|
The
‘green shoots’ of the economy are really red roots evidenced by a
labor market stasis and plummeting earnings. Chairman
Bernanke told ‘60 Minutes’ on Sunday that “green
shoots” of economic resurgence are sprouting. But those
perceived green shoots are really red weeds that the Federal Reserve has
internally debated for weeks. The economy is grinding to a halt, the
FRN$ is under intense pressure and beginning to buckle again while gold is
predictably playing its role.
But
the Fed officials do realize Americans want to be lied to about the state of
the economy so they spout worthless pablum on national television and bury
what remaining facts they decide to release in mostly unread reports.
FOMC
MINUTES
The 28-29 April 2009 FOMC minutes were
released today, 20 May 2009, and with all the blah, blah, blah edited out
there is some useful information including:
“Labor
market conditions deteriorated further
in March. … The civilian unemployment rate climbed to 8.5 percent
… Real spending on equipment and software dropped markedly
… Business output continued
to drop sharply,
and credit availability
was still tight. … the growth of real gross domestic product (GDP)
in China appeared to pick
up … investors were apparently surprised by the
Committee’s announcement that it would increase significantly further
the size of the Federal Reserve’s balance sheet … Poor liquidity in
the market for Treasury inflation-protected securities continued to make
these readings difficult to interpret. … daily trading volumes
for Treasury securities remained low. … The spread between the
forward trend earnings-price ratio for S&P 500 firms and an estimate of
the real long-run Treasury yield–a rough gauge of the equity risk
premium–narrowed during the intermeeting period but was still very high by
historical standards. … Commercial bank credit contracted …
Commercial real estate loans also fell. … Unemployment claims were
exceptionally
elevated … The economies of many key trading partners were seen as
experiencing quite
severe contractions. [emphasis and hyperlinks added]“
ECONOMY
GRINDING TO A HALT
Credit
is tight because holders of capital are seeking safer more liquid assets and
refusing to lend. Treasuries, the ‘risk-free asset’, has
anemic volumes as do the klepto-TIPS.
To compensate the Federal Reserve engages in
quantitative easing but will fail.
The
value of real estate, both commercial and residential, is a function of the
underlying business productivity. In January when I attended the IMN Real Estate conference it
was dead. Commercial real estate loans are still falling. Why
lend money to buy ghost malls?
I
agree with Bespoke Investment Group that
Jeremy Siegel of the Wall Street Journal is ‘living in la la
land’ regarding his view on the S&P 500 earnings calculations.
The
United States economy, a consumption gulag, is fueled by the top lines of
individuals. The labor market is disappearing, unemployment is quickly
rising, unemployment claims are probably rising faster and are exceptionally
elevated while businesses are not spending or producing. This downturn
is neither comparable nor is the S&P 500 making any money.
DOLLAR
NEGATIVE
The
Great Credit Contraction has begun and the
system does not collapse but evaporate. Access to
credit has evaporated. Jobs and earnings evaporate which causes real
estate values to evaporate.
Then
real wealth is evaporated as bailouts for corporations or individuals toss
money into the money hole and light it on fire. This results in tax
revenues evaporating with government spending rising at an greater rate and
leads to in an exponential increase in the budget deficit. Beware if
you have a safety deposit box.
As
capital flees to the safer and more liquid assets, anemic Treasury volumes
result as capital flees into the world markets which, along with the trade
deficit, results in a precarious current account deficit;
particularly in real terms as Americans are less able to import and purchase
foreign goods from real economies like Brazil which I discussed in-depth with
Contrary Investors Cafe on 20
May 2009.
Then
the budget deficit must be financed but it is the Treasury bubble which will burst.
On 18 January 2009 I wrote how and why the Treasury bubble will burst. ”When
foreign demand for U.S. debt subsides then at least two scenarios can happen:
(1) printing the money with hyperinflation or (2) a default”.
Before
a complete collapse there will be inflation through monetization, partial
defaults or increased interest rates. All are negative for business
activity. All reinforce the downward spiral.
GOLD
POSITIVE
Because
the FRN$ is the world reserve currency and because gold is the risk-free
asset therefore they are poles apart. Not paper gold like the problematic GLD ETF or
some other flimsy substitute but cold and hard bullion. Gold will hold
its purchasing power during times of fiat currency illusion inflation.
But it is during deflationary credit contractions that gold really
performs best.
As I
wrote about a couple weeks ago, “While the DOW may continue its rally I
highly doubt it will breach 11.5 gold ounces before it resumes its downward
destiny and reaching 5-6 ounces sometime this year. Silver will likely
continue its upward ascent and return to a more normal ratio with gold around
55.”
The
gold to silver ratio has moved from 72 to 65.8, or about 8.6%.
During this latest bear market rally some of the key
ratios have normalized but even with
the monstrous move silver is still out of normal with more upside
potential. The next downward phase for the bond and equity markets will
be upon us and if during deflation the FRN$ is king then gold is emperor.
CONCLUSION
‘Green
shoots’ are growing in China and the Brazilian Amazon but
not in the current American economy and Chairman Bernanke knows it.
Business activity is grinding to a halt with S&P 500 earnings
looking like red roots. Quantitative easing will fail.
The
Great Credit Contraction grinds on and capital continues
seeking safer and more liquid assets while key
ratios continue to normalize. Physical gold
and silver, the ultimate forms of cash, will be
prime beneficiaries of this mega-trend.
Disclosures:
Long physical gold and silver and no position in the GLD ETF or US
Treasuries.
Trace Mayer
RuntoGold.com
Trace Mayer,
J.D., holds a degree in Accounting from Brigham Young University, a law
degree from California Western School of Law and studies the Austrian school
of economics. He works as an entrepreneur, investor, journalist and monetary
scientist. He is a strong advocate of the freedom of speech, a member of the
Society of Professional Journalists and the San Diego County Bar Association.
He has appeared on ABC, NBC, BNN, many radio shows and presented at many
investment conferences throughout the world.
|
