Bullish Gold technicals point to 1200

http://unbiasedtrading.blogspot.com/2009/05/fibonacci-may-call-1192-next-station.html

Getting ready for the next big move in gold (even if it weakens for a few weeks), my bullish projections point to 1192 (so, about 1200) if it passes 1008 and continues "north". Below are some some bullish and bearish ideas, and my charts. First the numbers: While my bearish projections are to 641 or even 521 if gold drops in a big (C) wave (similar to Tony Caldaro's alternative OEW precious metals view), the bullish case calls for the 1192 area for several reasons. One is my long-term Fibonacci extension (based on a "bullish butterfly" Fibonacci pattern in the yearly charts), that if it moves above the 1033 high that completed a 1.382-extension initial objective for that pattern, then 1192 is the 1.618 extension objective for that pattern. The weekly and monthly chart projections support that area too.

A symmetry target on the weekly charts, applying a doubling of the move up from 681 and adding to the recent swing lows, points toward approximately 1190. Interestingly, the monthly charts can point there too. Applying a 1.382 extension to the drop on the monthly charts from 1033 to 681 (as if this could still be part of one large (B) wave movement), calculates to 1167. These numbers are all close enough, and have significance in enough time frames - weekly, monthly and yearly - that I must point them out. Readers know that I've been working with these bullish and bearish alternatives for a long time; also, I see that Tony Caldaro has been too, with his more bullish count marked as preferred count on his gold charts (as I posted a while ago, use the "Gold" label at right to see prior posts on this).

Some factors for the bullish case:
- If gold were going down in a (C) wave, it shouldn't be as strong as it's showing now.
- The shorter-term technical indicators have moved up smartly, although the longer-term indicators haven't followed suit yet. Generally, the technical indicators moving into a more positive position.
- Chris Carolan's comments at Pothole or Not? (5/21/09) · "Does the pothole for gold prices foreseen by the solunar model occur? Or is this break above the weekly net-line a strong enough signal that propels gold prices to the 1064 area of the upper weekly channel? The bottom line is that any seasonally inspired gold weakness should be temporary. The larger trend is up, and the corresponding technical picture is healthy for the yellow metal." See his updated Solunar chart at his post there (which does show the next move as another drop into mid-June however).
- Comments by both Merriman and Armstrong that point out, whether or not the dollar pulls out of its swoon, gold is seen globally as a currency alternative (and as I think on it, countries around the world seem right now in a contest to see which can devalue its currency more for economic competitiveness purposes - so if they're all trying to weaken their currencies, maybe that's bullish for gold!).
- This finally kicked in - there have been news accounts of individuals selling their gold and gold jewelry, and also that recent news story that people haven't been buying much gold jewelry lately. Maybe it is a contrarian indicator. Then again, all those TV ads touting gold coins has me worried. (Has Mr. T surfaced again? (Check out Minyanville's "Mr. T" gold indicator!)

U.S. Jobless Rate Likely to Pass Europe’s ~ NYT

That is no longer the case. Unemployment in the United States has risen to European averages, and seems likely to pass them when international data for April is calculated.

“The current economic crisis,” wrote John Schmitt, Hye Jin Rho and Shawn Fremstad of the Center for Economic and Policy Research, a research organization in Washington, “has turned the case for the U.S. model almost entirely on its head.”

In March, the American unemployment rate stood at 8.5 percent, the same as the average rate for the first 15 members of the European Union — the countries that were part of the group before it began to expand into Eastern Europe.

Because countries calculate unemployment rates differently, the rates used in the accompanying graph are the harmonized rates calculated by Eurostat, the European Union’s statistical agency. Harmonization does not change the American rate, but does affect some other rates.

Eurostat publishes harmonized rates for the entire European Union and for three countries outside the union, the United States, Japan and Turkey.

In April, the rate in the United States rose to 8.9 percent. When the European figures are compiled, it seems likely that the American rate will be higher for the first time since Eurostat began compiling the numbers in 1993.

http://www.nytimes.com/2009/05/23/business/economy/23charts.html?_r=1&partner=rss&emc=rss

'WE'RE OUT OF MONEY' ~ Obama

Hat tip to Troy Oz for reading Drudge.


Sat May 23 2009 10:32:18 ET

In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: "We are out of money."

C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.

So we've got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it's putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.

So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don't reduce long-term health care inflation substantially, we can't get control of the deficit.

So, one option is just to do nothing. We say, well, it's too expensive for us to make some short-term investments in health care. We can't afford it. We've got this big deficit. Let's just keep the health care system that we've got now.

Along that trajectory, we will see health care cost as an overall share of our federal spending grow and grow and grow and grow until essentially it consumes everything...

SCULLY: When you see GM though as “Government Motors,” you're reaction?

OBAMA: Well, you know – look we are trying to help an auto industry that is going through a combination of bad decision making over many years and an unprecedented crisis or at least a crisis we haven't seen since the 1930's. And you know the economy is going to bounce back and we want to get out of the business of helping auto companies as quickly as we can. I have got more enough to do without that. In the same way that I want to get out of the business of helping banks, but we have to make some strategic decisions about strategic industries...

SCULLY: States like California in desperate financial situation, will you be forced to bail out the states?

OBAMA: No. I think that what you're seeing in states is that anytime you got a severe recession like this, as I said before, their demands on services are higher. So, they are sending more money out. At the same time, they're bringing less tax revenue in. And that's a painful adjustment, what we're going end up seeing is lot of states making very difficult choices there...

SCULLY: William Howard Taft served on the court after his presidency, would you have any interest in being on the Supreme Court?

OBAMA: You know, I am not sure that I could get through Senate confirmation...

Developing...

Alf Fields tells Jim Sinclair: Gold to 1650

I bring to you the following with the specific permission of Alf Fields.

I have suggested to you often in the past that once the price of gold reaches into its maximum potential it will not repeat the fall of the 1980s.

I foresee gold re-entering the system in a new and unique form that does not include convertibility. It will not be tied to interest rates as it once was in its previous form.

I have written to you various times about the Federal Reserve Gold Certificate ratio, modernized and revitalized, which now may well be associated with an SDR form of an International Central Bank. The tie between the ratio and gold would be a measure of international liquidity considered zero or 100 on the day of adoption.

The following is Alf’s statement yesterday, with his permission to post:

“Gold cannot decline from its highs as it will be incorporated into the national and international monetary systems at that time.”
–Alf Fields, May 20, 2009

Now do you have any questions why Fund Wizard Paulson just got long a few billion dollars worth of Gold ETFs and a few major gold producers?

Finally a major event has taken place that is a US dollar milestone.

The financing and extremely important event is the arrangement between China and Brazil displaces the dollar as China becomes the major trading partner with Brazil. Since then the Rial has been celebrating and the dollar has been depressed.

This is a once in approximately a century replacement of a trading currency that has always meant a dethronement of the deposed and coronation of a new currency king.

The last time this happened was when the US dollar supplanted the British Pound as the major trading currency and entity with Brazil 79 years ago.

It took the Brits 300 years to supplant the Portuguese Escudo with the British Pound.

Only twice has this occurred in 379 years. This is obscure to most but not to Mr. Paulson the hedge wizard. Obscure to most, but not to our gang at JSMineset.

The dollar died in Rio and that means everywhere.\

The dollar is in for a very cold winter.

There is one thing that is absolutely certain and that is Gold is now headed to at least $1650 and in all probability much higher. This is happening NOW!

What more do you need to know?

"Olduvai Theory" ~ Do you buy it?

I don't because we have the means for a new technological and energy revolution. But the paper is usefull in that it demonstrates that the current energy order is unsustainable.

A new paper on the subject is worthy of a read.

Move from one economic chaotic attractor to another begins

I admire Jim Willie because he is not afraid to call a spade a spade. The Europeans at Leap 2020 also speck a major disconnect, as does your humble blogger; we don't agree on the details but few know them, if in fact they are knowable at all. The extent to which these processes are driven by the momentum of competing systems, planned geopolitical moves or an abrupt change in the network topology of the global infosphere caused by slow drift in the weightings of each node is difficult to determine.

Shit happens because stability breeds instability so I'd favour the third hypothesis because it accomodates the butterfly effect we see at inflection points in history.

I do rule out the Illuminati, the Elders of Zion or the alien lizard people, either individually or in cohoots, being behind the crisis, imaginary entities can be powerfull, surely, but their main power here is in the minds of those desperately seeking explanations that leave their ideology and victimhood intact without disturbing deeply rooted truisms. The dissonance between the values of the american revolution and the enormous energy and vitality of its civilisation in its heyday and the confusion of the bust must be accomodated.

But its difficult to assign blame, these processes of social and economic progress and decay seem to trancend the fashions of political or economic theory; they seem to me to require a syncretic theory of civilisational growth and decay, because the patterns seem general while the specifics vary wildly.

We only hope that while the locus of Western Civilisation may move east that the vitality of its promise remains and that even this massive geopolitical and monetary crisis is part of a larger theraputic process, a necessary breakdown on the rode to maturity.

OK, well, Gold is hot, imo......and less I digress further leave Jim Willie to speculate.....




