The JP Morgue Bunker Video

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Inflation + Debt = Higher Interest Rates

The vicious cycle created by the Federal Reserve’s Quantitative Easing monetary policy is now kicking into high gear.

Back on October 7, 2010 I wrote that while we would have deflation in some areas, we were going to suffer a concurrent bout of inflation - producing a paradox that many have difficulty reconciling.

Last Wednesday we noted that CNBC was reporting something that we have said for over 2 years now... that if you go back to the way inflation was calculated prior to 1999/2000 (when all the important components of inflation were stripped from the calculations to hide it's true impact) that inflation is actually raging at almost 10% right now.

But now even the highly manipulated current inflation calculation method is unable to disguise what is going on.

As the Wall Street Journal notes, Canada's consumer-price index jumped by its biggest monthly increase in two decades, adding Canada to the list of major economies recently pressured by inflation.

• "The jump surprised economists and analysts here, many of whom had been comforted by so-far benign inflation pressure across Canada, much of that thanks to a strong Canadian dollar. It also raises the likelihood of an interest-rate increase by the Bank of Canada, the central bank, sooner this year rather than later. Some economists had pushed back their forecast timing of such a hike after the Bank of Canada, which kept rates steady last week, offered a less hawkish tone on future action than many had expected."

Meanwhile in the US the big news is that the ratings firm Standard & Poor’s lowered its outlook on the United States rating to negative. Although the agency did not actually lower its highest AAA rating on America's debt, it was the first time since the S.& P. started assigning outlooks in 1989 that the country was given an outlook that was something other than stable.

This has lead M&T Bank Corp. CEO Robert G. Wilmers to warn today that the United States "may be on the same calamitous path" toward an economic and government debt crisis akin to that of Ireland, Greece and Portugal if it doesn't rein it its ballooning spending and debt.

As this blog has said before, the story of this decade is going to be all about sovereign debt.  Gobs and gobs of sovereign debt.

The gridlock in American politics combined with the paltry spending cuts proposed only guarantee things are going to get worse.

Meanwhile, as Zero Hedge notes, the real beauty about waging a two front war (keeping gold from hitting the barrage of $1,500 limit spot orders; and silver from passing a dollar a day) means that the COMEX cartel has to pick its fights. Today gold loses for now, as the $1,500 spot (but not futures) price is safely defended. The same can not be said for silver. $44 was just taken out. And those who actually wish to buy American Eagles or Silver Maple Leafs can do so at the low, low price of $47.32

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Coming Into Focus

In the last post I wrote, "As I have repeated ad nausem, the interest in precious metals is simply an extension of the interest in the housing bubble in Real Estate that has been our primary focus these past two years."

And, as if on cue, weekend reading reinforces the theme.

Following news that Chinese inflation in March hit 5.4%, the PBoC has once again decided to intervene, enacting its fourth Reserve Requirement Ratio hike of 2011. The move, taking the requirement to 20.5% for the nation’s biggest lenders, came less than two weeks after the central bank boosted benchmark interest rates.

“Tightening will continue until there are signs that inflation has been effectively brought under control,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd.

The increase in reserve requirements was the fourth this year and has been triggering  a  plunge in Chinese real estate, as noted by a number of blogs earlier last week including our friends over at VREAA and at Zero Hedge.

“Prices of new homes in China’s capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city’s Housing and Urban-Rural Development Commission... Home purchases fell 50.9% year over year and  41.5% month over month the newspaper said…  For all intents and purposes a drop of this magnitude levered even 2 times (assuming 50% or so equity down) means that China is on the verge of a complete bubble implosion.”

And as China's capital suffers it's biggest drop in real estate prices in 5 years and the nation suffers a 7% countrywide plunge, JP Morgan's Jing Ulrich has come out and said what we all know is already happening. 

Ulrich says it all means that real estate is no longer an attractive asset bubble and that the "mass affluent" Chinese will be forced to invest in gold and alternative property investments.

From Dow Jones: This group "has seen its investment options sharply affected by restrictive housing measures" such as property taxes, increases in down-payment requirements, and raised interest rates, "since these households possess sufficient capital to purchase investment property, but do not have the same degree of access to investment vehicles such as private equity funds and retail property as the super-rich,  equities, gold and alternative property investments become the key beneficiaries."

It is important you appreciate what is going on. 

The worldwide rush into Gold and Silver is only just starting. Back on  April 7th I posted this chart from Sprott Asset Management which shows how small the current investment in gold and gold mining shares is compared to large the investment has been during the previous bull market era's in Gold. 

As a % of global assets, investment in Gold in 2009 was less than 1%.

What you are going to witness over the next few years is a massive rush into precious metals.

And concrete evidence of this trend surfaced this weekend as it was revealed that the University of Texas has taken delivery of  $1 Billion in physical Gold.

With an entity as large as the University of Texas moving so solidly into Gold what have concrete proof that what you are seeing is the start of hedge funds making the move - just like they did in the years leading up to 1981, 1948, 1932 and 1921.

As this moves intensifies, the supply/demand equation for Gold/Silver will be squeezed hard... and the price will soar.

Meanwhile as the China real estate bubble collapses, the prognosis for the Vancouver market is that we will not escape the same destiny of the United States, England, Ireland, Iceland, Spain, Portugal, Greece, Italy, etc.

Foreign investors are always the last to pile into a bubble.  As the Chinese super-rich rush to join the precious metals stampede, they will dump their Vancouver real estate holdings to avoid loosing capital on real estate in the same fashion that is now playing out in China.

