It's not the news per se that's important... it's how you spin it.

Managing perception.

The concept has become so crucial in modern society that managing perception has become an art form.

Commodities trader Jim Sinclair is famous for deriding all the MOPE he sees in the press today.  That's the acronym he utilizes for all official attempts to put lipstick on the pig of a declining economy: the Management of Perspective Economics (MOPE).

Blogger Charles Hugh-Smith wrote about the practice last month and noted immediately in his post why the great game of perception management is so important:

"The economy will expand if you believe it is expanding - because you'll be 'animal spirited' into buying a lot of stuff on credit that you can't afford."

Smith observes that economists speak of these magical "animal spirits" that fuel economic expansion, but that this is simply a colorful term for perception management: when people perceive others reaping outsized gains in profits or pleasure from taking risky bets and freely spending borrowed money, then they will feel an overpowering urge to follow the herd and leverage their capital (if any) and disposable income (if any) into risky bets and zealous over-consumption, i.e. "animal spirits."

Conversely, when said risky bets blow up and participants have lost their ever-loving derrieres by following the herd, then "animal spirits" quickly dissipate as the herd thunders off a cliff to its financial demise.

The task of the financial/political/media Status Quo is to convince people to overlook the abundant evidence of economic deterioration and focus on heavily juiced "evidence" of robust "growth."

The game plan is this: if the Status Quo can convince you that the economy has righted itself and from here on in everything will get better and better, every day and in every way, then we will abandon financial rationality and start buying homes we can't afford on credit, cars we can't afford on credit and boatloads of stuff from China that we don't need on credit (of course looking cool is a "need," i.e. having an iPad to carry around).

In other words, believing it is so will make it so.

Which brings us to the latest media reports of February's Real Estate results.

The Vancouver Sun headline blares, "Metro Vancouver market balanced, board says: Price for residential properties up six per cent in a year according to report"

The article regurgitates the press released cranked out by Real Estate Board of Greater Vancouver (REBGV) president Rosario Setticasi. It heralds a "pre-spring hike in sales.",

Pre-spring hike in sales?

Haven't we been hearing constantly about how real estate sales are tanking in the Lower Mainland the last 2 months? How is it that we have a "pre-spring hike in sales?"

According to the REBGV:

“With a sales-to-active-listings ratio of over 18%, we see fairly balanced conditions in our marketplace as we move into the traditionally busier spring season. Sales reached 2,545 in February, a 61.4% increase over the 1,577 sales in January.

Wow! A 61.4% INCREASE in sales!!

With a headline like that and opening statements like that, it certainly appears like the market is rip-roaring hot, right? I mean sales are up over 61.4%... holy crap!

Of course that's the perception you're supposed to gleam from glancing at the article.

Dig a little deeper and you see that those 'rip-roaring' February sales actually constitute a DECLINE of 17.8% from the 3,097 sales that were recorded in February 2011.

Which means compared to last year, February 2012 was dismal. Yes they were a huge improvement over a disastrous January 2012, but they were still atrocious.

How atrocious?

The February 2012 sales in Metro Vancouver were the third lowest February total in the region since stats began to be gathered in 2002.

But the headlines and the press statements don't shriek sales are down 17.8% from last year, do they? Nor do they proclaim that February sales were the third lowest total in the last decade.

Of course not! Instead you are fed the line that sales are UP 61.4% from last month.

Then there is the benchmark price.

Not only are such measures highly skewed in a market with low sales volumes (as several sales of high end homes completely distort the averages) but this month's benchmark price comes on the heals of the industry radically changing the way the benchmark is calculated.

With that change put in place during the middle of last month, the REBGV is happy to tell you that the the benchmark price for detached properties increased a whopping 10.5% from February 2011

But as Garth Turner noted two weeks ago, the CREA changed the way the numbers are crunched so that the public accepts a new House Price Index that now masks the evolution of a national housing decline.