The gold chart is wildly bullish, with a 1300 target. The gold price follows the cenHead & Shoulders pattern. The neckline is at 1000 and the top of the head is at 715. The nearly 300 point potential indicates a 1300 target, a number that has come up frequently in several different patterns identified. Notice the upward vector in both moving averages, as well as the cyclical index. The only resistance will be the illegal kind from naked shorting of futures contracts by the usual villains who operate at the behest of governments, protected from prosecution. They will not be able to stop what comes. A challenge of the 1000 level could come very soon. Once 1000 is penetrated in clear fashion, with excitement and attention, an overshoot of 1300 could even occur.tral banks monetization and diverse federal fiscal stimulus worldwide, and has ignored season. As the big banks struggle to survive, the central banks take extraordinary measures, and frontal assaults are waged against hedge funds, all patterns have been departed from. What replenishes big banks also leaks generally into the system in time. As the economic recessions show stubbornness, expect fiscal stimulus to be monstrous and almost endless. The reversal pattern is unmistakable, the classic Head & Shoulders pattern. The neckline is at 1000 and the top of the head is at 715. The nearly 300 point potential indicates a 1300 target, a number that has come up frequently in several different patterns identified. Notice the upward vector in both moving averages, as well as the cyclical index. The only resistance will be the illegal kind from naked shorting of futures contracts by the usual villains who operate at the behest of governments, protected from prosecution. They will not be able to stop what comes. A challenge of the 1000 level could come very soon. Once 1000 is penetrated in clear fashion, with excitement and attention, an overshoot of 1300 could even occur.

1) The US-UK banking systems are shattered by deep bond asset losses, shrouded in fraud, deep with leverage, teeming with collusion, which renders them as insolvent and in need of transfusions. The reality is that Wall Street firms remain in control of the USGovt financial operations despite their responsibility for both the collapse and clear legal violations. The USDollar image is badly tarnished.

2) Incredible volumes of money have been committed by the US Federal Reserve and the USGovt, much already delivered, with staggering future rescues, bailouts, and stimulus packages assured. The sums total $12.8 trillion at last count. The undermine, if not debauchery, to the USDollar and its vehicle the USTreasury Bond is vividly clear, a palpable threat to foreign creditors.

3) Foreigners have begun to worry openly about the onset of profound price inflation. What normally had been less than 4% in excess bank reserves is now 92%. US banks will channel the bulk of their excess reserves into loans and investments, when considered safe. The baseless ‘All Clear’ signal can be witnessed, orchestrated and phony. For political and credit market reasons, do not expect any noticeable central bank drain. Price inflation awaits the landscape on a path of least resistance. The USTBond yield would rise, and lose colossal sums of money for foreign bondholders.

4) Foreign creditors have owned over half the US$-based government and mortgage agency bonds for almost a decade. With the dependence upon foreign institutions (central banks and sovereign wealth funds), the United States has quietly lost control of its fate. It can no longer make decisions without consulting major creditors.

5)The USMilitary has tacitly been supporting the value of the USDollar. By pressuring the Saudis on a regular basis, they have maintained the Petro-Dollar standard without a peep of objection for a few decades. When South Korea expressed interest in diversifying out of USTreasury Bonds a few years ago, suddenly some US naval exercises occurred off their coast. The pattern is clear to foreigners.

6) Some recognition has come that the aggressive USMilitary of recent years depends heavily upon USTreasury Bond sales in order to continue their adventures. As long as the USDollar is pre-eminent, the USMilitary will continue to play in neighbor’s back yards doing whatever.

7) The Chinese have been taking numerous steps to establish the yuan currency more as a global currency for international commerce. The more important step has been to set up numerous yuan swap facilities across the globe, the latest being in Argentina and Brazil. Others are across Europe and Asia. Such facilities make easier trade in high volumes, without need for settlement in US$ denomination, as has been the custom for a few decades.

8) The Chinese have begun to switch from a US$ basis to a yuan basis in their banking system domestically. They also have given a giant assist to the new emergency fund for the extended ASEAN group of SouthEast nations. My belief is that the fund, based in yuan currency, will morph into a regional development fund. Conversation already has lead in that direction.

9) The Chinese gave authorization to two banks outside the Middle Kingdom proper to sell yuan-based government bonds. The HSBC (based in London) and Bank of East Asia (based in Hong Kong) have been given permission to do so, with details to follow. More broad-based formal trading of Chinese Govt bonds is coming soon to a nation near you.

10) Watch their moves toward creation of the Chinese yuan as a global reserve currency. Watch their simultaneous moves away from the USDollar and toward gold for reserves management. The merger of the two important strategic initiatives is a gold-backed yuan currency. In fact, that is precisely what was stated openly by Zheng Lianghao, managing director of the World Gold Council’s Far East division. That news came out this week. The Chinese are clearly the spearhead to dethrone the USDollar as global reserve currency.

11) Numerous nations have stated publicly that they regard the USDollar as inadequate and unqualified to serve any longer as the sole global reserve currency. The isolated revolt has turned into a uniformly global revolt. They are blaming the US$ for their internal crises.

12) Russia demanded an alternative to the USDollar before the G20 Meeting in London, at the G20, and after the G20. Russia and China endorsed the IMFund plan to create a basket currency as a global reserve alternative. My personal view is that the concept was and is a Straw Man device that will pave the way to a new global reserve currency, or set of currencies later. The motive was to direct attention away from the USDollar, and heap some disgrace at it.

13) The Arabs have been planning for over two years an asset-backed new currency for the Gulf region. New crude oil purchases would ostensibly be conducted in the new dinar denomination, bringing an end to the Petro-Dollar standard. In early May, the decision was made to locate their new central bank in Riyadh. NOW THE EXIT FROM THE MONETARY UNION BY THE UNITED ARAB EMIRATES SIGNALS SOMETHING BIGGER. MY BELIEF IS THAT THE U.A.E. REJECTED THE SAUDIS DUE TO TIGHT USGOVT BEDFELLOW RELATIONS. THE U.A.E. WILL NEXT COURT A GRANDIOSE ACCORD WITH RUSSIA. THE NEW ALLIANCE WILL INCORPORATE A NEW CURRENCY, NEW PLEDGES OF SECURITY PROTECTION, AND A COORDINATION OF CREDITOR ACTIONS. The Creditor Nations will soon tighten the noose around the necks of Debtor Nations, and force a global banking shift of power. It will be astonishing in its effect.

14) The Germans have demanded all of their gold held in custodial accounts inside the United States to be returned to German soil. The story is not public, but details have come to me from a private source close to the action. The Germans have also given counsel for Dubai to demand all of their gold held in custodial accounts inside London to be returned to Dubai, where a new gold trading center will spring up. In my view, THIS IS THE BIGGEST NEWS FOR GOLD THIS ENTIRE YEAR. The hidden arch-enemy for the US-UK on all matters pertaining to gold bullion is Germany. This is not a well-known concept. Insults were hurled at the US delegation during the London G20 by their ministers. Germany is also advising the Chinese on currency and gold matters. Can one detect some coordination?

15) Venezuela has followed the Chinese and Russian pattern to lock up the majority of domestic gold mining output. They will keep most gold output in domestic hands, primarily with the government, which will have first crack at buying it.

16) A near default was averted at the Eleventh Hour when Deutsche Bank found almost a million ounces of gold to cover its (naked) short in gold futures at the COMEX at the end of March. Thanks to the Euro Central Bank, which happened to sell over a million ounces for some reason. My conjecture is that the Germans decided the time was not right to bust the COMEX. From sources, that date might be this September in a coordinated attack that requires preparations to remove the levers and kick out the pillars that support the COMEX.

17) Germany has been the broker in creating a Russian-German barter deal involving billion$ in trade between the two nations. Credits will be gained from delivery of a raft of commodities, led by energy products from Russia. In turn, Russia will receive finished products, equipment, and consumer staples. Germany has been the broker in a similar barter accord between Russia and China under similar terms. These barter deals will create entire systems that bypass the US$-denominated trade settlement.

18) The Chinese announced an increase in their gold reserves from 400 tonnes to 1050 tonnes in the last five years. At the same time, they have been harping on the extreme risk to their $2000 billion in savings, held in USTreasury Bonds, USAgency Mortgage Bonds, and USCorporate Bonds. They openly complain about US$ mismanagement, unbridled USGovt spending (for numerous crisis projects), and the resulting risk to the US$ exchange rate. They have engaged a war of words, precursor to trade war, with USDept Treasury officials, one that has lasted for at least two years. The Chinese have openly talked about a covert USTreasury Bond default, which is a very serious accusation to make.

19) The Chinese Business News (CBN) has made several queries with the GATA group, the US-based outfit challenging the USGovt on the legitimacy of the USDollar on a Constitutional basis, and challenging the USGovt on its illegal naked shorting of gold futures contracts in a long-running gold price suppression scheme. The Chinese might be building a weapon to challenge the USDollar’s legitimacy, in response to stupid currency manipulation charges lodged by the hack USGovt bureaucrats in high offices.

20) Either lawsuits or Congressional Bills have begun against the US Federal Reserve to force a formal accounting of their balance sheet, and of the gold contents at Fort Knox. A surprise would await them, to learn no gold exists at Fort Knox. Another lawsuit has begun to force the USFed to reveal the spending of the T.A.R.P. funds. Foreigners must watch the Wall Street syndicate with some degree of disgust. Watch the Supreme Court enter the picture.