The writing has been on the wall for several years and it's clearly visible now to anyone who wants to see it.

If you have real estate in Vancouver, sell it and cash in on the equity at the height of the bubble while you can.  If you are in debt, get out of it ASAP. And if you have money to invest, take advantage of what are now extremely low prices for precious metals... especially silver.

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Fantasy

So this blog has talked a lot about Silver lately.

As I have repeated ad nausem, the interest in precious metals is simply an extension of the interest in the housing bubble in Real Estate that has been our primary focus these past two years.

The financial system created a housing bubble, that bubble is in the process of collapsing (although Australia and Canada have delayed the effects to date), the response to the fianancial crisis of 2008 has been Quantative Easing, QE is triggering massive currency induced cost-push inflation, and QE will also trigger a massive increase in interest rates.

QE is also nothing more than a way to continue the ponzi scheme that is government debt... hence the huge increase in Silver/Gold and the reason Silver/Gold has yet to see massive growth in values.

Those have basically been our central themes. The nadir of Real Estate as an investment is over and the next great opportunity is precious metals, especially Silver.

On the real estate front here in the Village of the Edge of the Rainforest, there have been a wave of bearish real estate articles.  We have had the Globe and Mail newspaper come out with "Signs point to a severe housing correction in Canada", the National Post commenting on how - in the midsts of a federal election campaign - "Parties are silent on possible housing bubble", more IMF warnings about "Canada's growing debt burden", Canadian Business Magazine commenting that: "Housing: Real Insanity", and a great story on VREAA about how an afternoon TV news story by Vancouver's most prominent local TV station was promoted as 'a housing bubble' feature during the noon newscast and then quickly changed to a story about 'a steady climb' in the evening news story. That station is infamous in Vancouver as being very pro-R/E.

We're at the height of denial now in Vancouver.

On the interest rate/government debt theme, I'd urge you to check out this excellent commentary on the looming spectre of rising interest rates by Charles Hugh Smith.

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Another stunning week in Silver

Last weekend we posted that Silver had broken through the $40 mark.

And as the metal climbed over $41, the Banking cartel struck HARD this week and attempted to completely crush the silver surge.

On Monday the confirmed volume of paper contracts dumped on the COMEX was an  earth shattering 132,213 contracts. Remember... each contract represents 5,000 ounces of silver.  Thus, in one day, the cartel sold 661,065,000 ounces of paper silver to the silver market!

On Tuesday the cartel attempted to smash silver again by flooding the COMEX with a totally monstrous 141,111 paper contracts.  In ounces this is 705 million oz or 100% of annual silver production.


Yesterday the confirmed volume was another huge 106,025 contracts.

As all of this paper silver was dumped on the market at the start of the week, the price of silver plummetted from around the $41.75 level to the mid $39.00 level.

But demand has been equally strong and silver keeps rebounding.

Then came some stunning news out of Bolivia today which has completely reversed the cartel's attempts to pound down silver.

Bolivian daily newspaper La-Razon reports that Bolivia's president Evo Morales is planning on expropriating zinc, silver and tin mines sold off by previous governments.

Bloomberg reports that "Morales will announce a decree May 1 to “dismantle the privatization model,” said Nicolas Fernandez, a spokesman for state mining company Corp. Minera de Bolivia, known as Comibol.

"The government is recovering all the privatized companies,” Fernandez said today in a telephone interview from La Paz. “When the decision is taken, Comibol will be ready to manage these mines.”

Among the contracts to be affected are those with Glencore International AG, Pan American Silver Corp., and most importantly, Coeur d’Alene Mines Corp., which is operator of the San Bartolome mine: the world's largest pure silver mine. Notably San

Bartolome and Sumitomo's San Cristobal account for about 83% of the nearly 1.1M tons of fine silver Bolivia produced in 2009.

Speculation is that if this privatization actually happens, the price of silver will spike significantly because 1.33 million kilograms of silver were produced in Bolivia 2009, according to the U.S. Geological Survey.

Production is expected to fall off a cliff in the utter chaos that will accrue from this unexpected nationalization.

As a result, Silver closed out the day soaring over $42 an ounce.

And when you consider what the banking cartel threw at the silver market this week, that's nothing short of astonishing.

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Website blocked?

I've received messages from a number of you that there have been difficulties this past week accessing the site.

As faithful readers have dropped by, I am told that google has blocked the page and displayed a message indicating the site is infected and may damage the viewer's computer.

This is a google hosted site so I am completely perplexed as to why this is happening.

If you have difficulties accessing the site in the future, please let us know.

Thanks,

Whisperer

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Inflation actually near 10% according to CNBC

Quick post for today.

As faithful readers know, this blog has often posted that inflation is not only coming at us hard, but is in fact already here.

Numerous times we have talked about how the methods used to calculate inflation were changed in 2000. If you calculate inflation the way it was calculated in 1999 and before, the inflation rate is well into early 1970s levels.

And today, CNBC has come out with a story saying just that.

With an article titled "Inflation Actually Near 10% Using Older Measure", CNBC confirms what the blogosphere has been saying for almost a year now.

In case it gets yanked, here is the full story:

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After former Federal Reserve Chairman Paul Volcker was appointed in 1979, the consumer price index surged into the double digits, causing the now revered Fed Chief to double the benchmark interest rate in order to break the back of inflation. Using the methodology in place at that time puts the CPI back near those levels.

