Take Action On These Developments in China (Jack Crook's Is Michael's Guest Tomorrow)

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Posted by Jack Crooks - Black Swan Capital

on Friday, 13 July 2012 14:41


“All war is based on deception. “  -Sun Tzu 

Of Interest  - Spanish not exactly loving austerity (Bloomberg) 


Expectations for China’s GDP growth were 7.6% and “magically” the number came in at 7.6% (lowest in three years). Do you sense the sarcasm in my writing voice?

Analysts noted that electrical usage in the country suggested real economic activity was likely lower than reported. We’re going with the electrical grid numbers instead of those massaged reported. Why? China’s satellite country, aka Australia, is showing signs China’s demand is fading; it reported a decline in June payrolls. We believe the Reserve Bank of Australia will act to lower interest rates. Normally, you might expect that would be good news for Australian stocks, but in a world still driven by hot money liquidity flows it may not be. 


As you can see, the three price series—RBA Cash Rate, Australian $- USD, and MSCI Australian Stock Index (EWA)—seem quite positively correlated from a monthly perspective.

Picture 2

We believe the RBA Cash Rate expectations is the driver of this pack. A cut in interest rates in Australia represents growth concerns, represents falling yield differential for the Australian dollar, and triggers money, a lot of hot money intially there for yield, to flow out. At least that is the attempt to link the movement of the price series togther, and we think it makes sense. Remain short EWA. 

Be sure to listen to Michael Campbell interview Jack Crooks tomorrow on CKNW 980 @ 9:am PST Saturday June 14th/2012


The Current Danger Point & Timelines in the Endless European Crisis

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Posted by Eric Coffin: HRA Journal

on Friday, 13 July 2012 09:59

This month’s calendar has been chock a block with one important meeting or vote or conference after another.  Any one of these could have had a large impact on the endless Euro crisis.  The most impressive result (sarcasm implied) from all these meetings and votes is the overall lack of impact.   For all the wild swings in both debt and equity markets things have changed little in the past month and the European muddle through continues.

 Greece has a new, pro-bailout, government with three coalition partners.  The election turned out better than feared but the real work lies ahead.   All of the parties in the election promised a much looser austerity program either through negotiation or simply by reneging on the deal.   The winning coalition promised Greeks they could have their baklava and eat it too, to a lesser extent.  Based on probably accurate leaks out of Athens the plan is to approach EU institutions looking for a two year extension to hit deficit targets.   This would require about $20 billion in additional loans above the two Greek bailout packages in place already.

 This news is not going over well in Berlin.  Greeks took comments about trying to work with a pro bailout government to mean there would be some sort of completely new deal.   Not likely.  The Greek government has zero fiscal credibility, particularly since the winning party that dominates the cabinet is exactly the same one that had the biggest hand in creating the problem. Most Europeans, but particularly Germans, simply do not and will not believe Greece will stick to any deal.  

 German Chancellor Merkel is being vilified for being such a hardliner but she lives in a democracy and poll after poll shows German’s hate the idea of lending money that cannot be policed later.  This is the core issue for the EU and has been since its inception.   Most member governments are unwilling to give up any real fiscal sovereignty.  This means that lender states have little or no control over what happens to their funds after the cheque is cashed. It was no secret this was a big problem when the EU was being created.  Intricate rules and prohibitions were laid down that were meant to keep member countries on roughly the same plane when it came to deficit levels, etc.    

 Of course, these rules were broken by virtually every member state, including Germany itself.   So many EU countries breached the maximum deficit level as a percentage of GDP rules that it’s hardly surprising these rules are now viewed as mere suggestions.  

 This mess would always have taken years to work through.   The timeline is now longer, if anything.  That is partially due to the multi-year contraction in most of the debtor economies.  Even with harsh cuts it will take more time to balance budgets and there is no likelihood of surpluses that can reduce debt loads until debtor economies actually start growing again.  

 This news hasn’t gone over well with creditor nations.   An understandable reaction since a long timeline inevitably means more loans to some of the debtor nations.   Nonetheless, it’s becoming obvious that the creditors are not going to get a one way deal here.   There is going to have to be some compromise before this drama ends.  Unless creditor countries are willing to sweeten things, if only to improve sentiment in the peripheral countries, it will be hard for debtor economies to pull out of their tailspins.

 Current hopes rest with the EU meeting that is currently taking place.   This is the eighteenth meeting since the crisis erupted which should tell us what the chances of success are. The most important topic is some sort of EU level bank oversight and deposit insurance.   This will take years to create but even putting together credible time line and laying out what sort of bank oversight is being worked towards will help.  

 As we have noted many times, the current danger point is Spain and it’s the victim of a real estate bubble, not bad governance per se.   As this issue was being finished there was news of a compromise that will help the Spanish sovereign bond market.  The EU has agreed that the latest loan package will not have preference.  This is significant since it could and should give buyers of Spanish sovereigns more comfort since it will not place 100 billion euros of debt ahead of them if something goes wrong.