21) Meanwhile, the big US banks are maneuvering themselves to return T.A.R.P. funds when their insolvency is obvious, their balance sheet accounting is phony, and numerous events have begun or are planned to raise equity capital. They are rectifying their capital inadequacy and vanished loan loss reserves. The real reason they plan to return USGovt funds is to put an end to the extreme risk of underlings at the USDept Treasury, Congressional Budget Office, Govt Accountability Office, and various Congressional Banking Committees who have had access to records, the paper trails. Eight months have passed since TARP funds were injected into big banks, giving way too many eyes too much access. The situation is not manageable, an unexpected grand intrusion after fund confiscation. The financial (crime) syndicate must be protected. Quite a contrast event, in view of foreign actions listed above.

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John Kenneth Galbraith: Listen to a great US liberal, you might learn something new

Phillip Adams is in conversation with Canadian born American economist, author, adviser and presidential confidant John Kenneth Galbraith.


Galbraith, who died in 2006 at the age of 97, was a Keynesian economist and a leading proponent of American liberalism and progressivism. He wrote around 40 books in his lifetime but arguably his most famous works were the trilogy on economics: American Capitalism, The Affluent Society and The New Industrial State.


This interview was conducted at Galbraith's home on the grounds of Harvard University in Cambridge, Massachusetts, when he was 90. Galbraith talks about Keyensian economics, his relationship with past presidents (Franklin D. Roosevelt, Harry S. Truman, Dwight D. Eisenhower, John Kennedy and Lyndon Baines Johnson) about his work as director of the US Strategic Bombing Survey after WWII, the military strategy of the Nazis, and about his break-up with LBJ over the Vietnam War.

Download to listen.

News Snippets ~ UK , predictions, silver, Mitch's desert planet boomtown.. Ag/Au on the up..

Britain better put the IMF on speed dial.....

As the UK's public borrowings reach record levels, Britain's credit outlook has been lowered from stable to negative by the ratings agency Standard & Poor's. The agency cited government debt and political uncertainty with an election looming for its decision. It is the first time that Britain has been on negative outlook since S & P introduced outlooks in the 1980s. The move could eventually lead to a cut in the UK's Triple A rating and leave the Government in a position where it would have to pay more to borrow on financial markets. Official data released overnight also shows British public borrowing hit a record high for the month of April. The pound tumbled sharply and shares also fell in response to the Standard & Poor's decision..
................

On the qualification of predictions...

The late JK Galbraith, one of the twentieth century's most prominent economists, observed wryly that the purpose of economic forecasting is to make astrology look respectable. The American baseball star Yogi Berra, famous for his malapropisms, said: "It's tough to make predictions, especially about the future."

Recent history bears that out. Just about every official forecaster around the world underestimated the impacts of the global financial crisis. Over the past year the International Monetary Fund has revised down its forecasts for the global economy month after month. Just ten months ago, it was predicting that the global economy would expand by more than 4 per cent over the year to the end of 2009. Now it sees global growth going backwards by 1.3 per cent.

The Reserve Bank and the Treasury, too, have been consistently wrong during the course of the crisis - or, to put it more kindly, their forecasts have been overtaken by events. Within weeks of being issued in February, the updated economic and financial outlook from Treasury predicting that Australia would avoid recession looked heroic, bordering on ludicrous. Of course, it's almost certain that these forecasts were based on assumptions chosen to accentuate the positive. The last thing the central bankers or the econocrats want to do is undermine public confidence by predicting a recession until it would be utterly implausible not to.

Silver breaks out...



Mitch Hooke is a boso spruiker not to be taken seriously... the hyperbolic dimple will say anything,imo
The mining industry has released modelling saying 23,500 jobs will be lost by 2020 under the Federal Government's emissions trading scheme.
Around half the job losses are forecast to be in Queensland's coal industry, and Minerals Council head Mitch Hooke says those figures will multiply in the future, with job losses doubling by 2030."New South Wales would be the second highest level of job losses - a bit over 4,000 direct jobs [lost]," he said."Put a multiplier on that and you can see these figures really start to become quite significant."

He says one of the fundamental failures of Australia's emissions trading scheme is that its targets are far ahead of other countries. (Liar, liar, pants on fire Mitch...)

Hey Mitch, how many job losses in agriculture and tourism under this senario.....

Now, the MIT study has been published in a peer-reviewed journal -- The American Meteorological Society's Journal of Climate (subs. req'd) -- which obviously it makes it much more credible and high-profile. Reuters has a good story on it, "Global warming could be twice as bad as forecast." The study concludes:
The MIT Integrated Global System Model is used to make probabilistic projections of climate change from 1861 to 2100. Since the model's first projections were published in 2003 substantial improvements have been made to the model and improved estimates of the probability distributions of uncertain input parameters have become available. The new projections are considerably warmer than the 2003 projections, e.g., the median surface warming in 2091 to 2100 is 5.2°C compared to 2.4°C in the earlier study. Many changes contribute to the stronger warming; among the more important ones are taking into account the cooling in the second half of the 20th century due to volcanic eruptions for input parameter estimation and a more sophisticated method for projecting GDP growth which eliminated many low emission scenarios.

[Note: That rise is compared to 1981-2000 temperature levels. So you can add at least 0.5 °C and 1.0 °F for comparison with pre-industrial temperatures, which I did in the headline -- see "A (Hopefully) Clarifying Note on Temperature."]

The MIT press release calls for "rapid and massive" action to avoid this. Study co-author Ronald Prinn, the co-director of the Joint Program and director of MIT's Center for Global Change Science, says, it is important "to base our opinions and policies on the peer-reviewed science... There's no way the world can or should take these risks." Duh!

Global warming will hit us so quickly and dramatically going forward that idiots like Mitch will carry the shame of their denial for the rest of their lives round their necks like a dead albatros...

Standard Chartered say buy Gold Silver...

Standard Chartered is including gold and silver as one of four main recommendations to its private banking clients, according to a presentation by chief investment strategist, Lim Say Boon, in Dubai today.

The UK’s second largest bank by market capitalization has been winning clients in a flight to quality from its crashing rivals, and this global trend has also been evident in the Middle East.

Clients are being recommended to purchase gold and silver on price pull backs as the precious metals have a low correlation to traditional asset classes. The bank will recommend on different ways to invest in the metals.

A pandemic of paper money ~ Schoon

This time the deflationary depression will be accompanied by an extraordinary global currency crisis. Government attempts to reflate their deflating economies will instead give rise to additional massive economic distress.

Just as low 1 % interest rates reflated economies in 2002 but also caused property prices to balloon then collapse in 2006, today’s even lower 0.25 % rates coupled with today’s unprecedented monetary creation will create an unmitigated global currency disaster that will destroy money as we know it.

To stimulate deflating economies, so much fiat money is being printed that money will eventually become worthless. Throughout history this is how all fiat currencies have ended, in the uncontrolled printing and circulation of increasing amounts of increasingly worthless paper.

Last month, M-2, the monetary aggregate in Japan increased at a rate even greater than 100 % annually. The printing presses are now being run as never before in the US, the UK and Japan in the desperate hope that it will save them from the overwhelming gravitational pull of deflation, an economic black hole of immense inertia.

The borrowing, printing and circulating of excessive amounts of fiat money has been done before and does not work. Doing so is a recipe for disaster; albeit a time-honored recipe that has been tried in the past always with the same result.

It will be no different this time. If you think otherwise, just wait and see.

http://www.24hgold.com/english/contributor.aspx?contributor=Darryl%20Robert%20Schoon&article=2064670932G10020

Ambrose still bent on sustaining the unsustainable

Sabre rattling with talk of "aircraft carrier battle groups" is the gunboat diplomacy Ambrose has begun to allude to; several times he has hinted that the US should use its military might to force purchase of its debt.The UK will be cap in hand to the IMF before the year is out, imo..


Et tu Tokyo? If Washington is counting on Japan to act as last-resort buyer of US dollar bonds, it may have to think again. Masaharu Nakagawa, finance chief of the Democratic Party of Japan (DPJ), told the BBC that his country should not purchase any more US debt unless issued in yen as "Samurai" bonds, akin to "Carter bonds" in 1978.

This is the sort of petulance that tends to emerge in the late phase of slumps (1840s, early 1930s) when mass lay-offs provoke a populist backlash and hotheads run away with the agenda. Mr Nakagawa later played down the comments, calling them private thoughts, but the genie is out of the bottle.

We have come to assume that Japan under the Liberal Democratic Party (LDP) will always cleave to America, if only to safeguard US protection against Chinese naval expansion. Backed by Washington after the war as a rural counterweight to the urban left, the LDP has held an almost unbroken grip on power since 1955.

But crashes have a habit of bringing regime change. Brian Reading, a Japan veteran at Lombard Street Research, predicts a "seismic shock" over the next four months as voters rebel.

"With unemployment heading for 5 million by end-year, something must happen," he said.

The tremors from Japan follow near-weekly fulminations from Beijing, which suspects that Washington is engineering a stealth default on America's debt by the trickery of quantitative easing. This was put bluntly in February by Luo Ping, head of China's banking commission: "We hate you guys. Once you start issuing $1 trillion-$2 trillion, we know the dollar is going to depreciate." Premier Wen Jiabao picked up the theme more politely, asking whether the "massive amount of capital" lent to the US was still safe. Since then the People's Bank has floated ideas for a world currency.

