patrick.net

As long as rights and responsibilities go together, the market will figure things out.

Even with a highly distorted reality, the market will still figure things out. It will just be a bit messy.

I see the market as a manifestation of human actions and reactions. It is simply an extension to Nature.

Peter, the market exists. In spite of all the machinations of the control freaks who come to power, as long as there is society, there is a marketplace. To that extent, I agree with you.

I am not sure about the market "figuring it out". Are you saying the best possible outcome will always be reached regardless of whether the marketplace is free or not. I find that hard to believe.

Force and coercion, in many other countries (and this one), have caused abject poverty. Until freedom happens, that situation doesn't get alleviated. That has been observation.

TOB, just do what I do and lend through a broker. I get 12% on my money.

Malcolm,

care to elaborate on what kind of broker that is?

Are you saying the best possible outcome will always be reached regardless of whether the marketplace is free or not. I find that hard to believe.

In an imperfect market, the "best" outcome is always a moving target. So yes, it will not be reached. However, the market still tries to move towards some equilibrium point at all times.

Oh ho.

My little speculations on EU vs. the Fed are now being detailed by smarter and better researched people. Go Mish!

Patricks link to: http://globaleconomicanalysis.blogspot.com/2008/06/central-banks-clash-over-monetary.html?ref=patrick.net

Notable comment, "The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe."

Things are different now. The entire EU is up against the US and we are roughly equel in economic strength. However, the US massive outstanding debt in other regions curreys support for favorable US outcomes. I had always wondered if the EU could break through to become the dominant central banking force. The answers is now clear to me. We will repeat the early 1990s. Big recession in Europe, ironically a now slightly smaller recession in the US (but still a good ol character revealing, learn-how-to-budget-and-hope-you-don't-lose-your-job recession) and rising geo-politcal tensions where oil-producing nations re-learn that fast, large run-ups in oil are not in their best interest.
The key to long term US recovery will be how well we shift back to manufactoring. The belief is that capitalism will respond faster and thus blunt the worst of our version of Japan's 'lost decade.' I tend to agree, but we will need to undo the worst of the NAFTA abuses. We cannot outsource jobs to partners that do not follow the rules.

Duke,

I read the link and the basic premise seems to be that a differential in interest rates between Europe and USA is causing some kind of stress on the "financial system". And Morgan Stanley wants ECB to lower their interest rate so that rate(FED)=rate(ECB), ideally.

But why will that help? I just don't see it. It is possible that MS has some self-interest in rate parity, but why is this so important. Why will the weak dollar cause inflation in Europe? It should be the other way around. Or is it the Oil/$ effect? I don't "get" the big picture here.

Put in another way:

What is it a about interest rate disparity that implies that Fed and ECB are "squabbling", or that Europe and USA are "up against each other"? Does Mish explain that?

I have tried to read the comments to the article and did not find much explanation, really.

http://www.dqnews.com/News/California/Bay-Area/RRBay080618.aspx

Bay Area home sales return to record low in May

REO Speedwagon, from the DQ report:
Bay Area home sales return to record low in May
The impact was greatest in inland counties: Solano County's foreclosure resales were 57.6 percent of the resale market; in Contra Costa they were 43.3 percent and in Sonoma 26.6 percent. It was much different on the coast, where foreclosures resales were just 5.8 percent of the resale market in San Francisco and 4.5 percent in Marin County. Alt-A Bay is next...

FYI, az_lender on the HBB has a good business lending to those who live in manufactured homes...

Since when is Sonoma an "inland county"? Or did you guys move it after I left the Bay Area?

Since when is Sonoma an “inland county”? Or did you guys move it after I left the Bay Area?

Soon, Alameda County will be considered inland.

Anybody want to handicap today's TSLF auction? Its a Schedule 2 with $75 billion of Treasuries to swap. Last round (28 days ago), they got bids for ~$50 billion. I am guessing it should increase around $10 billion to $60 billion.