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site, Shadowstats.com.

“Near-term circumstances generally have continued to deteriorate,” said John Williams, creator of the site, in a new note out Tuesday. “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead.”

The pay-site and newsletter by Williams, an economic consultant for the last 30 years to companies, has gained a cult following among bloggers hungry to criticize Bernanke these days. The mission statement of the newsletter, according to the site, is to expose and analyze “flaws in current U.S. government economic data and reporting…net of financial-market and political hype.”

Investors are anxiously awaiting the release of March’s CPI reading on Friday. The consensus estimate from economists is for an annual inflation rate of 2.6 percent.

“Given ongoing inflation problems with food and the spreading impact of higher oil-related costs in the broad economy, reporting risk is to the upside of consensus expectation,” said Williams, citing a 10 percent jump in gasoline prices in March, in the note.

“While the federal government would have us believe the numbers are rather tame, our own personal gauge leads us to believe inflation is running between 5 percent to 6 percent annually,” wrote Alan Newman in his latest Crosscurrents newsletter that refers to Williams’ statistics.

Newman uses recent comments from Walmart CEO Bill Simon that inflation is going to be “serious” to back up the much higher CPI figures from him and Williams.

“Given Walmart's sales of $422 billion, we think Mr. Simon has a good idea of what’s in the pipeline,” said Newman.

To be sure, the BLS argues that the changes it has made over the last three decades more accurately reflect a true change in the cost of living. For example, in response to its hedonic adjustments, the BLS web site states, “to measure price change accurately, the CPI must be able to distinguish the portion of price change due to this quality change.

Still, going by recent strong comments from Federal Reserve officials, even members of the central bank must believe inflation is being underreported. Dallas Federal Reserve President Richard Fisher said in a speech last week that the central bank was reaching a “tipping point” as far as changing its policy so it can react to inflation. Maybe Fisher stumbled across Shadowstats.com. The voting member did, after all, mention Volcker in the same speech.

“The need to break the back of that (budgetary debt) spiral is as dire now as was the need for Paul Volcker to break the back of inflation in the 1980s,” said Fisher on April 8th. “As a result of his steadfast determination to press on with exorcising inflation, Mr. Volcker is today among the most respected living Americans and widely considered an exemplar for public servants worldwide.”

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Still Around?

Hi Gang, it has been a busy week and we've been unable to post.

Regular posting will resume tomorrow.

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Today in Silver

Two weeks ago we made a post that speculated that Silver might hit $40 by March 31st, 2011 in what was basically a buying feedback loop.

And while it failed to do so, 7 days later Silver has now broken that $40 barrier and closed going into the weekend at $40.93 with a stunning gain of $1.29 today.

ZeroHedge has come out with a great post citing a report from the Morgan Stanley metals desk explaining the stunning rise in price today:

• I was told on Wednesday that big buying went thru on Tuesday in may atm silver calls which should make the market short gamma.

• A short gamma position will become shorter as the price of the underlying asset increases. As the market rallies, you are effectively selling more and more of the underlying asset as the delta becomes more negative.

• So what that means is that the SELLER of the calls, probably bought Physical to delta hedge themselves neutral. As this market jumps just about 1-2% daily (this week alone +6.5%) they would need to now re hedge to bring themselves back to neutral by BUYING more Physical as SILVER goes higher, essentially driving the market Higher still and so the chase goes theoretically moving the market higher causing them to buy more to hedge and moving the market higher, thus buying into rallies.

• Now they could BUY puts also to create positive Gamma as well to offset some of that pain they are not bound to the Physical for their hedge. Lots of what if's but that’s the idea.

• On the other side if Silver were to gap lower, this would not help either as they would need to SELL Physical into a falling market to re-hedge themselves.

• Great in a slow steady market, nightmare in a volatile one.

As Tyler Durhan of ZH notes... Translation: ever-accelerating feedback loop (both higher and lower). Volume is about to go off the charts.

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Whoomp... there it is!

As of 9:37 pm PDT!

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Is it too late to invest in Silver?

Been busy this week, so I haven't had a chance to post a part 2 to last Sunday's post but I hope to get too it before too long.

Jeff Clark, of Casey Research, has come out with an article which it timely and addresses a subject I have been questioned about a lot lately: "As an investor, have I missed out on silver?"

 

I get this question almost every day. And with good reason... silver's performance since last August has been phenomenal, doubling in price since the dog days of summer.

So if you are just now looking to get into silver as an investment, are you making the mistake of getting in at the top?  Is the price being driven by all the same things we see in the Housing Bubble: ie. irrational exuberance and over investment?

The fact is, we haven't even begun to see silver rise in price... and you haven't missed anything yet.

One of the best ways of looking at silver is to compare the amount of money investors have invested in silver with those of other 'products'.

As Jeff Clark notes, the market cap of the silver industry is $73.1 billion.  Compare this with the market cap of other industries (see above chart). It barely registers when compared to a number of other industries.  The dying newspaper industry is over 26 times bigger. Drug manufacturers are 213 times larger. The gold market is 19 times greater.

And here’s a stunning statistic: the market cap of the entire silver market, with all its record-setting prices, represents just one-third of one percent of the oil and gas industry.

The silver market is very tiny.

And it's so tiny, that I would suggest to you that the money is just starting to flow into it.

That's why the price has risen so dramatically.

