24 times.

At the height of the financial crisis, Mr. Paulson spoke far more often with Mr. Blankfein than any other executive, according to entries in his calendars.
[...]
Moreover, because the schedules include only phone calls made through Mr. Paulson’s office at Treasury, they provide only a partial picture of his communications. They do not reflect calls he made on his cellphone or from his home telephone.

According to the schedules, Mr. Paulson’s contacts with Mr. Blankfein began even before the height of the crisis last fall. During August 2007, for example, when the market for asset-backed commercial paper was seizing up, Mr. Paulson spoke with Mr. Blankfein 13 times. Mr. Paulson placed 12 of those calls.

By contrast, Mr. Paulson spoke six times that August with Richard S. Fuld Jr. of Lehman, four times with Jamie Dimon of JPMorgan Chase and only twice with John Thain of Merrill Lynch.

Conclusion: Hank Paulson belongs to jail.

Gold's back to above $1000/oz

LONDON (Reuters) - Gold prices jumped through the psychological $1,000 an ounce level on Tuesday to its highest since February, boosted by a weak dollar and investors looking for a hedge against inflation, traders said.

Gold futures hit $1,007.1 an ounce and spot gold saw $1,004.95 an ounce, the highest since February 20 when it touched $1,005.40.

Futures have topped $1,000 nine times -- three times this year and six last year, including a record $1,033.90. Spot have risen above $1,000 just four times - once in February and three times in March 2008, when they hit a record $1,030.80.

"There's a lot of euphoria, the market has been waiting to test the $1,000 level," a Europe-based trader said. "Whether it lasts will depend on investors and whether they want more ... Myself, I think it unlikely. A sharp correction is due."

I also believed a correction was coming to the point were I even bought a few puts. But the same way that the stock markets didn't correct, gold hasn't neither. But the correlation between the two has been quite high in the past several months.

Hong Kong recalls gold reserves from London

I am still trying to make sense of this report on MarketWatch, but I still thought I would share it with you:

HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday.

The facility, industry professionals said, would support Hong Kong's emergence as a Swiss-style trading hub for bullion and would lessen London's status as a key settlement-and-storage center. [...]
The Hong Kong Monetary Authority, which functions as the territory's unofficial central bank, will transfer its gold reserves stored in other vaults to the depository later this year, the Hong Kong government said in an earlier statement.
[...]
Traders said the new depository facility could also foster new financial products, such as exchange-traded funds based on precious metals.
[...]
Martin Hennecke, a financial advisor with the Hong Kong-based Tyche Group Ltd., said that could be appealing to regional central banks unnerved after watching the global financial system teeter on verge of implosion last year.

"Central banks are increasingly aware of the importance of having gold reserves at time of financial crisis and having it easily available at their own disposal," he said.
[...]
Marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility, according to reports citing Raymond Lai, finance director with the Hong Kong Airport Authority.

Efforts will also be made to reach out to commodity exchanges, banks, precious-metals refiners and ETF providers, the reports said.

Management firm Value Partners planned to launch an ETF gold fund that will use Hong Kong instead of London as a repository for the gold backing the fund, local reports said Thursday.

Robert Prechter interview on King World News

While we're at it, Robert Prechter was on King World News for an hour long interview which is definitely worth listening to (here's the MP3 audio file).

Related posts on Robert Prechter.

Nature's Law

This is probably the last post I will make about Robert Prechter's (and A.J. Frost's) Elliott Wave Principle. And I will quote two bits that are located at the very very end of the book (p199 and forward).

The first one is about the economics fundamentals which are the basis of the Wave Principle:

The Wave Principle exists because man refuses to learn from history, because he can always be counted upon to be led to believe that laws of nature do not exist (or more commonly, "do not apply in this case"), that what is to be consumed need not first be produced, that what is lent need never be paid back, that promises are equal to substance, that paper is gold, that benefits have no costs, that the fear which reason supports will evaporate if they are ignored or derided.

Panics are sudden emotional mass realization of reality, as are the initial upswings from the bottoms of those panics. At these points, reason suddenly impresses itself upon the mass psyche, saying, "Things have gone too far. The current levels are not justified by reality". To the extent that reason is disregarded, then, will be the extent of the extremes of mass emotional swings and their mirror, the market.

The second one is more general opinion about how democracy morphs into some sort of dictatorship of the more numerous:

[...] each living thing in the natural setting either provides for its own existence or is granted no existence. [...] No living thing other than man ever demands that its neighbors support it because that is its right, as there is no such right. [...]