Justme,

I see the issue in the EU as this:
The rate differential is having the effect of making US consumers have to spend more dollars per same item exported from EU. This is on excahnge rate alone. We are printing lots of dollars. They are printing far fewer Euros. This means the EU export driven economy (or econmies) is really hurt as th US simply either stops buying their stuff or we ask them to discount it.
In a seperate issue it is true that a weak US dollar is helping fuel a global oil/food inflation spike. Since the high inflation in the EU is mostly restricted to food and fuel we are spiking inflation there. Sadly, and as Mish correctly points out, you cannot solve an oil/food inflation of this type with monatary tightening. So, higher rates are not solving the problem at all. In stead, you simply get business contraction. That's contraction on top of what you get from the ailing export problem.
In the end, it looks like the EU will pursue their (wrong) tight monetary policy and they will drive their economy into a recession. This is turn will help the US as most people in a recession are happy for work and tend to expect lower wages and lower standards of living. The US, who is due the same expectation, can offset some of their belt tightening with the belt tightening seen elswhere.
Now, if the rates moved in conjuction they would tend to avoid the differential problems. No brakes on economic expansion, no misguided attempts to 'control (the uncontrolable) inflaton' and less of a problem to their export industries.
In the end, we are seeing that the world is still very much tied to the US cnsumer. All of the theories about decoupling are proving to be very false. Or at least, no one is willing to test those theories.

Duke,

Sounds like EU is against lose monetary policy and the associated bailouts. And the US are for the same items. Then who is "wrong"?

Duke,

Thanks for explaining clearly.

Would US have similar issues if they were to raise rates and commodities demand doesn't drop off from rest of world?

Duke,

Another thought: It seems unlikely that ECB is just being dumb about keeping their interest rate higher and thereby hurting their export industry. And why would the US care, we should be more than happy to displace their export industry with our own goods.

There is something else going on here, or maybe it is just a storm in a teacup.

My guess is the former, but that the interested parties will not speak their true motivation. Can any one put their finger on what the real and conflicting motivations are? "Follow the money" is usually a good way to find out what is really going on.

An example of a possible hidden motivation: ECB could be amplifying the US dollar weakness by avoiding to cut their own rates, with the goal of displacing the dollar as the world reserve and oil trade currency. In the long run, pricing oil in Euro will give EU larger influence on world economic mattters.

I'm not saying this IS the motivation. I'm just bringing up one possibility.

Some SCARY STUFF about gold and silver etf's

http://www.theinternationalforecaster.com/International_Forecaster_Weekly/ETF_Threat_to_Gold_and_Silver_Rallies

RBS issues global stock and credit crash alert

I am sure a 25% drop in S&P 500 is very scary. :roll:

At some point, there will be a divergence of price for physical metals and paper metals. So I don't really worry about naked etf shorts. Owning physical gold and silver is quite easy, even if you have a substantial position. Even $100M worth of gold is manageable if you are serious about going physical, silver will be a challenge at that level though.

What I really worry about is agricultural bets, which can only be done through futures, forwards, derivatives, etfs, etns etc. If naked shorts happen there, I cannot possibly hoard N bushels of corn or soybeans myself.

Corn is going to go nuts with all the Iowa flooding.

All the farmers around here in Idaho pulled their land in from being fallow this year and planted lots of corn. I'll bet they make out like bandits this year.

OO

You said owning physical gold and silver is quite easy. Could you go into great detail how one would do this?

I have always had faith in the system until recently.

Justme,
I believe the EU is wrong. The US is battling solvency issues in the financial markets. Giving time to recapitalize the banks as oposed to letting them fail which would lead to fire sales which would allows holders of cash to buy assets at a bargain. The Fed's posion pill (if you will) is to run up inflation. Which Uncle Sam backing our businesses, the EU has to either try to break us, or go with us. It seems even if they try to break us (at the Central Bank level) that the citizens will not. Soooo, they need to allow core inflation to rise a bit with the US.
Is their a deeper motivation? Maybe. I think you scenario is certanly a possibility. There are small but real advantages to being the default curreny of business. However, I never underestimate the ability of people, and especially beaurocracies to be dumb. It is entirely likely Trichet has flipped to the page in his book called, "Inflation above target" and it says, "Raise rates." Deeper analysis could be beyond his mandate. Mish is certainly right in that the EU cannot combat food and oil with monetary policy. Of course, if he is smart he could be leading the EU to the realiztion that you should be food and energy independant.

An old Game Theory instructor of mine that used a lot of economic models used to show that even though the law of comparative advantage may dictate that you import all energy and food so that you can maximize, say, building nothing but computer chips so that everyone in the closed world system is doidng what they do best, the problem lies when the rules change. It is never is a soverigns states best interest to not be able to feed itself, defendi tself, or suuply its own energy needs.