As more investors start to seek the security of precious metals in this era of governmental fiscal mismanagement and runaway debt, average investors will be tripping over themselves to join in. And when they do, silver will rise parabolically.

Consider the following chart:

At $35 silver an ounce, all exchange-traded funds backed by silver amount to $20.7 billion.

This is less than a quarter of the market cap of McDonald’s. They’re about 10% of GE, a company that still hasn’t recovered from the ’08 meltdown. Exxon Mobil is more than 20 times bigger.

And this isn’t even a proper comparison as we are comparing the entire silver ETF market to a few individual stocks.

This is even more interesting when you consider that it’s the ETF market where most of the public – especially those that are new to the market – first invest in silver. So while the metal has doubled in the past seven months, total investment in the funds is still far beneath many popular blue-chip stocks.

The fact of the matter is that money hasn't even begun to start flowing into silver.

The same can be said for Gold as this chart from Sprott Asset Management indicates.  In 2009 investment in gold and gold mining shares as a % of global assets was less than 1%.

Compare this to investment in Gold and Gold mining stocks in other big bull market years for Gold.

I am personally convinced you will see the world move substantially into Gold and Silver in the coming years repeating the periods of high investment in 1981, 1948, 1932 and 1921.

And because silver is such a small market now, when you combine the investment demand with the industrial demand - I believe silver is set to rise exponentially.

Does that mean silver won't have a pull back?  Of course not. As Clark notes "price will always ebb and flow in a bull market, and an ebb is overdue. The question, of course, is from what price level it occurs. What if a correction doesn’t ensue until, say, a month from now, and the price falls back to… where it is now? I remember some articles in January that insisted silver would fall to as low as $22, and, well, they’re still waiting and have in the meantime missed out on some huge gains. For silver to fall back to $22 now would require a 40% drop; not impossible, but I wouldn’t hold my breath."

I often suggest people check out this youtube video clip that, while a bit sensational, outlines the silver case quite well.

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Bank of Montreal declares "A New Paradigm for Silver"

Silver investing is going mainstream.

BMO Capital Markets has come out with a report that declares that there is a New Paradigm for Silver. 

The report states:

• Demand is expected to outstrip production growth. BMO Research analysis indicates silver demand & supply fundamentals should remain positive to the end of 2012E.
• The prospects of further quantitative easing combined with sovereign debt concerns, competitive ‘fiat’ currency devaluation in western economies, and the return of inflation could result in investment demand exceeding BMO Research’s projections and extending the supply deficit through 2014E.
• This shift in the supply/demand dynamic lies in contrast to the broader investment perception for silver, which is rooted in the 1990’s when the metal was in abundance, driven by the demise of the photographic industry and Chinese selling.
• The paradigm shift for silver suggests that the traditional benchmarks for silver, such as the long-term historical ratio with gold, are no longer valid.
• Accordingly, the markets are searching for a new set of criteria against which to benchmark the price of silver, with a bias to the upside.

As we have mentioned before, investment in Silver by the general public hasn't even begun. And once capital starts flowing in, the price of the metal has the potential to go parabolic.

You can read the full report here.

Silver is the investment opportunity of the next decade.

Now... the mainstream is starting to take notice.

A new paradigm indeed!

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Real Estate, debt, interest rates, monetary policy, and gold/silver - Part 1

The title of today's post is a snapshot of what this blog talks about virtually every day.

For months I have ruminated about a post that ties them all together, that shows the concerns about Real Estate and how they are tied to debt, which is tied to interest rates, which has been heavily manipulated by monetary policy, which begets the strong interest in gold/silver I talk about.

Yesterday I read another great post by the blogger Gonzalo Lira. And he has articulated a number of pertinent points which I am going to borrow on for this post.

As I have said repeatedly, we still do not fully appreciate - nor do we fully comprehend - the depth and breadth of the financial earthquake that hit us in September, 2008.

The problems that triggered that collapse, and government attempts to manage it, are merely the latest acts in a play that really got underway almost 30 years ago.

As Lira notes, you can clearly see that specific policies were implemented, decisions made and actions taken which set us on the path that brought us to where we are today.

And while some will argue that it was the very invention of the Federal Reserve back in the early 20th century that set us on the current path we are on, a serious look at the policies, decisions and actions carried out in our own lifetimes gives us a clear picture about the path we are on.

It starts in 1975 when the US Congress consistently fails to deliver a balanced budget. This is followed by the US Federal Reserve giving both the U.S. economy and the Federal government a massive subsidy by way of its artificially low interest rates, starting in 1987.

Begining in 1975, the United States has had an uninterrupted string of yearly deficits as the American Federal government has routinely spent more money than it has brought in.

Deficit spending satisfied the ideologies of both sides of the economic divide:

• For the economic Right, cutting taxes satisfied its notion that more money in the hands of the citizenry and corporations guarantees greater economic growth.
• For the economic Left, more government spending every year satisfied its notion that more money spent by the government guarantees greater economic growth.

And since 1975, both sides of the political divide have failed to resolve the US fiscal incoherence.

The economic Right wanted lower taxes. The economic Left wanted more fiscal spending. Rather than thrash out their differences and come to a compromise, they resorted to the national credit card: rather than either/or — it’s been both. Both lower taxes and higher Federal government spending — bought and paid for with fiscal debt.

And as each year passed, the Americans have resorted to issuing Treasury bonds to cover the difference. As a result the overall debt has became greater and greater.