Gone will be average prices, replaced by a benchmark number – expressed relative to 2005 pricing, and taking into account property differences and the social aspects of a piece of real estate.

"It’s an even better tool for local real estate boards to mask evolving market realities, hide the early signs of a correction and remove raw data from the hands of consumers. It’s bad enough that the public MLS already omits vital information, such as the number of days a house has been on the market, price changes during a listing or previous sales history. But now being given a broad, homogenized index-based McNumber for a wide area is nothing but soma for the masses."

So don't listen to all that negative press you've been deluged with the past month or so.

It's a shiny happy world out there in bubble land.  Open that wallet. Plunge yourself into debt. It's a great day to buy a house...

... all you need is the right perspective.

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Email: village_whisperer@live.ca
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The 'Decade of Debt' Story continues

Faithful readers know that this blog is fond of saying that the 2008 Financial Crisis was a profound financial earthquake, the depth and breadth of which we still do no fully understand nor appreciate.

And that viewpoint was reinforced a couple of times this past few days.

Dr. Joseph Mark Mobius, a leading global investor and emerging markets fund manager, warned yesterday that "another financial crisis is inevitable because the causes of the previous one haven’t been resolved" .

Speaking to the Foreign Correspondents’ Club of Japan in Tokyo, Mobius said that this was because the massive 'Over-the-Counter' (OTC) derivatives problem has not been dealt with yet.

“Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes."

Many believe that  the $600 trillion or so in OTC derivatives will be the next source of systemic jeopardy.

Said Mobius:

• "The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10. With that volume of bets in different directions, volatility and equity market crises will occur."

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in write downs and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008. The MSCI AC World Index of developed and emerging market stocks tumbled 46% between Lehman’s downfall and the market bottom on March 9, 2009.

Mobius's warnings come the day after similar warnings from hedge fund titan Carl Icahn, who not only warns that the current levels of leverage are as bad as they ever have been and that the entire "system is not working properly." 

• "I do think that there could be another major problem... I don't think that the system is working properly. I really find it amazing that we're almost back to where it was, where there's so much leverage going on in the investment banks today. There's just way too much leverage and way too much risk-taking, with other people's money... I think we're going back in the same trap, and i will tell you that very few people understood how toxic and how risky those derivatives were."

In the last post we mentioned famed commodities investor Jim Sinclair.  Sinclair has long identified the OTC derivatives problem as the primary reason we will have QE to infinity and soaring Gold/Silver prices.  Last week Sinclair sent out the following message:

• Long speculated upon in our community, the rock and the hard place has finally become a reality. An economy not accelerating at an accelerating rate is declining at an accelerating rate. The mirage of a recovery is getting harder and harder to MOPE about. It simply is not there. We are entering a declining phase that will not end in any kind of a soft landing.
• Stimulation monetarily, QE, and fiscal are like controlled substances in that the real high is on the first injection. After that, each additional stimulation of an economy must be multiples of the first stimulation in ever increasing size just in order to hold the line. QE3 is guaranteed unless the powers that be want to see a depression that will make the Great Depression look like kindergarten in the pain department.
• This week we saw a European Bank forced to sell their US mortgage derivatives and the loss was a shocker. These pieces of crap are not worth the digital bits they are written on. Smart money has not let this event pass their view, and know now how broke the US financial system really is. This event broke the camouflage of FASB’s selling their souls out to politics by allowing the banks to value their mortgage derivatives at any price the bank wanted on the bank’s cartoon balance sheets. The western balance sheets of their financial institutions are raging misstatements. The system is broke. This is why there is no recovery of merit but rather a statistical aberration, which was until recently only holding the line.
• Here we are at that place we have anticipated for the past 45 years knowing that all the games being played had to play out at that point where super stimulation had no effect and it became totally appreciated that even many trillions of printed money will only impact the currency and not business.
• The rock and the hard place is a time when the Western World is simply screwed.
• The risk of not stimulating is stagflation at a spiritual level. The risk of stimulating is stagflation at a spiritual level. The risk of doing nothing is both an economic and currency collapse of biblical proportions.
• Should the Fed lose control of this, which is predictable, then currency induced cost push inflation would take gold to Martin Armstrong’s $12,500.
• The odds are 70/30 right now that hyperinflation occurs. That takes gold over $1650. If the odds shift then gold starts a run to balance the International Balance Sheet of the USA and will secure Martin Armstrong’s target of $12,500.