 Italy’s government is more guilty of pure mismanagement but it matters not; the EU does not want to see the Italian bond market go south.  It’s just too big to fix.  Many of the leading banks are also too big for their home countries to deal with.   Ireland and Iceland are the poster children for too big to fail banks (though, in retrospect, both countries probably should have let them fail anyway) but many other countries have banks that represent systemic risk, including Germany. 

 Bank oversight is not a bailout so much as something obvious and sensible that should have been put in place the day the Euro was created.  Promising not to demand preference for the current loan package to Spain is a huge relief to the market but the most important part of the compromise is the promise to set up an EU banking authority.   

 In typical EU fashion the details on the banking authority were scant and the timelines will undoubtedly be longer than the market wants but it’s a big step in the right direction.  One of the chief problems in Europe is the direct ties between bank recapitalization and sovereign debt levels.  Up to now, whenever a country that could not recapitalize its banks went to the EU the money would have to be borrowed and distributed by the government.   If this new bank authority is able to lend directly to financial institutions then every bank recapitalization will not automatically result in an equal increase it the home country’s sovereign debt level.   

 That is a huge change if the EU actually pulls this off. That said, this is Europe we’re talking about.  There will be lots of meetings and position papers and bureaucratic wrangling involved before the details are agreed to.  There is still room for things to go pear shaped if Germany and other creditor nations impose conditions so harsh that they cancel out the positive effects.  That possibility could cap gains but this does feel like a real shift in the political landscape.   The arrival of a large anti-austerity block headed by French President Hollande has changed the equation.

 The Euro crisis is not over.  Germany and its austerity block allies have yielded on a couple of important points but don’t expect a complete about face.  There shouldn’t be one because Merrkel and her allies are right.  The only long term solution is lower debt levels and structural changes to economies that make them more flexible and responsive to changing conditions.  The former is going to take years to accomplish even under best case scenarios.  The latter may too since confronting entrenched interest groups takes more political courage than most Euro area leaders seem to possess.  

 Expect more turbulence in the Euro market.   Battle lines have been drawn between the pro and anti-austerity camps and there are many more fights ahead.  The debt crisis and uncertainty about how to navigate it has done enormous economic damage to the Eurozone that will take a long time to repair.  Even mighty Germany has put out recent economic readings that imply it is starting to stall.  That may well be the real reason Merkel finally showed some flexibility.  It would have been better by far if this had happened two or three years ago.  

 Hopefully this does not embolden the anti-austerity group to the point where they forget cost cutting and reforms are still a necessity.  French President’s Hollande’s renewed promise to lower the retirement age in France was not a positive sign.  Aside from being just plain stupid under current economic conditions it’s also exactly the kind of grandstanding that could stiffen the resolve of creditor governments and mess up further progress.

 Economic readings outside of the Euro area have mainly come in better than expected.  Not great, but good enough to add some pressure to the Euro on top of its internal issues. Announcement of the compromise deal is generating one the largest one day move in the Euro this year. Gold has been trading with a very high positive correlation to the Euro so it’s getting plenty of lift too and the entire commodity complex is following suit.   This is all to the good but traders can be forgiven for remaining somewhat cautious.  When it comes to Europe this is a movie we have all seen may times before.   The devil is in the details when it comes to multi-lateral agreements.  EU rescue funds still don’t and won’t have enough money to literally rescue Italy for instance.  It’s unlikely it every will so the key will be regaining and retaining investor confidence.  The EU must get bond traders on side and keep them there.  If they can do that the world economy should be able to muddle through.

 Even with that the summer doldrums won’t provide a lot of trading opportunities unless and until another company makes what looks like a major find. Volumes will climb only slowly but continued movement in the right direction politically in Europe may finally give us a set up for a meaningful fall rally in the resource sector.  Let’s all cross our virtual fingers and hope the Eurocrats don’t find yet another creative way to wrest defeat from the jaws of victory.


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Peter Schiff on Gold and Money

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Posted by Peter Schiff via Gold Investing News

on Wednesday, 11 July 2012 07:55

There is no shortage of criticism of central bankers and their policies. But there is at least one thing that they are getting right, according to Peter Schiff, CEO of Euro Pacific Precious Metals: central banks around the globe are buying and holding more gold. And when it comes to that trend, Schiff advises investors to do as central bankers do, not as they say. Most people don’t own any gold, he said, and they need to start buying.

With over two decades of experience in finance, Schiff has taken on many roles. He is a financial commentator, a broker, and an adviser. Schiff is also an author. In a recent article, he wrote that he devoted a whole chapter in his latest book, The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country,to the merits of the gold standard. That caught the attention of Gold Investing News (GIN).

In an interview, Schiff told GIN that publicly, central bankers talk about why they don’t like gold or think it’s a barbaric relic, yet they apparently want more of it. It is a trend that he believes will accelerate as central banks figure out that fiat, or paper money, needs something behind it, something tangible.

“It can’t be just a piece of paper,” he said. “Gold is the most logical choice as a reserve for the paper.”