Peter
Yea - scary that London is calling for that 25% drop. It is certainly the way I ahve felt abov the golbal economy.

sa
Commodities should drop on a global recession. Period. Some may arguethat China and other massive holders of US debt are just chasing commodities before their dollars halves in value, but I don't believe it. Effectively they woud bid against themselves with the specualtors pocketing the profits.
My feeling is the US shold raise rates because the Fed is lending money at 2% to banks when inflation is running (in mymind) at least 7%. THAT is a real problem. Cheap money is still fueling bad business models. Inflation is a self enforcing problem ans it is cerainly taking hold now. Poole is right to say we are now on the wrong side of the balancing act. Negative growth, job loss, ans some failed banks and businesses are better than double digit inflation.

Duke,

Unless the world has a deep recession, bursting of commodities bubble will be short lived. Demand is going to come back again. Besides Asian consumers still use relatively very less oil compared to US. The wealth effect is enormous and %age price hike of oil in these countries doesn't match actial prices. My belief is consumption will continue to grow unless we see a deep recession.

@danville woman
Be very certain of your purpose for purchasing gold and silver. The speculation phase is IMHO long since gone; I wasn't making nearly as much as I do today back in 1998 when I did my best to "back up the truck", but that was the best time to buy in hindsight. My then-girlfriend (now wife) and I agreed that this was "the-end-of-the-world-as-we-know-it gold", no matter how much the nominal gains. We would only break this particular piggy bank if we were fleeing the country or some similar drastic activity.

By contrast, I just spoke with my wife's grandmother about purchasing gold and silver. She had a chunk of money in a CD, and asked me about precious metals since everyone in the family knows I hold physically-possessed precious metals. After much discussion, it turns out while she also has concerns about the currency, her time requirement for when she needs access to the funds is within a week or less, and she was only interested in precious metals because she just this year noticed the dramatic rise in price. This was in other words her emergency fund and protecting against inflation. So instead I helped her locate a local bank with a good Weiss rating and a high yielding CD account, and helped her establish a ladder-like approach to organizing the funds both inside and outside the CD so she struck a good balance between ready availability and yield. As for inflation, I determined her concern was not being able to afford food. We agreed that if push comes to shove, and her inflation fears extend further than they are now, she'll contact me and I'll help her set aside as many years of long-term stored food as she feels is necessary.

Physically-held precious metals at this point will tend to have very high transaction costs, so your round-trip conversion to a local currency will lose around 5-15% of spot, depending upon who you work with and the transaction amount and/or volume. A lot of people go to a local dealer thinking it is safer than mailing around cashier's checks and precious metals to and from a dealer on the Internet. That yields you transaction costs that trend towards the upper part of that range I gave above, and with U.S. Mail insurance so cheap, visiting a local dealer is a false economy. While it feels odd at first, I send a cashier's check through an insured, Registered Mail, return receipt envelope, and get the precious metals back in an insured, Registered Mail box. AJPM and Tulving are reputable Internet dealers that you will find praised on the Web forums, but perform your own due diligence as there are plenty of other reputable dealers. Transaction costs are around 8-10% of spot through these guys, and I haven't heard of anyone receiving counterfeits from these dealers.

For just pure protection against Argentina-style or Soviet Union-style currency vaporization, gold is gold. Don't get confused by all the different types of gold coins and bullion bars. There isn't enough value difference between them to matter for that purpose. Each type of coin and bullion has different alloying because gold in its raw natural state is soft enough to lose mass from just handling. So while actual weight will vary between different kinds of coins, 1 troy ounce is 1 troy ounce. Just stick with the major coins and bullion bars shown on AJPM's gold page, and look for the best $ per ounce price you can get, that you can also verify.

At these price levels, gold coin counterfeits are growing as a real (but still small) possibility. Either find someone through Craigslist who has a set with the detector you need or purchase your own Fisch Instruments fake gold coin detector set. Or Google how to perform your own mass-based assay (be aware that tungsten-based fakes can pass kitchen-scale accuracy mass-based assays); if you have access to a well-equipped chemistry lab, your personal assaying options (both destructive and non-destructive) open up considerably. Note the Fisch detectors might permanently sell out; if you are serious about accumulating gold, they are cheap insurance and you should pick up a set now as I haven't been able to find a comparable detector with as many good references on the Web.