Lord Thomas Babington Macaulay, British historian [...] correctly ascertained the root of the problem over a hundred years ago in a letter to H.S. Randall of New York dated May 23rd, 1857:

The day will come when in the State of New York a multitude of people, non of whom had more than half a breakfast, or expects to have more than half a dinner will choose the legislature. Is it possible to doubt what sort of legislature will be chosen? On one side is a statesman preaching patience, respect for vested rights, strict observance of public faith. On the other is a demagogue ranting about the tyranny of capitalists and usurers, and asking why anybody should be permitted to drink champagne and to ride in a carriage while thousands of honest folk are in want of necessaries?
[...]
As this century progresses, it becomes clearer that in order to satisfy the demands of some individuals and groups for the output of others [...]. He has not only mortgaged his present output, but he has mortgaged the output of future generations by eating the capital that took generations to accumulate.

In the name of a right that does not exist within the law of nature, man has forced acceptance of paper that represents nothing but costs everything, he has bought, spent and promised at an exponential rate, creating in the process the greatest debt pyramid in the history of the world, refusing to acknowledge that these debts must ultimately be paid in one form or another.
[...]
When the producers who are leeched upon disappear or are consumed, the leeches who remain will have lost their life support system, and the laws of nature will have to be patiently relearned.

"A democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine."
-Thomas Jefferson

When reading these quotes, and see how accurately they apply to the current events, it's difficult to believe that this book was written in 1978, about 30 years ago

Related Posts & Links:

• 2009-08-27 Probably the most important lesson of all?
• 2009-08-19 Nearly everyone was proclaiming a new bull market

The £200 billion that Mervyn King didn't get

This is old news, but I still think it's important to keep it in mind while thinking about the future of the GBP: the UK was probably the country were the credit bubble was the biggest (the UK and the US were competing for the title...) and is now probably experiencing the biggest credit deflation as well.

While this deflation is very bullish news for the GBP, the actions taken by the Keynesian Fools are very much likely to destroy the currency: Alistair Darling and Gordon Brown, who already driven the country in the ditch, debt-wise, and are now not only increasing the deficits, but with the help of Mervyn King, they are monetizing the debt.

This is the biggest credit deflation and economic down turn ever, and yet, prices are rising in the UK.

As you can see, they will not end this until they in the war against deflation.

Aug. 19 (Bloomberg) -- Bank of England Governor Mervyn King and two other policy makers were overruled in a push to expand the bank’s bond-purchase program to 200 billion pounds ($329 billion) as the majority favored a smaller amount.

The pound fell after the nine-member Monetary Policy Committee said it voted 6-3 to raise the total they will spend by 50 billion pounds to 175 billion pounds, according to minutes of the Aug. 6 decision released today. King, Timothy Besley and David Miles dissented in favor of a 75 billion-pound expansion.

“All members agreed that substantial further asset purchases were needed over the next three months,” the minutes said.

King, who has now been defeated three times as governor, said last week it’s “likely” that inflation will slow below 1 percent this year and won’t return to the goal until at least the end of 2012. Investors scaled back expectations for interest-rate increases next year after the comments.

“I’m stunned,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former Bank of England official. “This sends a clear message that the bank is willing to do whatever it takes, and that’s encouraging. It’s more likely they’ll make extra purchases than start tightening over the next year.”

An argument for a larger expansion of the bond purchases was that “insufficient stimulatory monetary policy” would harm confidence in the recovery. The risks of “another large stimulus might be less than the possible costs of acting too cautiously,” and the policy could be reversed if found to be “overly expansive,” the minutes said. [...]

Inflation unexpectedly held at 1.8 percent in July, instead of slowing as all economists in a Bloomberg News survey had predicted. Policy makers said that without more purchases, “nominal demand would likely be insufficient to prevent inflation remaining below the 2 percent target, perhaps substantially, throughout the forecast period.”

Pedge Fund Performance 200908

Historical performance since October 2008 are available here.

Summary:
Pedge Fund USD
August performance: +1,93% (gross, approx)
Year to Date performance: +5,09% (gross, approx)

Sentiment more bullish than the previous 2007 top

Right before the major collapse in the stock markets of late 2007, the sentiment hit an extreme level of bullishness, even with mortgage institutions collapsing into bankruptcy and the real estate market imploding because of the US lemmings falling under the weight of the debt they couldn't possibly service.

So we may very much have reached a top, at least a cyclical one, even though the fundamentals should suggest a secular one. I already mentioned this last week (Apogee of exuberance, paroxysm of irrationality. Sign of a top?), and it's been confirmed for now but here are some impressive charts to back that up.

S&P 100 Bullish Percent Index (click for bigger image)

S&P 500 Bullish Percent Index (click for bigger image)

Dow Jones Industrial Bullish Percent Index (click for bigger image)

S&P Financial Sector Bullish Percent Index (click for bigger image)

Bankrupt companies taking +600% in a few weeks (click for bigger image)

[Update: I hadn't seen this one, but even Lehman Brothers shares surged in the last several days, and went from $0.05 to an intraday high of $0.32, which is about +650% in one day.]