It has become so great that total fiscal debt that exceeds 100% of GDP. Yearly deficits for the next five years will exceed 10% of GDP each year.

The US Government has been able to get away with this deficit year after year because of the cheap interest rates it has had to pay for its debt.

Enter the Federal Reserve.

The price of a good is the intersection of its supply and its demand — this is Economics 101. Money is a good like any other — and like any good, it has a price: Its interest rate. Ordinarily, the price of money is fixed by suppliers of credit—that is, banks. They create money via credit—and they sell this money to their customers, the price of this sale being the interest rate that they charge.

Starting in 1987, the Federal Reserve went beyond its mandate of price stability and full employment, and instead went into the business of goosing along the economy.

In other words, it focused on mindless growth — and focused specifically on the blunt, club-like metric of GDP growth — and goosed along the economy in order to raise that mindless metric.

It did this by usurping the role of banks, and providing cheap money by way of low interest rates; low interests rates carried out with the explicit aim of gaming the GDP.

The economy slowing down?

Cut interest rates.

Momentary market panic?

Flood the market with liquidity.

The economy (as measured strictly by GDP) slowing down again?

Cut interest rates some more.

GDP booming?

Very very very slowly and predictably raise rates — then cut ‘em again the instant the GDP looks like it’s starting to slow down.

This was, in a nutshell, what Federal Reserve Chairman Alan Greenspan did during his tenure: he subsidized money for the sake of gaming a single metric, the GDP.

Everyone knew it.

There was even a name for it: The Greenspan Put.

For such an avowed free-marketeer Greenspan was, in reality nothing of the sort. Rather than allow the market to dictate the price of money, he subsidized it like a Socialist Pricing Board. And just like a Soviet apparatchik of old, Greenspan focused on one number — GDP — irrespective of all the other subtle qualifiers that define a healthy economy.

The distortive effects that Greenspan’s money subsidy brought to the US economy are clear to all... serial bubbles. There was:

• the Dot-com bubble,
• the Tech bubble,
• the Bio-Tech bubble,
• the Collateralized Debt Obligation bubble,
• the Real Estate bubble,
• and now the Treasuries bubble

All of these serial bubbles have been blown by the Federal Reserve’s relentless subsidy of the price of money.

Now of course, if you are using the subsidized price of money to goose along an economy, there comes a moment when it doesn’t work anymore.

Enter Ben Bernanke. His Zero Interest Rate Policy (ZIRP) and Quantitative Easing 1, QE lite and QE2 are the perverted policies he has had to pursue in order to keep up the Greenspan Put.

All of The Bernank’s recent policies are aimed at shoring up the “growth” that the U.S. economy has experienced over the last 24 years.

But as Lira points out, that “growth” isn't real. It's steroid-induced bubble muscle. An illusion.

If you measure gross GDP adjusted for inflation, which has been Greenspan’s sole metric, there has been "growth".

However, if measured by median and average wages, per capita incomes adjusted for purchasing power, or any other such metric that measures the well-being of the average, and the below-average,citizen, there has been no growth whatsoever.

People are less well off. The middle class in the United States has shrunk drastically. Sure, the average income might be higher, but that’s the distortive effect you get from having tremendous, inorganic wealth disparities.

It’s not merely that the disparity between the wealthy and the rest of the population is obscene — the disparity skews the results. Remove the top 15% of the population, and the average income in the United States drops below Slovenia’s.

Furthermore the sort of growth the American economy would have experienced since 1987 without this money subsidy would likely have been very different from the growth we have actually experienced.

The growth we have experienced has been speculative. Cheap (ie. subsidized) money that Greenspan made available was set to chase returns via trading, not production.

Had money been expensive, yields that beat savings would have been harder to come by and thereby encouraged savings instead of speculation.

Expensive money would have also kept banks from the insane speculation of the real estate markets: On the one hand, expensive money would have kept low quality buyers from access to credit, and on the other, expensive money would have dissuaded banks from expanding their businesses into riskier territories, in order to reap higher returns.

In other words, risk would have been accurately priced.

In other words, there wouldn’t have been a Global Financial Crisis.

Now, obviously, it’s a fool’s game to try to go back over the 24 years since Greenspan took office and try to deduce what would have been the organic price of money without his and Bernanke’s subsidy.

But clearly, had the Greenspan Put never existed, there would likely have been less growth than has been had.

Would there have been less money for venture capital and the financing of new businesses? Yes, no question. Would those new businesses therefore never have existed? Again, yes.

However: How many ridiculous, fairy-tale businesses would have been financed, as happened during the various bubbles of the last 24 years?

Very few. Capital would have been much more efficiently allocated in a world where there was no subsidy on money. It would have been too expensive for the economy to throw away capital on clearly nonsensical businesses.

Would the solid businesses have gotten financing? The ones that actually did something for the economy, like Google, Ebay, and so on?

Clearly, it would have been tougher for them, and their growth would have been slower — but just as clearly, they would indeed have gotten financing, because they are obviously good businesses.

Anyway, even if many good businesses would have failed to raise financing in a world of more expensive credit, the good outweighs the bad: There would not have been any serial bubbles.

But most importantly... the US Federal government would not have had access to cheap financing. And it is the cheap financing which encouraged the accumulation of back-breaking debt.

Had Greenspan not subsidized money, it would have been far too expensive for the US Federal government to continue increasing its yearly deficits, and adding to the national debt.