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Where is the price of Gold going?

Interesting article in the Vancouver Sun newspaper this week.

In a mid-year review of the world economy, the UN warned of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline.

The report, an update of the UN “World Economic Situation and Prospects 2011” report first issued in December, noted that the dollar exchange rate against a basket of other key currencies had reached its lowest level since the 1970s.

This trend, it said, had recently been driven in part by interest rate differentials between the United States and other major economies and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners.

At another point the report referred to the “still looming risk of a collapse of the United States dollar.”

As this blog has stated on numerous occasions, the next decade is going to be all about debt. Specifically 'soverign debt'.

And it is the looming spectre of massive sovereign debt that drives our iron-clad belief that Gold and Silver will be going up significantly in value in the coming years.

And one of the clearest signs that this belief is not misplaced is that Central banks (who were net sellers of gold a decade ago) are now buying vast amounts of the precious metal to reduce their reliance on the dollar as a reserve currency.

In April the Gold price reached a record level 15 times different times month on demand from investors seeking an alternative to the US dollar.

China's Central Bank is one of the largest buyers of Gold.  China has already stated they are out to have more gold than America. China wants to show its currency has more backing than the U.S.

Russia is aspiring to the same, having purchased more than 8 tons in the first quarter of 2010.

India is also well known as having a voracious appetite for Gold.

In fact in 2010 central banks added 87 metric tons in official-sector purchases by countries including Bolivia, Sri Lanka and Mauritius, according to World Gold Council data.

And, as Zero Hedge notes today, the middle east is ramping up it's purchases of Gold too.

Jim Sinclair, perhaps the most successful commodities trader of all time and a frequent CNN and CNBC commentator, was one of the few who recognized what Gold was going to do in the 1980's.

Based on a simple formula, he predicted early in the the 70's (when Gold was at $35/ounce) that Gold would probably go to about $900 (the high was actually $873).

He has been predicting another Gold resurgence for the past 15 years.  The metal has already sourced from about $220/ounce in 2001 to over $1,500 an ounce today.

Where does Sinclair see Gold going this time around?

• Because gold is held by many central banks, once as a reserve currency but now as an inventory currency, it functions as a swing asset to balance the International Balance sheet of the US.
• Central banks are sellers of dollars but still hold, by default, large dollar inventories.
• China has hedged its dollar position 50% through commitments to long term dollar commercial agreements, pay in, mineral, and energy deals internationally. That is an act of pure genius.
• We can assume other central banks still hold 90% of their reported dollar positions, on average unhedged by commercial obligation positions.
• In crisis times, the US dollar price of gold ALWAYS seeks to balance the International Balance Sheet of the USA.
• Therefore: Take 90% of international US dollar debt less China and then add 50% of the US debt owned by China. Then divide that number by the ounces supposed to be owned by the US Treasury. The result is where gold wants to go.
• In 1974 this gave me $900 gold.

So what do we get if you believe Jim Sinclair is, once again, correct about Gold?

From the most current TIC report:

Total Foreign Holdings of Treasury Securities: $4,479.2 Billion

-Less : China – Mainland (1,144.9)

-Plus: 50% of China – Mainland 572.5

Adjusted Foreign Holdings of Treasury Securities $3,906.8 Billion

Number of Fine Troy Ounces held in Custody by the US Mint for the US Treasury:

Note to Financial Statements 6, "Custodial Gold and Silver Bullion Reserves", page 59

Statutory value @ $42.2222 per FTO $10,574,053,000

Number of FTO 250,438,229

Valuation of Gold required to equal Adjusted Foreign Holdings of Treasury Securities

Adj Fgn Holdings $3,906,800,000,000

Number of FTO Gold at US Mint 250,438,229

Therefore Sinclair's formulat gives us a Gold price Valuation of: $15,600 per ounce

This is the level at which Sinclair believes Gold wants to go. And if Gold goes to that level, what about Silver? If Silver remains at it's approximate 37:1 ratio to Gold, we would then have a Silver price of $421/ounce.

