Bonds & Interest Rates

Stress Tests No Sweat - why the Fed is keeping interest rates so low

Posted by Peter Schiff - Europacific Capital

on Friday, 16 March 2012 07:39

The Federal Reserve ran another "stress test" on major financial institutions and has determined that 15 of the 19 tested are safe, even in the most extreme circumstances: an unemployment rate of 13%, a 50% decline in stock prices, and a further 21% decline in housing prices. The problem is that the most important factor that will determine these banks' long-term viability was purposefully overlooked - interest rates.

In the wake of the Credit Crunch, the Fed solved the problem of resetting adjustable-rate mortgages by essentially putting the entire country on an teaser rate. Just like those homeowners who really couldn't afford their houses, our balance sheet looks fineunless you factor in higher rates. The recent stress tests assume market interest rates stay low, the federal funds rate remains near-zero, and 10-year Treasuries keep below 2%. Why are those safe assumptions? Historic rates have averaged around 6%, a level that would cause every major US bank to fail!

The truth is that higher rates are the biggest threat to the banking system and the Fed knows it. These institutions remain leveraged to the hilt and dependent upon short-term financing to stay afloat. While American families have had to stop paying off one credit card by moving the balance to another one, this behavior continues on Wall Street.

In fact, this gets to the heart of why the Fed is keeping interest rates so low. Despite endorsing phony economic data that shows the US is in recovery, the Fed knows full well that the American economy cannot move forward without its low interest-rate crutches. Ben Bernanke is trying desperately to pretend that he can keep rates low forever, which is why that variable was deliberately left out of the stress tests.


Unfortunately, rates are kept low with money-printing, and those funds are starting to bubble over into consumer prices. Bernanke acknowledged that the price of oil is rising, but said without justification the he expects the price to subside. This shows that Bernanke either doesn't know or doesn't care that the real culprit behind rising oil prices is inflation. McDonald's, meanwhile, is eliminating items from its increasingly unprofitable Dollar Menu. A dollar apparently can't even buy you a small order of fries anymore.

Unless the Fed expects us to live with steadily increasing prices for basic goods and services, it will eventually be forced to allow interest rates to rise. However, if it does so, it will quickly bankrupt the US Treasury, the banking system, and any Americans left with flexible-rate debt.

That is why the Fed feels it has no choice but to lie about inflation. If it admits inflation exists, then it may be pressured to stop it. However, if it stops the presses, it will bring on the real crash that I have been warning about for the past decade. Just as the Fed's response to the 2001 crisis led directly to the 2008 crisis, its response to 2008 is leading inevitably to either deep austerity or a currency crisis.   

[For more on the crisis ahead, pre-order Peter Schiff's latest book, The Real Crash, due out in May.]    

Imagine this scenario:

When the banks fail as a result of higher interest rates, the FDIC will also go bankrupt. Without access to credit, the US Treasury will not be able to bail out the insurance fund - which only contains $9.2 billion as of this writing. So, not only will shareholders and bondholders lose their money next time, but so too will depositors!

Americans are much less self-sufficient than they were in the Great Depression. One only needs to look at Greece to see how a service-based economy deals with this kind of economic collapse - crime, riots, vandalism, and strikes.

There are a few countermeasures left in the government's arsenal, including selling the nation's gold, but there comes a point at which the charade can go on no longer. The sharply widening current account deficit shows that we are becoming even more dependent on imports that we cannot afford. Just as homeowners had a good run pulling equity from their overvalued properties, Washington and Wall Street will soon find the music turned off. And there will be no one there to help them clean up the mess left behind.

I propose a new rule of thumb: until true economic growth resumes in the distant future, the fed funds rate should also be used as the "Federal Reserve credibility rate." We'll use a scale of 0-20, which is approximately how high rates went under Paul Volcker to restore confidence in the dollar. So, until the end of this crisis, if the fed funds rate is near-zero, all the Fed's statements, forecasts, and stress tests should be given near-zero credibility. When rates rise to 5%, the Fed's words can be assumed to be ¼ credible. When they hit 20%, that would be a Fed whose words you could take to the bank - if you can still find one.  