A fiscal day of reckoning would have happened a lot sooner and therefore would have been a lot less painful.

It would have been bad (all days of reckoning are bad), but it wouldn’t have been mind-crunchingly destructive as the coming crisis will be.

We are in a world where first Greenspan, and now Bernanke, have keep money at absurdly, unsustainably low prices. The US Federal government was allowed to balloon its fiscal debt to monumental proportions: over 100% of GDP, with future yearly deficits in the +10% of GDP range as far as the eye can see.

The Federal Reserve’s subsidized money has postponed the day of reckoning, insofar as the Federal government debt is concerned. And it is making that day of reckoning much worse than it needed to be.

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What does Carney know?

For more than a year now, Bank of Canada Governor Mark Carney has been warning Canadians about interest rates.

Critics have jumped all over his warnings as hypocrisy... Carney was the one who cut them, why would he be so surprised that Canadians are taking advantage of them?

Wasn't that the whole point of lowering them to begin with?

Some suggest that Carney is a very bright mind who knows exactly what's going on. The tight rope that he has had to walk between currency, manufacturing, employment, trade balance and international economic relations is a difficult one. And the consequences of Canadians gorging on house and consumer debt are a necessary by-product of resuscitating the economy.

Some even suggest that Carney, by bringing in emergency level interest rates and staving off a housing collapse in 2009, has created an opportunity for astute Canadians to divest themselves of debt laden real estate and prepare for what is coming.

There is no doubt that Carney is fully aware many Canadians aren't making astute decisions. He has noted that while Canada’s recovery has been the envy of the Group of 7, the recovery has relied on levels of consumer spending and investment in housing that are proving unsustainable.

Last November Carney appeared on CBC's Sunday Edition and said:

• We're providing as much transparency as we can about the future path of monetary policy, as much as appropriate. The one thing we can say with high degree of certainty is that over a thirty year mortgage interest rates are not going to be at the same level as they are now, they're going to be higher, and that Canadians, individuals, should be comfortable that they can service their debt at higher interest rates, and the banks that lend to them should also be comfortable about that.

This passage caught my eye and intrigues me.

"We're providing as much transparency as we can about the future path of monetary policy, as much as appropriate."

The inner circle of Central Bankers is a tight one and some have suggested that Canada's Central Banker Carney, a former Goldman Sachs employee, is tighter with the US Federal Reserve than most Central Bankers.

And this week Carney warned that "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening" is particularly chilling.

Does Carney know things that other Central Bankers do not?

This thought line intensified yesterday as the Federal Reserve finally complied with a court order to forced to disclose unredacted data on it's lending from it's discount window.

As initial scrutiny of the 25,000 or so pages of declassified information began, one glaring anomaly surfaced repeatedly.

Copious data exists about FX swap lines between the US Federal Reserve and other banks. Many critics have charged that these swaps were the means by which the Fed bailed out much of the world.

And as the information is studied, parties like Zero Hedge are looking at just what the terms were on these various borrowings.

To everyone's surprise, there was a whole lot of "NR" exemptions, aka redacted data.

What's redackted is data on par lent out, par received, net change, limit and undrawn available, which is critical to determine whether the Fed actually lost money on its FX swap transactions.

But what is even more stunning is that it appears that one Bank in particular (which everyone believes can only be the Bank Of Canada) has been purposefully and diligently redacted out of the 977 pages in the document highlighting the currency swap data.

Why?

Suddenly Carney's comments that the Bank of Canada is "providing as much transparency as we can about the future path of monetary policy, as much as appropriate," and his comment that "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening" becomes even more ominious.

What is going on between the US Federal Reserve and the Bank of Canada? What does Carney know that others do not? More importantly... how wise is it to ignore his year long warnings that Canadians need to prepare for significantly higher interest rates when he appears to be privy to such inside information?

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Wal-Mart US CEO To America: "Prepare For Serious Inflation"

Faithful readers know that beginning last September I started harping on cost push inflation. At the time I said,

• [It's] inflation that isn't (because government doesn't count it anymore).

  The quantitative easing and stimulus money are working their way into the commodity sector which is allowing the dogs of inflation to slip their leashes and work their havoc.
  

  Take a look at the way food prices are being driven to unseemly high levels once again just as they were in 2008.
  

  Corn is coming up on $5.00, wheat is more than $7.00, soybeans are over $10, sugar is over $0.24/pound, cotton is closing in on $1.00, coffee is up near $2.00 pound wholesale (which is a 13 year high), cattle are just shy of $1.00/pound, bellies are trading over $1.50/pound for fresh product.
  

  What does it all mean?
  

  It means the consumer is on the verge of watching his disposal income be decimated by high food prices.
  

  In Canada this comes at a time when most Canadians are living paycheque to paycheque and are saddled with the highest levels of household/mortgage debt ever. Disposable income is at an all time low. In the USA, a record number of Americans are on food stamps and are either unemployed or underemployed.
  

  The only saving grace is that energy prices have not YET begun moving up alongside the rest of the commodity complex. But it's only a matter of time. When the crude complex gets involved you will see home heating bills, home cooling bills, industrial energy costs and gasoline prices join the list of soaring costs nationwide.

Well 7 months down the road and we see that the CEO of Walmart has this warning Americans that U.S. consumers face "serious" inflation in the months ahead for clothing, food and other products.

Walmart says that "every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along. Except for fuel costs, U.S. consumers haven't seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory."

Read that again... inflation will be unprecedented in recent memory.