China and Japan together hold 23pc of America's $6,369bn federal debt. This has caused alarm on the US talk radio circuit, but fears of imminent "dollardämmerung" and a collapse of American economic power may prove far off the mark. Who ultimately holds a gun to the head of whom?

If Asia's leaders give free rein to frustrations and crater the US bond market, they will ensure their own political destruction. Japan already risks descent into demographic death, deflation, and debt atrophy (its public debt is nearing 200pc of GDP). China's regime depends on perma-boom for post-Maoist legitimacy. Could it survive the wrath of jobless graduates and rural migrants if it provokes America into erecting trade barriers, killing the globalisation goose that lays the golden egg?

American can if necessary retreat into its vast home market and rebuild its industrial base, well-armed with 12 aircraft carrier battle groups.

The last 12 months should be lesson enough that Asia cannot yet stand on its own two feet. Its mercantilist export model remains a "high-beta" play on the West, to use trader parlance.

Japan's industrial output has fallen 34pc. China's exports are down 23pc.

Ray Maurer, from Qatar's QNB Capital, said China may be too busy closing factories it should never have built to challenge US primacy over coming years.

"China is not going to be a juggernaut until it creates a viable economy based on home consumption. It's just a tiger, living a myth," he said.

Lombard's Charles Dumas says the "super-savers" (China, Japan, Germany) have warped their own economies by relying on exports and, therefore, on perpetual debt build-up by the West.

"Their currencies are due to decline against the dollar as weak US recovery throws a few scraps from its table, over which the world's exporters will have to scrabble, cutting their prices and currencies in the process. The US is not, and is not about to become, Argentina or Zimbabwe," he said.

Let us not forget how we got here. Japan amassed a quarter trillion dollars of US bonds from January 2003 to March 2004 in a frantic effort to drive down the yen and stave off deflation. It has not yet won that battle. Producer prices fell to minus 3.8pc in April, a 22-year low.

China's holdings of US bonds are a consequence of its own policy of holding down the yuan to boost exports. Beijing may rage about America's "helicopter" stimulus, but what would have happened to the factories of Guangdong if the Fed had not taken emergency action or if the US Treasury had allowed the banks to collapse? China wants it both ways.

The world economy has long been running on fumes. The debt appetite of the Anglo-sphere and Club Med kept demand afloat, concealing excess capacity. The deformed interplay of Asia's Confucian model and Western consumption ran unchecked, until the imbalances blew up.

Yet it is easier to blame Uncle Sam, subprime, and friendless bankers. A folk tale has captured political discourse everywhere, from Beijing, to Tokyo, Moscow, and Berlin. If they are foolish enough to act on this self-serving illusion, they will pay the higher price.

The comments make more sense....
Asia does not need the US. It can simply dump it`s exports in the ocean and start its own `funny money` printing presses.

The US has nothing to offer but nostalgia.

This is too much attention, given to a mere shill for the print-a-living nations.

This so called economic journalist ''Ambrose'', has no clue what so ever. China has won the game hands down. It is very easy to explain. China accumalates USD and than buys all of the worlds tangible assets, copper, gold, oil, cobalt etc etc. He who controls the tangible assets weilds the power. It is really that simple. The next step down the line is war over these commodities. Very easy to understand plain and simple.

Ambrose an apologist for Keyensian-militarist lunacy? Didn't expect that...

Sir, you are SO wrong on this one. The US is finished as an empire, which is a GOOD thing. The Chinese have intentionally positioned themselves to pick up all the pieces from this crash. The economic fundamentals are overwhelmingly on their side (and I'm not exactly happy to be saying this). The US is beyond bankrupt and the dollar is toast. One of the last props holding the dollar up - the hope that Obama might restore some credibility to the US govt - is now gone. The world now knows that Obama is GWB2, and so the common shares of USA Inc. will soon reflect the corrupt and criminal management.
The Chinese commies are evil as well, but they are NOT stupid.

So lets get this straight. Asia has all the productive capacity and savings pool, the west has a ponzi scheme economy based on speculation and vendor financing using worthless fiat money and they are the ones in trouble! In the madcap world of the Keynesians, all we need to do is print our way to prosperity. God save us from the opinions of "experts" like you Ambrose!

No Ambrose, you're in denial.

If the Chinese stop buying US government bonds, the dollar will collapse and Americans will be too broke to buy Chinese products. However, as the dollar falls China's currency will rise, and along with it will rise the purchasing power of the Chinese people. China's vast population will start to consume their own products.

The only reason foreigners continue to finance America's current account deficit by buying US bonds is because the dollar is the world's reserve currency. If they allowed the dollar to collapse their foreign currency reserves would decline in value. However, China is diversifying out of the dollar by purchasing gold, copper and other currencies. When they finish this process of diversification they will stop buying US bonds and start selling the ones they already have.

It is the producing/saving economies that have power, not the debt/consumption countries. Production is difficult, not consumption.

�America can if necessary retreat into its vast home market and rebuild its industrial base, well-armed with 12 aircraft carrier battle groups�.
How would America raise capital to rebuild its industrial base, it has no domestic savings. Who do you think pays for the US military? It's foreigners, by purchasing US bonds.
America eventually will have to stop its phony borrow and consume economy and rebuild a real economy based on domestic savings and production. This will take a long time, and will start when Obama's ridiculous Keynesian stimulus packages based on deficit spending fail.

FT explores the outer limits of monetary nutjobbery

Negative interest rates, spend it or lose it. Why people wouldn't buy gold and bury it in the back yard or why the negative nominal rates won't result in hyperinflation and a flight to real goods (Flucht in die Sachwerte) is unexplored. Indeed the whole notion of savings representing idle resources that can be put to the task of capital formation is hereby turned totally on its head.

All I can say is those whom the gods would destroy they first make mad!

The Financial Times blog presents this as a serious proposal.

Removing the zero lower bound on nominal interest rates would represent a valuable addition to the policy arsenal of the central banks. We know something about how interest rates work. There is no reason to believe there would be any dramatic change in the effectiveness of policy rate cuts if these cuts bring the official policy rate to a level below zero. We know next to nothing about the effectiveness of the alternative policies that central banks are forced to adopt if they don’t just want to sit on their hand once the official policy rate hits the zero lower bound: quantitative easing and credit easing, relaxing the collateral requirements for central bank lending etc.

All these alternative measures also blur the distinction between the responsibilities of the monetary and the fiscal authorities. It undermines central bank independence, something which, up to a point, I consider valuable.

There are at least three ways to remove the zero lower bound that are feasible: abolish currency, tax currency and ensure that currency is not the numéraire. Taxing currency may be awkward and intrusive, but abolishing currency is not just easy (just do it) but also has considerable advantages as a blow against criminality and terrorism. Unbundling currency and numéraire is something that can be done over the weekend.

I really don’t understand why central banks are not aggressively pursuing options for removing the zero lower bound. It is that they love the seigniorage so much? But they retain seigniorage revenue from currency issuance in the rallod economy. Is it hidebound conservatism and lack of imagination? Quite possibly. But if so, this is a costly mistake. Central banks should act to remove the zero lower bound on nominal interest rates now.

http://blogs.ft.com/maverecon/2009/05/negative-interest-rates-when-are-they-coming-to-a-central-bank-near-you/#_ftn1

Gold demand up ~ Bloomberg

May 20 (Bloomberg) -- Gold purchases rose 38 percent in the first quarter, led by investment demand that exceeded usage by jewelers for the first time since at least 2004, according to the World Gold Council.

Global demand increased to 1,015.5 metric tons, from 733.9 tons a year earlier, the London-based council said today in a report based on figures from research company GFMS Ltd. Investment purchases more than tripled to 595.9 tons while jewelry demand fell 24 percent to 339.4 tons.

Gold rose to an 11-month high of $1,006.29 an ounce on Feb. 20 as governments spent trillions of dollars to fight recession, sparking speculation inflation will accelerate. In India, the world’s largest gold buyer last year, jewelry demand was the lowest in at least 20 years and net retail investment turned negative for the first time as holders sold metal for recycling, the council said. Chinese demand was six times that of India.

“In the current environment, investment demand is part of the diversification of assets in portfolios and therefore is less sensitive to price than jewelry demand,” said John Meyer, research director at Fairfax IS in London.

Investment demand for coins, bars and exchange-traded funds was the highest since at least 2004, when GFMS began tracking them, and “could well be” a record, GFMS senior metals analyst Philip Newman said. Jewelry demand had accounted for about two- thirds of gold demand in the past 30 years, he said.

Investment Flows

“Investment flows in the first quarter of this year were unprecedented and, based on an analysis of the past 30 years of the gold market, probably unsustainable in the long term,” UBS AG analyst John Reade wrote in an e-mail. Concerns about inflation and currencies “are likely to continue for the next year or so and this should keep investment flows strong, if not perhaps at the super-strong levels seen in the first quarter.”

The U.K. Royal Mint used 75 percent more gold in the first quarter than a year earlier and the U.S. Mint’s sales of 1-ounce American Eagle gold coins more than quadrupled in January.

Gold for immediate delivery climbed $2.98, or 0.3 percent, to $928.04 an ounce by 8:24 a.m. in London.