Silver is tougher to set aside, and personal assays with silver are more difficult. If faith in the currency system is your concern, then you might consider just sticking with gold. But if "walking around money" in the aftermath of a currency dislocation is what you are after, most commentators suggest bags of 90% silver coins. There might still be a speculative opportunity in silver at this level, but it can be a very dangerous bet as the speculation position depends upon a huge run up in gold (up to $2-3K+), and a stampeding panic by the public into "poor man's gold", such that silver's price wildly leverages. It is also very cumbersome to store compared to gold.

If your purpose is to protect yourself against a literal overnight currency devaluation or dislocation, then do not store your precious metals anywhere except under your personal physical control. That means either hiding small quantities, or putting it into an in-floor safe (if I recall correctly, you own your own home), or a similarly-protected safe. Some people consider the purchase of a safe as part of the "transaction costs" of holding precious metals; I just consider a safe as another asset I should own regardless, and a sunk cost.

Hope this helps.

Duke

>>I believe the EU is wrong. The US is battling solvency issues in the financial markets. Giving time to recapitalize the banks as opposed to letting them fail which would lead to fire sales which would allows holders of cash to buy assets at a bargain. The Fed’s posion pill (if you will) is to run up inflation. Which Uncle Sam backing our businesses, the EU has to either try to break us, or go with us.

and

>>My feeling is the US should raise rates because the Fed is lending money at 2% to banks when inflation is running (in mymind) at least 7%.

So EU is wrong for having too high interest rates and US is wrong for having too low interest rates, and should raise them, at the same time as it shouldn't because we need to "recapitalize" the banks using a high interest rate spread.

There's some very mixed messages here!

I still think it is not obvious why EU should be reducing rates. I lean towards the US increasing rates to fight inflation. I see no law of economics that says that all the big currencies (dollar, euro, yen, maybe pound) ought to have roughly the same interest rate. If that was the case, why did we not complain for 15 years about the very low interest on Yen? It is still only 0.75%, and borrowing cheap yen caused many of our present problems.

At the moment we have Fed=2%, ECB=4%, BOJ=0.75% and BOE=5%.

Where "should" these numbers be?

Here is a hint why Wall St wants ECB to reduce rates:

"U.S. needs to restructure global policies to compete for foreign capital, vice president of Goldman Sachs International says at Asian banking and finance conference."

In other words, we need help with our bailout. ECB should help us by lowering interest rates and thereby pushing European investors towards the US equity markets.

Now it makes sense. Inflation be damned, both here and in Europe.

Well two of the banksters at Bare Sterns got arrested this morning.

http://biz.yahoo.com/ap/080619/bear_stearns_investigation.html

The US did not complain about low Japanese interest rates as we could afford the trade imbalance with Japan as our debt was relatively cheap during that period. All though, some segments did complain. Ask any electronics manufacturer. We now build no TVs in the US. Few CRTs or flat panels. However, we absorbed people into defense, IT, fnance.

I am not so sure of a mixed message. EU should not be at 5% and thinking of going up. It is too high relative to US. In my estimation if US went to 3% by year end (up from 2%), EU came down to 4%, US promises to balance budget and Oil supply either goes up or a global recession lowers demand, then we can reassess.

SA
I disagree. The commodities bubble is a lot of money chasing a lot of commodities (just less than cash) because people are buying the stuff commodities are turned into. We can think that, perhaps, China is turning dollars into oil reserves (or coppr, or steel, or whatever) but that would be dumb. In truth, a recession will lower demand. Then, people will test their own internal mrkets (and find them failing) and production will slow. In the end, China cannot keep oil prices down for their people, so China will address their own energy problems (which they are doing very well with the hydro-electric) and then find an economical way to dig up their own stuff (they have a ton of resrouces) rahter than try to industrialize the Sub-Sahara - becasue that is just a nihtmare.
To my mind, at its core, the Market finds price points at which it makes sense to do stuff. If shipping copper from Nigeria is super expensive, it will stop and China, if it wants to keep using copper, will pursue the next cheapest alterntive. Either another country, or its own soil.
On last comment. Speculators don't want commodities. The want to sell the contracts on commodities. If people lower their production, a bunch of speculators get killed having paid too much. In the end, the fundamental of world demand is in play, and right now oil is making mpost everything un-economical. Sooooo, I think the commodities rush is just hype as surely as the housng market was hype.