But since governments in both American and Canada changed the way they calculate inflation starting in 2000, 'official' statistics will claim there is no inflation. Which means that as workers try to negotiate wage increases to offset the ravaging effects of higher costs in just about everything important, they will be denied as employers hide behind the government sham that is the Consumer Price Index.

You may have already noticed the rising cost of things on your pocketbook. But the reality is that you haven't seen anything yet.

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Change...

A five minute presentation made at Sony's annual shareholders meeting about change.

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Bank of Canada says many are underestimating what's happening

On Saturday Bank of Canada Governor Mark Carney was giving a speech to the annual meeting of the Inter-American Development Bank in Calgary.

He noted that commodity prices could continue to increase for decades (hello Gold and Silver) and encouraged central banks in emerging markets not to delay raising interest rates because inflation pressures will only worsen.

And you know what that means for interest rates, right?

"Everything else being equal, higher commodity prices usually necessitate higher policy rates. Even though history teaches us that all booms are finite, this one could go on for a long time," Carney said.

More warnings, but many want to know WHEN!

"Bringing that message back to Canada — even if the US Federal Reserve stays on hold through 2011, look for the Bank to start responding to rising commodity price pressures before long." BMO economist Douglas Porter said in a commentary.

Many figure it will come after the Federal electiion on May 2nd.

But by far the most significant comment came when Carney said, "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening."

There are those who will pooh-pooh Carney's comments as more empty warnings.

They ignore at their own peril.

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The fickle winds of change.

Along with the west side of the City of Vancouver, the City of Richmond has experienced a surge in house prices as well. And like Vancouver, hot asian money is said to be the reason.

According CBC, home prices in Richmond are skyrocketing.

The Real Estate Board of Greater Vancouver reports that, over the past year, the price for detached homes in the Vancouver suburb has climbed 20% (about $215,000). The median price for a detached home in the Garden City is now hovering just above the $1-million mark, up from $885,000 just six months ago and $879,000 one year ago.

Giddy up.

And according to Patsy Hui, a Richmond real estate agent, it's not the inherent beauty of Richmond that's driving prices: It's the investors. "All kinds of people, but mostly people originated from mainland China," Hui said. The prices may seem high to us, she added, but present a "real deal from a world point of view." One home that sold last year for $1.2 million brought $1.73 million this year, Hui said.

Buy now or be priced out forever, right?

Well... not so fast. In what may become a colossal paradigm shift (although you know damn well the shepple have short memories), Richmond may be about to see an abrupt reversal to that trend.

Remember that little 'shake and slosh' that hit the land of the rising sun two weeks ago?

Seems the images of that stunning 9.0 earthquake and resulting Tsumanmi have struck a chord. As the images of waves sweeping across the flat Japanese countryside, wiping out houses, buildings and airports with relative ease, a realization appears to be taking hold.

And that realization is that the images seen in Japan are not all that far removed from images that we would see in Richmond when the Cascadia subduction zone triggers it's own, long anticipated, 9.0 earthquake and Tsunami down the inside passage and onto our shores.

People aren't stupid. After watching the devestating images from Japan, nervous eyes are glancing at Richmond, which sits below sea level with only a rinky dink little two foot dyke as protection. The predicted 30 metre Tsunami triggered by a 9.0 earthquake would wipe Richmond houses off the face of the earth. As the City of Richmond website notes,

• "Richmond is located on a floodplain. A ‘floodplain’ is: 'land adjacent to a watercourse that is susceptible to flooding', such as from periods of high tide. In addition, isolated instances of flooding can occur in any community as a result of unanticipated weather events. To protect Richmond from the possibility of flooding due to high tides or river floods, the City has constructed a comprehensive system of dykes on Lulu Island. These dykes are over 49 km in length and protect an area of 12,805 ha."

As always our local anecdote archive, VREAA, captures the emerging reprecussions of world events on our little hamlet on the Edge of the Rainforest. Only two months ago, a local realtor was boasting that:

• “One of the owners of a large west side Real Estate company has a friend in Hong Kong who’s been living there 20 yrs. He says that Vancouver's ‘official travel destination’ status from the Chinese government, combined with a restriction on investing in China real estate, has opened the flood gates to dumping money into Vancouver real estate. He says ‘it’s only the beginning’.”

And since all beginings have an end, it appears the... ummm.... tide has turned. The same realtor notes a stunning reversal of fortune barely two months later, and only about 14 days after the Japan earthquake.

• “Funny enough, my buddy is a firefighter and lives in Richmond. He said the same thing. Many ‘For Sale’ signs and no buyers, unlike a month ago. If true, this should be a lesson to all of Vancouver East and West about how fickle the market can be, even with the ‘Asian invasion’ as it is often described.”

Oh my. If the trend plays out, it is a stark example of just how fast things can change.

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More commentary on the problems at the Silver COMEX

If you have been following the Silver COMEX story you might be interested in this.

Dave Kranzler of the Golden Truth gives his thoughts on the JP Morgan controversy about the establishment of it's own vault. Kranzler had 3 contracts (15,000 ounces) standing for delivery in March. He offered these thoughts on Friday.

• The COMEX goes "Extend And Pretend" On JP Morgan's paper silver short. And in the process has likely perpetrated and enabled the continuation of the biggest fraud in the financial markets.
  
  By now everyone knows about the absurd imbalance between JPM's short position in the silver futures market and the availability of physical silver at the COMEX and in their ETF fund:SLV.
  