Total demand from India fell 83 percent to 17.7 tons, from 107.2 tons a year earlier. In Thailand, total usage was a negative 16.9 tons, compared with net demand of 2.1 tons a year earlier. Purchases in China rose 1.8 percent to 105.2 tons from 103.3 tons. In the U.S., demand rose 15 percent to 55.2 tons.

‘A Bigger Role’

“Certainly over the long run, you’re going to see China permanently taking a bigger role,” said Rozanna Wozniak, London-based investment manager at the council. “Across the world, there has been an increase in recycled gold sales, due to a combination of profit taking and distress selling due to difficult economic conditions.”

Demand in Germany for bars and coins expanded fivefold in the first quarter to 59 tons, according to the report.

“Throughout the western world, the safe-haven motive to buy gold was very strong due to economic uncertainty,” Wozniak said. “In Germany, it also appears to be motivated by inflation.”

Owners of gold sold a record 558 tons of metal back into the market, with net retail investment a negative 17 tons in India and 19.9 tons in Thailand, according to the report.

Gold mine production rose 2.9 percent to 560 tons from 544 tons. Central bank sales slumped 55 percent to 35 tons from 77 tons.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net

Last Updated: May 20, 2009 03:52 EDT

Commodities will recover first and then roar on demand and inflation

This is my position, Don Coxe, Rogers and all those who recognise that the supercycle in commodities was about normalisation of prices, not high prices, historically speaking...

What some call the 'Commodity Super Cycle' is a simple rebound from extreme devalorization of commodities as an asset class over nearly 20 years. The process is intensified by extremely fragile and unrealistic world currency values, within which the Euro is likely the weak link, being a de facto money of resource-depleted Europe, forced into circulation in too many countries, too late. The US dollar’s plight needs no commentary.

Due to the massive fossil energy intensity of the current global economy’s structure, and low appreciation of the critical need for energy transition away from fossil fuels, we can be sure that near-term limits to world oil and natural gas supply capacity will have a strong impact on relative asset value sorting in a generally inflationary context. Even using IEA published data, world oil supply capacity could fall as much as 25 Mbd from now to 2025. Any small net increase in supply would need heroic investments, estimated by the IEA at about 26 000 Bn USD through less than 20 years. If we took an optimistic approach on the decline of world oil export supply or 'offer' from 2010, and assumed that net supply fell at a rate of 4% or 5% annual, perhaps due to energy saving and substitution programs in exporter countries (which at present is unlikely), this would translate to a long-term net annual decline in world export supply at well over 2.5 Mbd. This is close to German or South Korean oil import demand. Two years at this loss rate, would equal a little less than Japan's total import needs.

It is not difficult to identify what impact real structural undersupply will have on traded oil prices. The waiting period will be short. Oil prices can only show a massive rebound from almost the moment there is any sign of global economic recovery. The knock-on effect of higher energy prices on food prices will be rapid, as was shown in 2007-2008. This in turn and already poses a serious threat to the duration of sustainability of any global economic recovery, while also helping to rekindle inflation.

To be sure, this should also rekindle interest in Renewable Energy and Cleantech investing, itself a now highly financiarized asset sector, exposed to exactly the same tensions and volatility as 'mainstream' equities and other traded assets. The certain near-term return of Oil Crisis should however not mask the other resource-linked facets of the depletion crisis facing the straight majority of real resources – including the nominally renewable bioresources.

Raching its peak in the slow-growing real economy of the 1990s, an apparent oversupply of energy and natural resources helped push down the baseline for commodities relative to all other asset classes, in some cases to historic lows. This has dangerously masked the real, almost reverse video picture of hard asset production, supply and therefore price outlooks. To be sure, this ‘resource pinch’ is intensified by the extremely classic and conventional Henry Ford-style economic takeoff of the Emerging Economies. We therefore face accelerating depletion of key natural resources, plus structural resource-limiting factors like climate change and population growth.

Asset Value correlation

As already noted, the neat two-part division of hard asset commodities into ‘renewable’ and ‘non-renewable’ breaks down under the onslaught of current-structure global economic growth. Through 2005-2007, running at around 5%pa in a world of about 6600 million consumers and potential consumers, the pressure on real resource supply was easy to demonstrate. Conversely, equity and derived paper assets can be created in an electronic eyeblink, grow with little constraint, and avoid the problem of credibility as long as there is some growth of the ‘underlying security- - the global economy.

The unrealistic hopes embedded in the fragile ‘Chindia decoupling theory’ are based on the mirage of Decoupled Emerging Economy Growth at near double-digit annual average percentage rates, perhaps for 15 or 20 years, or more. In fact, this poses essentially impossible challenges for commodities production and supply. This concerns the near-term real world future, not some mythic Keynes-type long-term ‘when we are all dead’.



As noted above, there are decreasing numbers of ‘firewalls’ between the two theoretically-distinct asset classes inside the commodities sphere (i.e. renewable and non-renewable), as well as between Equities and Commodities. Due to present structure global economic growth, this trend is self-reinforcing. Thus price correlation and linkage, both inside the asset classes as well as between, is a strong real world trend. This again clearly supports the argument for near-term and possibly extreme of most Commodity prices.

This ‘re-linkage’ or new correlation can be observed with almost any real resource commodity. One example is the ags and softs, specially the grains and oilseeds, simply due to the 2005-2007 biofuels boom and slump. This left behind the price linkage of oil with food, but not the massive amounts of biofuels promised by various leaders, such as the RFS program of G W Bush. One major supply-side cause of this is the energy intensity of current agroindustrial production techniques, downstream processing, and transport of these commodities. For sugar and corn ethanol, and soybean or rapeseed biodiesel production, this’ energy price linkage’ is now powerful, providing another quick acting transmission vector for inflationary contagion within the real resources space.

To be sure there is considerable resistance on the part of economic and political deciders, but increasing reactivity and transparence in the pricing system, to pass-through upstream and absolute price rises for energy and food commodities. In other words this means there is now the certainty of ‘dam breaker’ surges in energy, food and fiber prices at the consumer level, both in OECD and in other countries. This sets the likely timeframe for a very sharp upturn in OECD country inflation, and fast growth of Commodity prices, to the near-term, probably Q2 2009 – Q2 2010. Prospects for the majority of real resource prices, as we noted in this article, include nearly stepwise upward change. Whenever there is clear break in price trends for Equities relative to Commodities – signaling deconvergence – this upward movement is likely to amplify and reinforce itself. This may start in Q3-Q4 2009.
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http://www.financialsense.com/editorials/mckillop/2009/0519.html

Australia to build world's largest solar energy plant: Kevin Rudd

this is good breaking news for australia, solar thermal, esp. with steam storage, is a built once then its an almost free output situation.

SYDNEY (Reuters) - Australia plans to build the world's largest solar power station with an output of 1000 megawatts in a A$1.4 billion (US$1.05 billion) investment, Prime Minister Kevin Rudd said on Sunday.

The plant would have three times the generating capacity of the current biggest solar-powered electricity plant, which is in California, Rudd said during a tour of a power station.

Tender details will be announced later in the year, and successful bidders will be named in the first half of 2010. Rudd said the project was aimed at exploiting the country's ample sunshine, which he called "Australia's biggest natural resource."

It was also aimed at helping the country become a leader in renewable, clean energy, he said.

"The government plans to invest with industry in the biggest solar generation plant in the world, three times the size of the world's current biggest, which is in California," Rudd said.

"Why are we doing this? We are doing it in order to support a clean energy future for Australia, we're doing it to boost economic activity now and we're doing it also to provide jobs and much needed opportunities for business as well."

The project should eventually lead to a network of solar-powered stations across the country, Rudd said, with locations chosen to fit in with the existing electricity grid and ensure good access to sunshine.

"We don't want to be clean energy followers worldwide, we want to be clean energy leaders worldwide." Rudd said.

The A$1.4 billion dedicated to this project was part of a wider A$4.65 clean energy initiative by the government, he said.

Rudd also said Australia would become a full member of the International Renewable Energy Agency, which will have its first global meeting in June.

(Editing by David Fox)

Catastrophic to Awful! - The Banking Spin Cycle ~ Satyajit Das

The recent rally in equity markets – the largest for decades – was predicated, in part, on the improving fortune of banks.

Banks reported better than expected profits. U.S. banks seem likely to pass the "stress" test. Repayment of taxpayers' funds by some institutions, at least, seemed imminent. Scrutiny suggests that the episode reflected Adlai Stevenson's logic: "These are conclusions on which I base my facts."

Banks beat "well managed" low-ball expectations. In the last quarter of 2008, publicly traded banks lost $52 billion. Despite a return to profitability for some institutions, in the first quarter of 2009, banks are still expected to lose around $34 billion. For example, UBS and Morgan Stanley recorded losses.

The quality of earnings was questionable. Core businesses declined 20% to 30%. Trading revenue, especially fixed income, rose sharply at most big banks, reflecting high volumes of bond issuance, especially investment grade corporate issues and government guaranteed bank debt.

Corporate issuance was the result of the continued tightening in credit availability as banks reduced balance sheet. The issuance of government guaranteed bank debt provided underwriters with a "double subsidy" – the government guaranteed the debt but then allowed the banks to earn generous fees from underwriting government guaranteed debt.

High volatility generated strong trading revenues. Key factors were increased client flows and increases in bid-offer spreads (by up to 300% in some products). High trading revenues also reflect principal position taking and trading. It will be interesting to see if trading revenues are sustainable.