For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor newsletter. CLICK HERE for your free subscription. 

For a great primer on economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes.


Gold & Precious Metals

This Could Spark a Massive Move in Gold

Posted by Jeff Clark via Peter Grandich

on Friday, 16 March 2012 05:48

Get ready for a golden summer.
Precious metals have been selling off lately. Gold is down 10% from its peak last August, including a violent $100 drop last Tuesday. Silver is down almost 30% since its peak last April. It dropped 6% in just one day last week.

20120313 GSW_SILVER1


Gold & Precious Metals


Posted by Bob Moriarty via Michael Campbell

on Thursday, 15 March 2012 12:21

A Juxtaposition:

Jan 2008:  Gold at $846 - Kinross Gold Corp  $23.21 - Newmont Gold $58.40
Mar 2012: Gold at $1694 Kinross Gold Corp @ $9.90 Newmont Gold @ $54.20
Bob Moriarty is a fascinating, and very wise man. The youngest naval aviator in the Vietnam war who survived  824 fighter aircraft missions, Bob had a weight problem when he was  22.........given he was draped with 42 Air Medals and three Distinguished Flying Crosses when promoted to an Air Force Captain. Moriarty also holds 14 International Aviation records and simply stunned the French when he flew a Beech Bonanza through the Eiffel Tower arches. 
But that's not why Michael Campbell of Money Talks wanted to talk to Bob. No, Mike wanted to talk to Bob because his entrepreneurial mindset and wisdom motivates a 100,000 people a day to visit his 321Gold.com. Why? Because Moriarty has simply made those daily visitors money. Bob was so convinced gold/silver were at a bottom in 2001, he started one of the first websites devoted to teaching readers what they need to know about investing in resource stocks, and what a success that has been.  
Ever looking for opportunity, Bob travels to dozens of mining projects a year and then writes about them. That's why Michael thought there was no-one better to ask whether mid-tier and major Gold producing Gold companies are currently cheap and a bargain or in BIG trouble. Given Gold producer's shares are trading at 2008 prices or lower despite Gold having exploded upwards close to 250% from its 2008 low to March 9th's close of $1711!
Screen shot 2012-03-15 at 5.57.44 AM
When asked the whether the "Flash Crash" was important and whether Gold shares are a bargain here, Bob explained it like this: "If you were going to buy a new Cadillac, and the car was a $1000 cheaper than the price you thought you were going to have to pay, you'd think that was a good thing. But we have a whole group of Gold Bugs who when Gold gets cheaper to buy literally get into a panic, whereas I think it is an opportunity". Well that's pretty clear. By that measure Gold producer's shares are remarkable opportunity here. 
As for the significance of the "Flash Crash", Bob thinks that ultimately we will find out that rather than Central Bank manipulation "we will find out that somebody big had to meet a margin call, even then after the Flash Crash Gold immediately turned around and went higher and I think that is a good thing". When asked why there appeared to be little concern about the prices the liquidator got on the day of the Flash Crash, Bob said "you've got to understand that the World's Financial System is right on the lip of a major crash" that there will be things that are happening all the time, with time bombs going off everywhere, but its as simple as "if you like Gold at $1700. you have to love it at $1600". 

