Addison Wiggin – September 15, 2011
- Another day, another fix for Europe: how this one heralds the distant arrival of a global currency
- What happens when — not if — Greece defaults? A two-part answer and a six-part solution
- Markets go wild over latest European nonsolution: some ominous numbers the traders are ignoring
- The Donald accepts a deposit for prime office space… in gold
- “Get a job!” The revenge of Generation X, as younger readers take aim at boomers in today’s Social Security mailbag
Yeah, we know. “Wake me up when Greece defaults,” you say. On occasion, we’re inclined to feel the same way.
But today, we have to beg your indulgence. The developments we’re going to recount this morning signal an event we first forecast in The Demise of the Dollar in 2005: the serious proposal of a global currency by 2013…
The world’s biggest central banks will unleash a fire hose of dollars onto the big European banks today.
The European Central Bank, the Federal Reserve, the Bank of Japan, Bank of England and Swiss National Bank — they’re all in on the deal.
Ordinarily, European banks can borrow dollars from the Fed via the other central banks for up to one week. Now they’ll be able to take out three-month loans during three auctions — starting next month and continuing through December.
The timing of this is, well, interesting. Recall from yesterday’s issue that Moody’s downgraded two of the big French banks, in part because of dollar liquidity worries.
Too, there was a Wall Street Journal piece that said U.S. money market funds wanted nothing more to do with a third big French bank, BNP Paribas, which BNP perfunctorily denied.
And if that’s not enough, today’s the third anniversary of Lehman Bros.’ Chapter 11 filing. Good times.
The announcement has had the following effect on markets:
- European stocks: The major indexes, including France’s CAC 40 and Germany’s DAX, closed up more than 3%
- U.S. stocks: The major indexes are all up 1% or better. The S&P 500 is back above 1,200 for the first time in two weeks
- Currencies: The euro, below $1.37 late last week, is at $1.388. The dollar index is off three-quarters of a percent to 76.3
- Precious metals: For the first time in September, gold has fallen below $1,800, and silver below $40.
“The U.S. and Europe have clearly stated that market forces will not be allowed to prevail,” says Michael Pento, the newest member of our team. “Central banks controlled by Ben Bernanke and Jean-Claude Trichet have now fully committed to supplying liquidity in the market at any and all costs.”
Unfortunately, says Mr. Pento, the problem is not only one of liquidity. “Many European banks would be insolvent if they used mark-to-market accounting rules. That’s because the assets they hold — sovereign debt of bankrupt counties — need to be written down and restructured in a big way. But that would engender a series of many Lehman moments in Europe and, indeed, throughout the world.
“The EU will have to face the fact that Greece is insolvent, and a massive injection of bank capital will be needed from the ECB to support the ‘too big to fail’ policy adopted on both sides of the Atlantic.
“But it’s not just the Greeks that have a problem. Italian 10-year note yields remain stubbornly close to 6%, despite Trichet’s efforts to bring them much lower. Therefore, the troubles in Europe have just begun, and the inflationary policies used to subvert the clearing mechanism of the market will ensure they are going to become much worse.”
“This morning’s announcement is merely the first volley in a barrage of the coordinated easing policies,” adds our short strategist Dan Amoss. “I’ve been expecting coordinated central bank efforts to ease liquidity shortages at European banks for over a month.
“Ultimately, in the wake of a Greek default, we could see the same group of central banks agree to inflate their balance sheets by an equivalent amount and buy government debt with the proceeds — a sort of ‘global quantitative easing’ that would satisfy the concerns of each country worried about too much currency appreciation.”
“The most important question,” Mr. Amoss goes on, “facing investors today is: What happens when (not if) Greece defaults? As the Greek government loses popular support amidst a rapidly contracting economy, Greece looks certain to default.
“Once this occurs, eurozone officials would retreat from efforts to keep lending more money to Greece, and save dry powder to fight the risk of cascading eurozone bank failures and contagion to the other PIIGS countries.”
Where does this “barrage of coordinated easing policies” finally lead?
The International Monetary Fund has long pushed for Special Drawing Rights (SDRs) to form the basis of a new global currency. SDRs are a basket of currencies the IMF uses to smooth over trade imbalances.
“Over time, there may also be a role for the SDR to contribute to a more stable international monetary system,” said Dominique Strauss-Kahn last February, when he still ran the IMF. Strauss-Kahn is gone, but the agenda remains.
“In theory,” we wrote in The Demise of the Dollar, SDRs could function as the beginning of an international currency.”
“But given the widespread use of the U.S. dollar as a peg for so many currencies worldwide, it is unlikely that such a shift to a new direction will occur before circumstances make that the only choice.
Those circumstances are now fast approaching. The world’s central banks made that clear today.