There doesn't seem to be much to report in the latest H.4.1 release. Increase in repos ($7 billion) and $3 billion in Treasuries sold off. TSLF increased but we knew that already from last weeks auction results. The good news is that this weeks auction showed a decline of around $10 billion from the one 28 days previous. Hopefully last weeks auction was just a small blip -- total TSLF should still be slightly north of $100 billion.

EBGuy,

There was also 38B worth of Temporary OMO and 37B worth of TSLF just today.
I received 8 email alerts about this from the New York Fed so far.

Would that show up in the H4.1 report today or next week?

37B worth of TSLF just today.

"This weeks auction" that I referred to in my post is the 37B that you are talking about. Auction was yesterday and the results get posted today. Current and historical TSLF results can be found here. This weeks results won't show up in H.4.1 until next week. Note that terms are 28 days so that you need to compare to the one 28 days previous to get the net increase, or in this case, net decrease (~$10 billion) in the swaps.

Danville woman,

I think apostasy gave a very good summary already.

first of all, I do not think that we will ever need to go into Whole Foods paying silver coins, or buying a house with gold bars. I am going into as physical as possible position because I do NOT trust the corrupt financial system, and I do worry about naked shorts, so I choose to hoard it in the most un-shortable way to combat manipulation (all sovereign funds that invest in PM take physical delivery). I also invest in gold and silver knowing that most of the toilet paper USD is in the hands of developing countries where gold=ultimate wealth is a deeply ingrained belief of their cultures. At some point, all these toilet paper will have to be converted into something that is hoardable with worldwide recognition, and I believe gold is the ultimate path for all these sovereign funds which are prohibited from buying critical US assets. They won't stay in USD toilet paper for long.

It really depends on what you want to do with PM. If you are just fearing the worst, and don't want to spend a fortune on PM, just buy a few coins from the US Mint so that you know they are not fake, and if the US falls apart, you and your family will have enough to buy an one-way ticket (extremely unlikely scenario). Now, if you want to have it as a part of a portfolio to fight inflation, the best way is to select a mutual fund that carries the physical bullion, and you don't even need to bother with the 28% collectible tax. If you just want to speculate on the price and make some quick bucks, the best way is GLD, IAU, fast and convenient. If you already have amassed a small fortune and want to protect the earning power of your wealth, then you should spread your gold holdings across several categories including ETF, physical, gold certificate, gold bars in a foreign vault.

So from paper to physical, the progression goes this way: ETFs, then US mutual funds holding gold bullions, foreign funds (developed countries ONLY) holding gold bullions and bars, gold certificate or depository service, gold in direct possession, physical gold stored in vaults of a highly developed country like Switzerland, Canada or Australia (with a foreign residency to complement).

You don't have to go all the way being physical. Where in the continuum you want to be depends on your personal need.

One word of advice, if you cannot have access to a foreign bank account or a foreign vault, and you are buying more than a few coins, buy gold and silver with CASH in this country, and leave NO paper trail. Do not tell anyone, do not report your transaction. Do not even buy coins, go straight for the bars which have the least fabrication cost.

EBGuy,

it seems that H3 has improved as well, the degree of non-borrowed reserve deterioration has slowed down quite substantially.

it seems that H3 has improved as well, the degree of non-borrowed reserve deterioration has slowed down quite substantially

May 19 was the auction where the TAF credit card was maxxed out (they do $75B every other week). The Fed has not upped the limits so they can't do anymore damage (for now).

It’s Thursday, and Mountain View inventory is back up at 167. I guess we’re on track after all.

@Apostasy and OO

Thank you for the wealth of information about Precious Metals.I have read it over many times. I am visiting Scottsdale at the moment (115 degrees in the shade) but as soon as I return home I will print the info and begin taking action.

THANKS AGAIN !!!

The US is more broke than France, by objective measure of deficit/year/GDP.

The US is more broke than France, by objective measure of deficit/year/GDP.

Measures can be "objective," but applications of measures are subjective.

France is broke broke, by subjective measure of their welfare state.