Questions remain about the impact of payments by AIG to major banks including Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion). Non-U.S. banks also received substantial payments including Société Générale ($12 billion), Deutsche Bank ($12 billion), Barclays ($8.5 billion) and UBS ($5 billion). Conspiracy theories notwithstanding, it seems likely that these were collateral amounts due to the counterparty or settlement of positions that were terminated. At a minimum, the banks benefited from a one-time increase in trading volume and, reflecting the distressed condition of AIG, larger than normal bid-offer spreads on these closeouts.

The banks also benefited from revaluing their own debt where credit spreads widened. The theory is that the bank could currently purchase the debt at a value lower than face values and retire it to recognize the gain. Unfortunately, banks are not in position to realize this "paper" gain and ultimately if the debt is repaid at maturity, then the "gain" disappears.

Earning also were helped by a series of one-time factors. Bank of America realized a large gain on the sale of its stake in China Construction Bank and also revalued some acquired assets as part of the closing of its Merrill Lynch acquisition. Goldman Sachs changed it balance date, reporting results to the end of March rather than February. Given that its last financials were for the year to the end of November 2008, Goldman separately reported a loss for December 2008. It is not clear how much Goldmans Sachs profit benefited from the change in the reporting dates.

Barclays Bank recently sold its iShares unit (a profitable unit which contributed around 50% of the earnings of Barclays Global Investors) to a private equity firm for $4.2 billion, allowing the bank to book a gain of $2.2 billion that boosted capital ratios. CVC Capital only paid $1.05 billion with the rest ($3.1 billion) being borrowed from Barclays itself. The loan was for five years and Barclays is required to keep the majority of the debt on balance sheet for at least five years. In effect, the gain and capital increase is lower than the cash received (in effect, Barclays is treating part of its loan as profit and capital!). In addition, senior executives of Barclays received substantial gains from the sale under a compensation scheme where Barclays Global employees received shares and options up to 10.3 % of the division's equity.

Effects of changes in mark-to-market accounting standards, which arguably reflected political and industry pressure, are also not clear. New guidance permits banks to exclude losses deemed "temporary" and also allows significant subjectivity in valuing positions. This may improve the financial position and overstate both earnings and capital. Some commentators believe that the changes could increase earnings by up to 10% to 15% and capital by up to 20%.

The market ignored continuing increases in bad debts and provisions. After all, "that's so yesterday!" Further losses are likely in consumer lending (e.g. mortgages, credit cards and auto loans), corporate and commercial lending.

In recent years, it has become an article of accepted faith that corporate debt levels have fallen. In aggregate, that is perfectly true. However, the debt has become concentrated in a number of sectors – commercial property, merger financing, private equity/ leveraged finance and infrastructure and resource financing.

The overall quality of debt has deteriorated significantly. In 2008, more than 70% of all rated debt was non-investment grade ("junk"). This is an increase from less than 30% in 1980 and around 50% in 1990. The debt is also heavily reliant on collateral; the loans are secured against financial assets (shares and property). Reduced ability to service the debt and falling collateral values may prove problematic. For example, the recent distressed sale of the John Hancock Tower produced about half the value paid a few years earlier.

In April 2009, the International Monetary Fund (IMF) estimated that banks and other financial institutions face aggregate losses of $4.1 trillion, an increase from $2.2 trillion in January 2009, and $1.4 trillion in October, 2008. Around $2.7 trillion of the losses are expected to be borne by banks. The IMF estimated that in the United States, banks had reported $510 billion in write-downs to date and face additional write-downs of $550 billion. Eurozone banks had reported $154 billion in write-downs and face a further $750 billion in losses. British banks had written down $110 billion and face an additional $200 billion in write-offs.

Banks may not be properly provisioned for these further write-downs. Recent accounting standards made it difficult for banks to dynamically provision, whereby banks provided in low-loss years for any eventual increase in loan losses when the economic cycle turns. Criticisms regarding income smoothing led to this practice being discontinued. Increasing bad debt will flow directly into bank earnings as credit losses increase as the real economy slows.

Banks may also face write-downs in intangible assets (goodwill or surplus on acquisition) and future income tax benefits. The values of businesses purchased in a more favorable environment will need to be progressively reassessed. The tax benefits of losses can only be carried as an asset where there is a reasonable prospect of utilization in the near future.

In one of his raves on TV, James Cramer, the notorious American commentator, referred to bank accounts as "fiction." He referred to them as the work of Somerset Maugham, William Faulkner or Joseph Conrad. In reality, they are the works of lesser writers – "pulp fiction" or "romantic potboilers.''

The stress tests do not provide comfort regarding the health of the banks. As Nouriel Roubini, chairperson of RGE Monitor, has pointed out, the likely macro-economic environment is likely to be significantly worse than the adverse scenarios used. The Federal Reserve hinted that banks – even banks that passed the "stress test" – would be required to hold extra capital. This is puzzling as surely a bank is appropriately capitalized or it is not. Given that the test is the basis for setting solvency capital requirements, this is hardly reassuring or a guarantee that further taxpayer funded recapitalization of the banking system is not going to be needed.

The proposal floated by some banks to return taxpayer capital misses an essential point. The banks did not offer to waive the government/ FDIC guarantees, which have allowed them to fund in the capital markets. The suspicion is that the proposal had more to do with avoiding close public scrutiny of compensation and hiring practices. Goldman's compensation costs increased 18% in the first quarter while employee numbers were down around 7%, translating into a 27% increase in employee costs.

The reality is that the global economic system is deleveraging and levels of debt must be reduced. As result, asset values are declining and sustainable growth levels have fallen significantly. In this environment, banks are likely to continue to suffer losses on assets (bad debts and further write-offs) and earnings will remain sluggish (lower loan demand and lower levels of financial transactions). Higher funding costs and the need to raise capital compound the difficulties. For the banks currently: "On the liability side, some things aren't right and on the asset side, nothing's left."

Many major global bank shares are still, on average, trading at levels 70% to 90% below their highs. Following the collapse of the "bubble" economy, Japanese banks staged a number of significant recoveries in share price before falling sharply, necessitating government intervention to recapitalize and consolidate the banking system.

Analysis of recent financial performance does not also take into account the underlying favorable current dynamics of the banking industry. Banks are currently beneficiaries of very low and, in some cases, zero cost of deposits. Banks also benefit from a sharply upward sloping yield curve that allows them to generate significant earnings from borrowing short and lending long. Banks have also benefited from subsidies and support from governments; favorable changes in the fair value accounting treatment of securities; and sharply lower competition in most market segments. Adjusting for these factors, it is surprising that banks haven't actually performed better.

The truth is that banks remain in the ICU (intensive care unit). Even after around $900 billion in new capital, the global banking system remains short of capital by $1 trillion to $2 trillion. This translates into an effective reduction in available credit of around 20% to 30% from previous levels. Bank earnings and balance sheets remain under pressure.

The financial system will need continued government support for some time to come, even though the performance of governments trying to rehabilitate the financial system has been problematic. In April 2009, Elizabeth Warren, chairperson of the Troubled Asset Relief Program (TARP) Oversight Panel, questioned the very approach to resolving the problems of the financial system: "Six months into the existence of TARP, evidence of success or failure is mixed. One key assumption that underlies Treasury's Public-Private Investment Program (PPIP) approach is its belief that the system-wide deleveraging resulting from the decline in asset values'' – thus leading to an accompanying drop in net wealth across the country – "is in large part the product of temporary liquidity constraints [that are a consequence of] non-functioning markets for troubled assets. On the other hand, it is possible that Treasury's approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth.''

Two other panel members, New York State Superintendent of Banks Richard Neiman and former New Hampshire Sen. John Sununun, issued dissenting findings, noting: "We are concerned that the prominence of alternate approaches presented in the report, particularly reorganization through nationalization, could incorrectly imply both that the banking system is insolvent and that the new administration does not have a workable plan." Many would question the selection of the words "incorrectly imply."

Constant changes in tack in the dealing with financial system problems do not suggest a consistent and well thought out strategy in dealing with the problem. Less than rigorous stress tests, using the PPIP to leverage FDIC funding into a lopsided subsidy for private investors or converting the preferred stock into shares to avoid having to seek additional congressional mandates also suggest political constraints in resolving the issues.

Evidence of political influence and a palpable lack of transparency in dealing with the problems are emerging. There are allegations that the Treasury may have "pushed" Bank of America to consummate its controversial acquisition of Merrill Lynch when it sought to withdraw after additional losses came to light. The Treasury secretary at the time, Henry Paulson, is alleged to have suggested that Bank of America's management and board could be removed if it did not proceed. There are also suggestions that both the Treasury and Bank of America decided to avoid public disclosure of these events.

In his books "The Logic of Collective Action" and "The Rise and Decline of Nations," American economist Mancur Olson speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well-funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population. Over time, the incentive structure means that more distributional coalitions accumulate, burdening and ultimately paralyzing the economic system, causing inevitable and irretrievable economic decline.

Government attempts to deal with the problems of the financial system, especially in the U.S., Great Britain and other countries, illustrates Olson's thesis. Active well-funded lobbying efforts and "regulatory capture" is impeding necessary actions to make needed changes in the financial system. Urgent steps are necessary to accurately recognize losses on assets, remove toxic assets from balance sheets, recapitalize the banks and allow normal financial transactions to resume. If such actions are not taken then the broader economy and sustainable growth levels will be adversely affected. There seems to be a patent unwillingness to admit to and confront the problems facing the industry. Recognition of the problem is generally a prerequisite to working towards a solution.