“At the end of all of this,” says Dan Amoss, “confidence in paper money, central banks and governments will hit a new low. Prepare accordingly by holding precious metals and avoiding (or selling short) stocks and bonds of companies that will get hurt in this environment.”
Dan has six specific recommendations to carry out that advice. Learn more about his protection plan at this link:
U.S. stocks are rallying on the back of the ECB announcement — the Dow nearing 11,400 — despite a raft of miserable economic numbers out this morning:
- Consumer prices: Up 0.4% in August, higher than the highest guess among dozens of economists polled by Bloomberg. Nearly every category of goods is higher in price. The year-over-year increase comes to 3.8%
- Weekly unemployment claims: Up sharply to 428,000. The previous week’s figures were, as has become custom at the Bureau of Labor Statistics, revised higher
- Industrial production: Up 0.2% in August. This figure, incorporating factories, mines and utilities, is still positive — but slowing significantly
- New York state manufacturing: Contracting, and at an accelerating pace, according to the Fed’s Empire State Manufacturing Survey. At -8.8, the index has turned in a negative number for four straight months
- Pennsylvania and New Jersey manufacturing: Contracting, but not as badly as last month, according to the Philly Fed’s monthly report. The reading of -17.5 is the third negative reading in four months.
The sound you hear is mewling from Fed governors… who find themselves getting squeezed between the proverbial rock of rising inflation and the hard place of a weakening economy.
We can hardly wait to see what the Fed’s Open Market Committee dreams up next Wednesday.
“In the first half of the week,” Options Hotline editor Steve Sarnoff wrote his readers last night, “stocks have bounced smartly from short-term support. There is a chance demand firms up, and the market stages a confident rally.
“But lest bulls get too complacent, signs of solid resistance are showing up. So far, the rally looks less than robust, and, in my opinion, the market is likely to be headed back lower over the weeks ahead.
“The upside may be limited from the current level, and, if support gives way, we could witness another strong leg lower in stocks.”
All that liquidity sloshing around Europe has washed out the precious metals. At last check, spot gold was down to $1,778 an ounce. The bid on silver’s been knocked back to $39.49.
By one measure, gold ought to be $10,000 an ounce:
This chart, courtesy of analyst Dylan Grice at Societe Generale, measures the dollar amount of gold in Fort Knox as a percentage of total U.S. currency.
For a closer look at what the chart means, and some investment implications from our friend Rick Rule, take a look at today’s Daily Resource Hunter.
“It’s a sad day when a large property owner starts accepting gold instead of the dollar,” says Donald Trump.
We were unaware that His Hairness cared a whit about gold. But now he’s accepting three 32-ounce bars as a deposit on a 10-year lease on one of his marquee buildings.
The precious metals dealer Apmex will take up residence on the 50th floor at 40 Wall Street in New York for a deposit in gold equal to $176,000.
Apmex, according to The Wall Street Journal, “is promoting the use of gold as a replacement for cash in some situations.”
Trump appears to be on board with that sentiment, too. “The economy is bad, and Obama’s not protecting the dollar at all… If I do this, other people are going to start doing it, and maybe we’ll see some changes.”
The world is clearly out of whack when Trump starts seeing things the way we do. Even scarier is this nugget from our archives: “I just bought 800 acres of land in Washington on the Potomac River,” Trump said in February 2009. “It’s a club, with golf courses and other tremendous things… the reason I did it is I see Washington as the only growing place in the United States.”
We’re not keen on Trump’s business model, which seems to be built around the serial stiffing of creditors in bankruptcy court. But clearly, the guy’s onto something…
“My question is simple,” writes a reader diving headfirst into the deep end of our Social Security debate. “Do people have a responsibility to think for themselves, be responsible for their own future and ask if what they are being told by government or anyone else is credible?
“Who has believed for the past 20 years that Social Security would be solvent now, 20 years later?
“It was obvious to me, and most financial advice subscriptions I had for years, that I should not expect to collect a penny of the funds I ‘contributed by force’ to Social Security.
“Sadly, the best advice I have come to know for a certainty is this: Whatever the government recommends or states as true, I think and do the exact opposite, and the healthier, wealthier and happier I have become.”
The 5: You didn’t identify yourself by age, but we detect a generational divide. Boomers and the older Silent Generation are offended by the systematic theft of the Social Security trust fund… while Generation X long ago wrote off the prospect of collecting a penny from the system.
“As a 49-year-old, I expect I’ll get nothing from the Social Security trust fund,” writes a reader confirming our suspicion. “I expect I may soon face the reality of my elderly in-laws moving in with me. I expect that my 19- and 21-year-old, terrific-work-ethic daughters may live with my wife and me for a few more years as they try to develop careers in the midst of a depression. I expect I’ll have to live without some toys I’ve been wanting. I expect I’ll be reining in some dreams and will not retire at 65.