....read the Entire Interview HERE




Interesting Charts from Don Vialoux, Michael's Guest on Money Talks Tomorrow

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Posted by Don Vialoux - Timing the Market

on Friday, 06 July 2012 12:52

Editor’s Note: Mr. Vialoux is scheduled to appear on Michael Campbell’s radio show at approximately 12:05 PM Eastern (9:05 Pacific) tomorrow. Available on the net at http://www.cknw.com/

Interesting Charts

Currency was the driver for world equity markets yesterday. The Euro fell sharply following comments by European Central Bank President Draghi that European economies continue to weaken. Conversely the U.S. Dollar Index moved higher. Both remain in a six week trading range.

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Grain prices continue to shoot skyward with no signs of a peak yet.

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Donald Coxe: "The Euro is Bound to Fail" & What you Should Do About it

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Posted by Donald Coxe: BMO Financial

on Tuesday, 26 June 2012 07:34


Hey I am glad you are with us, I am excited about this, every once in a while I get lucky and get Don Coxe to agree to come on this show. He is a Canadian investment advisor for BMO Financial out of Chicago but he has a tremendous track record and he is really widely read by institutions around the English Speaking World. Don is the guy who was absolutely accurate in predicting, and it sounds so funny so early in advance after a 20 year bear market in commodities, he said you know what, we are just about to have this magnificent Bull Market in Commodities in 2000-2001. Another thing he also said that anything that China wants to buy he is going to buy first, and that of course is part of that commodity boom. 

Don what I want to know from you is the bull market in commodities ended or are we just seeing a correction in the commodity boom?
Don Coxe: Well we have gone through the easy part of it, which is adjusting to the knew world order in which China, and then others,  Indonesia, then India and then others like Brazil that came into the scene, who weren't included in the scene I would call the white mans club plus Japan. It seems so long ago that those were the only countries that you needed to talk about economic progress. And where companies, the major corporations were focusing most of there foreign investment and their operations. But the world has been transformed in that time so that the pause that we are having now people are saying this must be the end of the China story which began in 1985 when Deng Xiaoping processes began to work in China and they have not had anything like a recession in all that time. Now you are entitled if you have been going for 27 years with gains of more than 9% a year in that time, you are entitled to have some readjustment and realignment of the economy because you started off as a virtual subsistence economy and are now the 8th wonder of the world in terms of cities, transportation systems, all these things. So we are entitled to have some adjustments here and this comes at a reasonable time because they have a 10 year plan and they are transferring their leadership as of this fall. 
So yes, there was bound to be a slowing there and we collectively in the west have managed to blow away a large portion of the money we have made in the tech bubble, then the real estate bubble, then we discovered our banking system (thank heavens not in Canada) turned out to have vastly bloated balance sheets and had to be bailed out. Despite the things we have done wrong the world has continued to progress. So I can say that the commodity story can hardly be over when the country that has generated the growth is still growing at a rate that is maybe 6 times the rate of the US economy. So it is absurd to say it is over but the consumption patterns are going to change and it is still the most amazing story on earth. 
Don, the big question is will the European Currency survive, will the European Union Survive?
Done Coxe: Well I don't think the Euro will be around 3 years from now, but I would like the story to end sooner. If you've got an extremely medically sick person around who has a severe illness you want to keep them alive as long as possible but if you find out that it was going to cost $100,000 a day for 3 years to keep someone alive from a disease that they are never going to recover from, you might say gee, can the health care system afford this. And we are all part of the health care system for keeping the Euro afloat. I was certainly glad that Prime Minister Harper didn't want to become to involved in this for which he was denounced by the European Union, but you know he is on the right track if he is being denounced by them for saving their own currency. I don't think the Euro can make it. Now that is not the majority opinion, and I wish frankly the would get it over with. Go through the adjustment process which will be a wrenching one. I do not see how a currency which puts together a group of competitive northern economies with traditions of hard work and honest public service can work putting together in the same currency a group of economies which are best at having relics of past civilizations, having good tourist attractions and having a dolce vita lifestyle. You just can't expect to subsidize it forever. These countries should never have been put into the same currency, and it is bound to fail, and the sad thing is it will take a long time to come to a conclusion because they keep being able to get money from other parts of the world. Now I hope the IMF doesn't give them too much. I am glad Canada isn't, the US can't afford to because its struggling, so its going to fail. But its also one of the reasons Gold is at $1,550 instead of $750 which is where it was when the first signs came about that the Euro wasn't going to make it. 
Don, the question I want to ask you is what should be be doing to protect ourselves in this environment?
Don Coxe: The first thing you do is avoid taking pure financial risk by investing in banks that are hugely tied into Euros. That's one of the reasons I recommend people stick with Canadian Bank Stocks. What we don't know is how exposed US banks are but we can remember that one relatively small bank Lehman Brothers in 2008 nearly brought the whole system down. A lot of people think that they are going to be able to protect themselves by having money in bank accounts abroad, but that is just not a safe trade right now thanks the the Euro Currency Crisis. 
The other thing is that China is still doing relatively well and you want to be investing in things that the Chinese and those countries that are following China's model want to buy. 

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