Amusingly, Peter Hahn, a former managing director of CitiGroup and now a fellow at London's Cass Business School, was reported by Bloomberg as saying: "When you look at the income numbers that have been put out by banks recently, they contain so much fudge and financial manipulation. You could say that the automobile industry has a clearer future at the moment."

Banks have gone from catastrophic to just awful. By most standards, that condition does not constitute a necessary and sufficient condition for a recovery in the global economy.

Satyajit Das is a risk consultant and author of "Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives" (2006, FT-Prentice Hall)

Views are as of May 15, 2009, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security.

Federated Equity Management Company of Pennsylvania.

http://www.prudentbear.com/index.php/guestcommentaryview?art_id=10228

Global systemic crisis: June 2009 - When the world steps out of a sixty-year old referential framework

Leap 2020 haven't always got the timing right but they have got the trends for certain. All the benefits of financialisation have been accrued to the US and to some extent to UK. Finance became rent seeking, well the winners of the boom must become the whingers and whiners of the bust, that hasn't happened yet......

On to Leap 2020 Geap 35.....

The financial surrealism which has been at the heart of stock market trends, financial indicators and political commentaries in the past two months, is in fact the swan song of the referential framework within which the world has lived since 1945.

Just as in January 2007, the 11th edition of the GEAB described that the turn of the year 2006/07 was wrapped in a « statistical fog » typical of an entry into recession and designed to raise doubts among passengers that the Titanic was really sinking (1), our team today believes that the end of Spring 2009is characterized by the world’s final stepping out of the referential framework used for sixty years by global economic, financial and political players in making their decisions, in particular of its “simplified” version massively used since the fall of the communist bloc in 1989 (when the referential framework became exclusively US-centric). In practical terms, this means that the indicators that everyone is accustomed to use for investment decisions, profitability, location, partnership, etc ... have become obsolete and that it is now necessary to find new relevant indicators to avoid making disastrous decisions.

This process of obsolescence has increased dramatically over the past few months under pressure from two trends:

. first, the desperate attempts to rescue the global financial system, particularly the American and British systems, have de facto "broken navigational instruments" as a result of all the manipulation exerted by financial institutions themselves and by concerned governments and central banks. Among those panic-stricken and panic-striking indicators, stock markets are a perfect case as we shall see in further detail in this issue of the GEAB. Meanwhile, the two charts below brilliantly illustrate how these desperate efforts failed to prevent the world’s bank ranking from experiencing a major seism (it is mostly in 2007 that the end of the American-British domination in this ranking was triggered).

. secondly, astronomical amounts of liquidity injected in one year into the global financial system, particularly in the U.S. financial system, led all financial and political players to a total loss of touch with reality. Indeed, at this stage, they all seem to suffer from a syndrome of diver’s nitrogen narcosis – impairing those affected and leading them to dive deeper instead of surfacing. Financial nitrogen narcosis has the same effects than its aquatic counterpart.

Destroyed or perverted sensors, loss of orientation among political and financial leaders, these are the two key factors that accelerate the international system’s stepping out of the referential framework of the past few decades.


Top 20 financial institutions by market capitalization in 1999 (USD billions) - Source: Financial Times, 05/2009


Top 20 financial institutions by market capitalization in 2009 (USD billions) - Source: Financial Times, 05/2009
Of course, it is a feature of any systemic crisis and easy to establish that, in the international system we are used to, a growing number of events or trends have started popping out of this century-old framework, demonstrating how this crisis is of a kind unique in modern history. The only way to measure the magnitude of the changes under way is to step back several centuries. Examining statistical data gathered over the last few decades only enables one to see the details of this global systemic crisis; not the overall view.

Here are three examples showing that we live in a time of change that occurs only once every two or three centuries:

1. In 2009, the Bank of England official interest rate has reached its lowest level (0.5 percent) since the creation of this venerable institution, i.e. since 1694 (in 315 years).


Bank of England official interest rate since its creation in 1694 - Source: Bank of England, 05/2009
2. In 2008, the Caisse des Dépôts et Consignations, the French government’s financial arm since 1816 under all France’s successive regimes (kingdom, empire, republic…), experienced its first yearly loss ever (in 193 years) (2).

3. In April 2009, China became Brazil’s leading trade partner, an event which has always announced major changes in global leadership. This is only the second time that this has happened since the UK put an end to three centuries of Portuguese hegemony two hundred years ago. The US then supplanted UK as Brazil’s leading trade partner at the beginning of the 1930s (3).

It is not worth reviewing the many specifically US trends popping out of the national referential framework compared to the past century (there is no relevant referential framework older than that in the US): loss in value of the Dollar, public deficits, cumulated public debt, cumulated trade deficits, real estate market collapse, losses of financial institutions… (4)

But of course, in the country at the heart of the global systemic crisis, examples of this kind are numerous and they have already been widely discussed in the various issues of the GEAB since 2006. In fact, it is the number of countries and areas concerned, which is symptomatic of the world’s stepping out of the current referential framework. If there was only one country or one sector affected, it would simply indicate that this country/sector is going through an unusual time; but today, many countries, at the heart of the international system, and a multitude of economic and financial sectors are being simultaneously affected by this move away from a “century-old road”.


Stock market trends – adjusted for inflation – during the last four major economic crises (grey: 1929, red: 1973, green: 2000, and blue: current crisis) - Source: Dshort/Commerzbank, 17/04/2009
Thus, to conclude this historical perspective, we want to emphasize that the stepping out of the century-old reference system is graphically visible in the form of a curve simply popping out of the frame which allowed ongoing trends and values to be represented for centuries. This popping out of traditional referential frameworks is speeding up, affecting increasing numbers of sectors and countries, enhancing the loss of meaning of indicators used daily or monthly by stock markets, governments, or official sources of statistics, and accelerating the widespread awareness that "the usual indicators" can no longer give any insight, or even represent the current world developments. The world will thus reach summer 2009 without any reliable references available.

Of course, everyone is free to think that a few points’ monthly variation of a particular economic or financial indicator, itself largely affected by the multiple interventions of public authorities and banks, carries much more value on the evolution of the current crisis than those stepping out of century-old referential frameworks. Everyone is also free to believe that those who anticipated neither the crisis nor its intensity are now in a position to know the precise date when it will end.

Our team advises them to go see (or see again) the movie Matrix (5) and to think about the consequences of manipulating the sensors and indicators of one’s perception of given environment. Indeed, as we will examine in detail in our special summer 2009 GEAB (N°36), the coming months could be entitled « Crisis Reloaded » (6).

In this 35th issue of the GEAB, we also express our advice on which indicators, in this period of transition between two referential frameworks, are able to provide dependable information on the evolution of the crisis and the economic and financial environment.

The two other major themes addressed in this May 2009 issue of the GEAB are, first, the programmed failure of the two major economic stimulus plans: namely the Chinese and American plans, and, secondly, the United Kingdom’s appeal to the IMF for financial assistance by the end of summer 2009.

In terms of recommendations, in this issue, our team anticipates the evolution of the worlds’ largest real estate and treasuries markets.

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Notes:

(1) At that time, our team added « Just like always when change occurs, the passage by zero is characterized by a «fog of statistics» where indicators point in opposite directions and measurements provide contradictory results, with margins of error sometimes wider than the measurement itself. Regarding our planet in 2007, the on-going wreck is that of the US, that LEAP/E2020 has decided to call the « Very Great Depression », firstly because the « Great Depression » already refers to the 1929 crisis and the years after; and secondly because, according to our researchers, the nature and scope of the upcoming events are very different ». Source: GEAB N°11, 01/15/2007

(2) Source: France24, 04/16/2009

(3) Source: TheLatinAmericanist, 05/06/2009

(4) Political leaders and experts insist on comparing the current crisis to the 1929 crisis, as if the latter were a binding reference. However, in the US in particular, current trends in many fields have moved beyond the events which characterized the « Great Depression ». LEAP/E2020 already reminded in GEAB N°31 that relevant references were to be found in the 1873-1896 global crisis, i.e. more than a century back.

(5) In the Matrix series of movies, reality perceived by humans is created by computers. They think they live a comfortable life when in fact they live in squalor, but all their senses (sight, hearing, taste, touch, smell) are manipulated.

(6)The title of the second in this series of movies: « Matrix reloaded ».

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Markets to fly on a sea of money ~ Marc Faber

The Fed printing presses are turning at full speed as the government is monetizing the debt by printing more money said Marc Faber yesterday . "from 2002 to 2007 We had this huge bull market in asset prices, during which everything went up. Commodities, equities, real estate worldwide , even bond prices and art.

Then came the big awakening, credit growth began to slow down and in 2008 everything collapsed except for bonds and the US Dollar, because global liquidity was shrinking and that was dollar supportive. And then we had the beginning of the recession at the end of 2007 and the global economy fell off a cliff between September of 2008 and March of 2009.

I think the rate of deceleration is now diminishing, we still have bad news, the global economy will not recover in a long time but it is not going to deteriorate much more. And we have a huge effort by governments worldwide to create fiscal deficits, in other words to print money. For that reason even if the world economy does not recover you will have a strong recovery in asset prices."