If Silver goes back to it's historic average ratio of 16:1 to Gold, we would have a Silver price of $970/ounce.

If Silver overshoots to a ratio of 10:1 to Gold (as many predict), we would have a Silver price of $1,560/ounce.

In 1974 everyone thought Jim Sinclair was absolutely bonkers for predicting a $900/ounce price for Gold. By 1980 he was hailed as a genius. I am pretty confident even more people will dismiss his current prediction of a Gold price of over  $15,000/ounce.

It's all about Sovereign Debt. It's going to be an interesting decade.

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The Day After... so what now?

Yesterday was a significant day.

Besides the 80th anniversary of Black Tuesday, the day marked an important signpost on the winding road of interest rates.

As reported in Bloomberg, the US Federal Reserve's seven-month $300 billion treasury purchase program ended on Thursday.

The treasury purchase program was responsible for keeping interest rates artificially low in the face of global concern about the dollar, U.S. deficits, and the U.S. financial system.

Most importantly, lower interest rates have helped keep both Canadian and U.S. mortgage rates down, thus supporting the housing market.

Now questions abound.

What will happen to U.S. treasury rates, and by association the economy, housing, and asset markets, once this program ceases?

Will the US move to authorize more purchases?

Interestingly there is a possible political showdown in the offing with a couple of important dates on the horizon.

On November 4th the Federal Open Market Committee (FOMC) meets. This committee is comprised of the 'bigwigs' of the US Federal Reserve and most likely will discuss the timing for the exit from economic stimulation. The Committee will meet only days before the next G20 meeting.

On November 7th, that next G20 meeting will take place.

In attendance will be the BRIC nations (Brazil, India, and China) who will anticipate a cessation of quantitative easing (QE) and a commitment to establish a currency alternative to the US dollar.

The proposed alternate to the US dollar would take the form of Super Sovereign Currency. This is not an intended as an immediate substitute for the dollar as a reserve currency but rather an alternative in new commitments.

As for QE, back in the middle July at the USA/Chinese Washington Financial Summit, China supposedly struck a deal to buy US Treasuries so as to let the Fed back off their US Treasury instrument auction QE.

As I understand it, the BRIC countries, not China alone, have given the US until early November to deliver on that pledge. The most influential BRIC nation, China, has been clear in it's desire to see the end of the US Federal Reserve's policy of Quantitative Easing.

Will they get both of these things? The first indication will come on November 4th at the FOMC meeting.

Jim Sinclair, perhaps the most successful commodities trader of all time and a frequent CNN and CNBC commentator, has been counting down the days to these two meetings and November 7th in particular.

That's his picture at the top of the post.

Back in August, Sinclair postulated on his website that these meetings will be the trigger for a dollar collapse.

Sinclair argues that there is a conflict brewing between the US Federal Reserve and the US Treasury on whether or not it's time to end the financial stimulation. Sinclair believes Bernanke will loose the battle to Geithner, a development which will not sit well with China et al and Sinclair believes the fallout will be significant.

Sinclair reiterated this forecast on Tuesday.

Now make no mistake, Sinclair is a hard core gold bug and the gold bugs have been seeing the collapse of the dollar everywhere recently.

But even so, ya gotta love anyone who gives a definitive date for such a dramatic event and announces a "countdown to the implosion of the dollar" on his website almost three months in advance.

Sinclair believes the impact on the price of gold will be immediate. "I know $1224 and $1650 are certain," he says.

Just for the chutzpah value alone, it's worth watching to see what happens.

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