How to make sense of Gold Producer's shares trading at equal to or less than prices they were trading at in 2008 when Gold was in the $600's.? "If you are going to make money in investing, what you always want to do is buy irrational behavior. If you see something deviate from the mean, you know that sooner or later it is going to regress to the mean. With $600 Gold in 2008, in relative terms Gold Shares are cheaper today at $1700 Gold than they were back then. Now rather than that be a cause for panic, its an opportunity because when something deviates from the mean its going to come back. So there is an incredible opportunity right now because anyone who is in production is going to be making money hand over fist. We have $33.Silver and that too is an incredible opportunity. So instead of whining, people should be getting there checkbooks out and saying I want to buy".
One of the factors that is affecting Gold Share prices comes in the form of  Gold Bullion ETF's, where people can invest giving them complete exposure to the price of Gold Bullion, but at the same time that diverts money away from Gold Shares. "Face it, people are goofy, they do irrational things all the time. So if you are going to make money you have to look at something that is irrational. Like the price of Kinross Gold, Botero or Agnico Eagle, say wait a minute, they are really good companies doing really good things, I want to invest because the price is cheap. What the average investor wants to do when you have $4 Silver they say Gawd, I don't want to buy that, nobody wants it. But when you have Silver at $50 they say its gone up for 3 months in a row, I want to buy because its safe here!. What you have to do is break yourself from that habit. When you see Silver at $50 there are hundreds of guru's saying buy, but why didn't they say buy when Silver was $4"?

Its totally irrational, we have the lowest XAU over Gold Ratio we have ever had. Gold could go to $600 and the shares would still be cheap. As for the tension between Israel and Iran, Bob thinks we are literally talking about World War III. "Russia and China have literally said is that if there is an attack on Iran, they will defend Iran, and one of the alternatives is that they mean that. We probably have right now a 1000 valid reasons to own Gold and Silver. Its like driving home and finding your house on fire and someone drives up and says Hey, do you want to buy insurance on your home? Gold is an insurance policy, I own Gold that I have had for 10 or 12 years, I was a big buyer at $252, I don't care what the price of Gold does, it doesn't make any difference to me, but we've got Greece defaulting, you've got the credit default swaps, a credit event has been declared, the entire financial system in the World is about to explode, we have enormous tension in Syria and Iran that could literally go to World War III, there are all kinds of valid reasons to own Gold and Silver."

You can visit Bob's Resource investment sites at 321Gold.com and 321Energy.com

About Bob Moriarty:
Bob Moriarty was a Marine F-4B pilot at the age of twenty and a veteran of over 820 missions in Viet Nam. Becoming a Captain in the Marines at 22, he was one of the most highly decorated pilots in the war. He went on to ferry General Aviation aircraft all over the world for 15 years with over 240 over the water deliveries. He holds 14 International Aviation records including Lindbergh's record for time between New York to Paris in two different categories. In 1996 he began an online computer business on the internet with his wife Barbara becoming one of the early adopters of the internet.  Bob and Barbara started one of the first websites devoted to teaching readers what they need to know about investing in resource stocks. Bob and Barb now operate two resource sites, 321Gold.com and 321Energy.com where up to 100,000 people a day visit. Bob travels to dozens of mining projects a year and then writes about them. He was one of the first analysts to write about NovaGold, Northern Dynasty, Silver Standard, Running Fox and YGC Resources among many, many others. He claims with some justification that all of his readers are financially better off since they have been coming to his site.



Dollar at a Critical Juncture

Posted by Justin Smyth - Resource Investor

on Thursday, 15 March 2012 07:34

As we go through the first significant pullback in the market for 2012, the dollar seems to be at a turning point that should influence market trends for the next few months. Going all the way back to 2002, there has been a strong inverse correlation between stocks and commodities, and the US dollar.  For the most part, the dollar has been falling during this period, which has helped drive cyclical bull markets in stocks and commodities.  More recently, the stock market panic of 2008 and the first euro crisis of 2010 drove significant countertrend rallies in the dollar, and corrections in stocks and commodities.



Stocks & Equities

Michael Campbell Suggested Reading: "Why I Am Leaving Goldman Sachs"

Posted by Greg Smith via NY Times

on Thursday, 15 March 2012 06:01

Michael is going to comment on the subject in this article in tomorrow's Market Minute and he'd like anyone who listens to have this article posted here to refer too. "TODAY is my last day at Goldman Sachs. After 12 years, the environment now is as toxic and destructive as I have ever seen it." (Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.)


(Click on image or HERE to read the whole article or continue reading below)

Why I Am Leaving Goldman Sachs

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

.....read next page HERE


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