“What I’m not going to do is beat my head against the horrific wall of reality whose brick and mortar is the mismanaged, debt-laden legacy that generations of bureaucrats have bequeathed me. It is what it is. Instead, I’ll keep out of debt, live as simply as possible, try to assimilate all I can about investing and wealth creation and work on that self-employment business that I’ve had on the back burner while stocking up on food, gold, silver and ammunition.
“I appreciate the dismay and anger expressed by fellow readers. However, as a long-time reader of many Agora newsletters, I think I can accurately say that the various writers take no joy in pointing out the painful but obvious truths of our Social Security mess. Sometimes I think you satirize, ridicule and jest over the financial chaos, as your only other alternative would be to weep in frustration or collapse into a catatonic state of vacancy.”
“I was born less than two weeks before 1965,” writes another. “In 1983, Congress passed a bill to ‘fix’ Social Security. The only problem with the fix is that it is only fixed it until 2030.
“Based on that ‘fix,’ if I retire under the currently existing plan on my 65th birthday, I should expect to receive less than two weeks of meaningful benefits. Of course, changes since then have reduced the assets of the alleged trust fund.
“Those who support Social Security support the systematic robbery of all Social Security ‘contributions’ from everyone born after 1965. Additionally, those born before 1965 should subtract their birth year from 1965 to get an estimate of how long they can expect to draw meaningful payments from Social Security.
“I don’t think Social Security payments will stop. What will probably happen is that everyone will get a Social Security payment, but the payment (in depreciated dollars) will be insufficient to buy a loaf of bread.
“So our choices are to halt this Ponzi scheme before it destroys all the purchasing power remaining in the dollar, or keep it going, and destroy the finances of every entity depending on the dollar as a store of value. This will lead to politics descending to what happened in 1920s and 1930s Germany.
“Many of the newly broke will need to start a business without any capital. The ‘oldest profession’ comes to mind. How are you going to look your younger female relatives in the eye when you know that your, and your generation’s insistence on receiving ‘Social Security,’ made them make that choice?
“I say go back to work.”
The 5: Damn, we have intergenerational warfare breaking out in our virtual pages.
“To those complaining about Social Security cuts, get a job!” adds another, firing a new volley. “I’m in favor of keeping the disability aspect of Social Security, given our current economic situation.
“But that’s for true disabilities — not those who are ‘disabled’ because they won’t get off the couch and exercise to lose weight, etc. Social Security was set up to assist physical laborers who truly could not labor in the last few years of their lives. It wasn’t intended to help desk jockeys, who can work as long as their minds work, even if they are wheelchair-bound.
“Never in human history has there been the concept of ‘retirement.’ So why now should healthy people not produce for the last decades of their lives? I see few elderly who are incapable of working at something. That’s the solution to Social Security: Forget retirement age, and transfer everyone over to a disability concept. Construction workers and dementia sufferers would still get to quit working relatively young, while everyone else would work until their final illness, unless they can support themselves without working.
“That’s the future Generation X and Generation Y are facing, so the current retirees aren’t going to get much sympathy from their youngsters!”
“Those other readers,” says our final contributor today, “seem to think that you are a congressman and can do something about Social Security.
“If it’s the truth, it’s the truth. We are better off taking care of ourselves, if we can, and that’s where you come in: Help us make sense out of this goofy world and profit from the situation!”
The 5: We’re doing our best. We’ve developed a comprehensive solution set for people seeking retirement income. It’s not for everybody… but it deserves your attention.Decide for yourself here:
The 5 Min. Forecast
P.S. “All great inflations end with the acceptance of real money—gold—and the rejection of political money—paper,” according to Rep. Ron Paul. “The stage is now set; monetary order is of the utmost importance. Conditions are deteriorating, and the solutions proposed to date have only made things worse.”
“Although the solution is readily available to us, powerful forces whose interests are served by continuation of the present system cling tenaciously to a monetary system that no longer has any foundation.”
“The time at which there will be no other choice but to reject the current system entirely is fast approaching. Although that moment is unknown to us, the course that we continue to pursue will undoubtedly hurtle us into a monetary abyss that will mandate a major reform.”
Dr. Paul could have written this last week. He actually wrote it in 1982, in the original foreword to The Case for Gold, the “dissenter’s manifesto” he issued after the U.S. Gold Commission on which he served decided not to return to a gold-backed currency.
Dr. Paul graciously took time out of his Congressional and campaigning schedule to speak at length with us yesterday, accompanied by a film crew.
He reflected on the cascade of events that began with Nixon closing the gold window in 1971, leading up to his decision to run for Congress in 1974. More to come… Watch this space.