  To review, JPM's short position is several multiples of the amount of reported physical silver that is available for delivery at the Comex. For purposes of this commentary, I will set aside any discussion about whether or not the reported inventory is actually there or not. Of course, you would have to be either ignorant of the facts or an idiot to believe that it is.
  
  It was announced 10 days ago that JPM was approved by the CME to operate a COMEX metals storage vault. While on the surface this is no big deal, the manner in which JPM managed to get around the full review process has raised a lot of knowledgeable eyebrows in the precious metals market, especially in the context that JPM - by far - has the largest short position in paper silver in the universe, in addition to also having the largest proprietary position in OTC gold and silver derivatives.
  
  Again, both states of existence would be no big deal as long as the world could verify with its own eyes that JPM actually has the ability to deliver the underlying physical metal represented by the firm's absurdly massive short position.
  
  That is the crux of the problem.
  
  Show me the metal you can deliver and feel free to make markets and short away.
  
  Otherwise there needs to legally enforced scrutiny. The CME, with its hastened approval of JPM as a vault operator has demonstrated that it is unwilling to enforce legal scrutiny. Furthermore, The JPM COMEX vault news tells us all we need to know about the extent to which the bullion banks... will go to fight their problem with precious metals.
  
  Operating a gold and silver vault will now enable JPM to exploit the fact that most metals players who take delivery of their metal typically let it remain at COMEX vaults for safekeeping. Again no big deal, because it is convenient and saves delivery fees, as long as the owners of the metal hold the vault operators accountable.
  
  In other words, if more players stand for delivery than JPM has available to actually physically deliver, JPM can just notify the owner that delivery has been made to its vault without ever having to make the actual delivery unless the owner asks for delivery into a private depository off the COMEX. It has long been suspected that all of the current vault operators, especially HSBC and Scotia, engage in this "fractional" bullion banking scheme, but now that JPM has entered the vault storage game, there is no doubt in my mind that the COMEX is running low on deliverable metal.
  
  And by extension, it also serves to reason that SLV is running low on metal (JPM is the vault custodian for SLV - hmmm...), although I do not, like many, believe that SLV is empty. Again, a lot of commentators out there squawk about SLV being empty without ever having bona fide actual proof. I think from the standpoint of probability analysis, SLV is at least 1/3 covered (at any given time a large holder can exchange his SLV shares for delivery of metal - my bet is that SLV has enough to cover this present value of this possibility). I believe the COMEX is less than 1/3 covered and this is why JPM had to rush into the vaulting business and jammed thru its approval by skirting the standard rules.
  
  Everyone who trades this stuff knows that there is a massively inordinately large amount of outstanding silver contracts still open with last delivery day being next Thursday March 31st.
  
  As of today there were still 632 open contracts representing 3.16 million ounces of silver. I have never seen this large amount of open contracts so late in the delivery process. And given that the COMEX is reporting as of yesterday that over 41 million ounces of silver are available for delivery, it tends to raise a lot of skepticism about the amount of silver that is actually physically there to be delivered.
  
  Historically, most open contracts in a delivery month get filled within the first two weeks of that month. If this view is correct, it would make sense then that JPM wanted to rush through the approval of a licensed vault that it make phantom deliveries into and no one would know the difference unless they ask for delivery out of the vault.
  
  Again, probability analysis would say that very little of that silver will be called upon like that (by the way, anyone can track the reported flows of silver in and out of COMEX vaults at the CME website: you can also track daily changes in open interest, etc on that site, that's how I know that very little metal that is delivered actually is demanded from the COMEX vaults).
  
  Essentially JPM is playing a game of chicken.
  
  Since JPM likely does not have the resources to make good on the actual physical delivery of all of the silver that is standing for delivery, the next best alternative is to play the odds and deliver electronic silver into a surreptitiously approved vault and anticipate that most, if not all, of the deliverees (the "stoppers") will never ask for private delivery.
  
  Our fund stood for delivery of 3 contracts this month. We were given notice on one of them right after first notice day and that silver was made available by HSBC to be picked up by our carrier and delivered to our private depository within the appropriate time frame.
  
  HSBC, however, changed the rules on the other 2 contracts.
  
  We were notified that the silver for the other two contracts was being delivered last week. Why they waited 3 weeks to notify us on the other two is open for conjecture. HOWEVER, this time HSBC informed my partner that in order for us to send a carrier to pick up the bars he had to fill out a bunch of paperwork and send a copy of his driver's license and that it would take HSBC five days to process everything. Today being the 5th day, we called for a status update. They informed him that he had to send them a copy of his passport because his driver's license had expired. I'm not sure how long it would have been before they notified us of that fact if we had not called.
  
  The point here is that we are now seeing all kinds of tactics being legally - and illegally - employed in order to make the process of taking delivery of metal from the COMEX more burdensome and further enabling the big ponzi scheme to keep going on there.
  
  The fact of the matter stands that events like the JPM vault and the sudden new delivery requirements of HSBC serve to further amplify the fact that the COMEX and SLV are running out of actual physical silver and the desperation to hide this fact is growing stronger.
  
  While I still don't expect that a COMEX delivery default will occur this month, or even this year, the cracks in the system are growing wider and one of these days we will wake up in the morning to find gold and silver prices that are several multiples higher than the day before and the bid/ask spread in the markets for these products will be a country mile wide. THAT is a day that will fun watch.

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