James Dines ~ Audio

Ranked #1 newsletter worldwide by Timer Digest multiple times

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GOLD WILL REACH $3000 ~ Willie

GOLD WILL REACH $3000 BEFORE THIS CHAPTER OF US HISTORY IS FULLY WRITTEN. SILVER WILL REACH $100 BEFORE THE LAST CHAPTER IS WRITTEN. These are easy targets. A tipping point comes just over the horizon, and the Hat Trick Letter is prepared to identify it. A massive spillover is due soon, from the money printing coffers into the streets where they people live and work and shop. When they finally receive the so-called money, it will be worth less than before, and might be worthless altogether. We are witnessing the heart attacks and seizures to the banks, the ambulances for the people, the weeds for the businesses, and the alzheimers for the press, as Pied Pipers run rampant and the USGovt vacillates between touches of fascism and communism. Sit back and watch, because we are in for a wild ride on the Weimar roller coaster. Not one in a thousand Americans even knows what that means. Try to avoid being a lamb at the slaughterhouse.

Jim Willie

Flashback ~ The battle for the soul of capitalism ~ Moyers and Bogle

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JOHN BOGLE: Well, it's gotten misshapen because the financial side of the economy is dominating the productive side of the economy

BILL MOYERS: What do you mean?

JOHN BOGLE: Well, let me say it very simply. The rewards of the growth in our economy comes from corporate, largely - from corporations who are a very important measure, from corporations that are providing goods and services at a fair price innovating and bringing in new technology — providing a higher quality of life for our society and they make money doing it. I mean, and the returns in business in the long run are 100 percent the dividends a corporation pays and the rate at which its earnings grow.

That still exists. But, it's been overwhelmed by a financial economy. The financial economy, which is the way you package all these ways of financing corporations, more and more complex, more and more expensive. The financial sector of our economy is the largest profit-making sector in America. Our financial services companies make more money than our energy companies — no mean profitable business in this day and age. Plus, our healthcare companies. They make almost twice as much as our technology companies, twice as much as our manufacturing companies. We've become a financial economy which has overwhelmed the productive economy to the detriment of investors and the detriment ultimately of our society.

BILL MOYERS: By the financial sector, you mean?

JOHN BOGLE: Banks, money managers, insurance companies, certainly annuity providers. They're all subtracting value from the economy. They have to subtract. To be clear on this now — I don't want to overstate it. To be clear on this, they have to subtract some value. But, the question is--

BILL MOYERS: What do you mean they subtract some value?

JOHN BOGLE: In other words, — you've go to pay somebody something to provide a service. It's just gotten totally out of hand. My estimate is that the financial sector takes $560 billion a year out of society. Five hundred and sixty billion.

BILL MOYERS: Where does it go?

JOHN BOGLE: It goes into the pockets of hedge fund managers, mutual fund managers, bankers, insurance companies. Let me give you this just one little example. If you didn't make a $129 million last year — I'm presuming that you didn't. You don't rank among the highest paid 25 hedge fund managers. A $129 million doesn't get you into the upper echelon.

BILL MOYERS: And on the way here this morning, I saw a story that now a $1 billion will not get you in the FORTUNE 400. A $1 billion!

JOHN BOGLE: Well, I spend a lot of time thinking about that. I mean, you kind of asked the question, which I've asked in some of my work. What is enough here? And the society is out of control. I mean, in THE BATTLE FOR THE SOUL OF CAPITALISM, I talk about the frightening similarities between the American economy in America, our nation, at the beginning of the 21st century and Rome all those centuries ago around the 4th century.

BILL MOYERS: What are the comparisons?

JOHN BOGLE: We have an idea that we are the world's value creator and leader. And I'm talking not just about economic value, but, we like to think of America as having the best values of integrity and citizenship in the world. We're getting a little bit too much self interested. We have our own bread and circuses. And they're a little different than the bread and circuses they had in Rome. But, we surely have our circuses whether it's sports teams or casino gambling or the lottery in the states. And we see this not just in our economy, in our financial system. This very short-term focus on everything. You see it, sadly, in our government.

Everybody knows social security is going to run into crisis. We can't run these federal deficits forever. But, everybody looks out two years and says, "Will I be elected two years from now or a year and a half from now?" And, the short term focus ultimately betrays the very values that we have come to be used to in this great nation of ours.

BILL MOYERS: You said the other day to someone that we think we can fight the war in Iraq without paying for it.

JOHN BOGLE: Well, we borrow the money to fight the Iraq War by some estimates and they're not absurd estimates is running now towards a $1 trillion. We could be doing what the British empire did. We could be bankrupting ourselves in the long run. And--

BILL MOYERS: You see us as an empire?

JOHN BOGLE: Well, of course it's an empire. We reach all over the world. We thought of ourselves in many, many respects as the policemen of the world. God knows we know we're the policemen of the Middle East. And there are those say, even from Alan Greenspan on up or down, that oil is the root of that. I mean, these are great societal questions. Protecting oil, which is in turn polluting the atmosphere.

We have problems as a society. And we don't have to surrender to them. But, we have to have a little introspection about where we are in America today. We've go to think through these things. We've got to develop a political system that is not driven by money. I mean, these are societal problems for us that don't have any easy answers.

But you don't have to be an economist to know that a great deal of or a minimum in our economy is coming from borrowed money. People are spending at a higher rate than they're earning, and we're starting to pay a price for that now. Particularly in the mortgage side. But, eventually, that could easily spread and people won't be able to do that anymore. You can't keep spending money you don't have. It gets a lot of it, you know, and it wasn't that many years ago — maybe a couple of generations ago — that if you wanted something, you saved for it. And when you completed saving for it, you bought it. Imagine that. And that wasn't so bad. But, now, we know that we can have the instant gratification and pay for it with interest payments, of course, over time, which is not an unfair way to do it. We're going to pay a big price for the excessive debt we've accumulated in this society both in the public side and the private side.

And it's no secret that this lack of savings in our economy — just about zero — is putting us at the mercy of foreign countries. China owns — I don't know the exact number — but, let me say about 25 percent of our federal debt. China does. What happens when they start to buy our corporations with all those extra dollars they've got there? I mean, I think that's very-- these problems are long term, are very much worrisome and very much intractable.

BILL MOYERS: Your book is called THE SOUL OF CAPITALISM. Tell me what you mean by the soul of capitalism.

JOHN BOGLE: Well, I try in the book a little definition from Thomas Aquinas about the core of being — he's talking about the human soul, of course — but, the core of being,the elements that give you meaning, the values that you have-- the whole kind of wrap up of what makes a human being a human being.

And that happens in a much more, you know, a much less profound way in a corporation. There is in a good corporation and in capitalism a core of being of providing goods and services, at raising the standard living. And it's done a very good job at that. I don't want to demean that. You know, we went from the beginning of time, to around 1800, — the way people lived barely changed at all. And since 1800, the Industrial Revolution, and capitalism around that time has taken us to standards of living that are just — that would have been unimaginable to anybody of that day. We have all the perquisites and ease and freedom and safety of modern life. And so I salute capitalism for doing that. It's just we've taken it too far. Today's capitalists are different from yesterday's capitalists-

BILL MOYERS: How so? What's the big difference?

JOHN BOGLE: Well, I think much more they're operating on their own. Instead of for the interest of whose money has been entrusted to them. It's an element — it's what we call a bottom-line society, again. But I think it's the wrong bottom line. I want to come back to the difference between the financial system and the productive system. The productive system adds to the value of our economy. And, by and large, the financial system subtracts. And, yet, it's growing and growing and growing. And this short term thing where short term orientation in which trading pieces of paper is regarded as a social value. It is not a social value. Some of it has to happen, don't mistake me.

BILL MOYERS: Right.

JOHN BOGLE: But not as much as we have.

BILL MOYERS: What does it say to you that people seem so indifferent to the fact that one tenth of one percent of the population owns most of the wealth in this country?

JOHN BOGLE: Well, in the long run, I believe it's unsustainable. You know, this is not going to be, you know, a country like France, say, at the time of before the French Revolution. You know, the lords of France, the kings had probably the same kind of distribution of wealth we had today come by through long generations. Their own castles. We have those castles in America now. But it says to me that, in this society, it's not sustainable. There will be an outcry.

Even Allen Greenspan says in his book he's worried, new book-- he's worried about this division in the society. He's worried about dissatisfaction. He's worried about violence in our society. You can only have so much of an advantage to those at the top of the pyramid, and so much disadvantage that's at the bottom of the pyramid, before you start to get some very difficult things going on.

BILL MOYERS: This seems to me to be your great concern, that this self correcting faculty that is built into both democracy and capitalism is in jeopardy?

JOHN BOGLE: Actually, I think it's fair to say it's in jeopardy. But there's one sense that it's not in jeopardy. And that is, ultimately, the system will correct. The bigger the boom, I fear, the bigger the bust. In other words, you pay the price. It's not a self sustaining system at this kind of a level.

BILL MOYERS: Do we need new rules?

JOHN BOGLE: One thing is, I believe, to have a federal standard of fiduciary duty for money managers. They've come from eight percent ownership of American business to 74 percent ownership of American business. It's staggering, over unbelievable change. Without any rules as to how they're supposed to behave. We have state laws of proven investing and fiduciary duty and things of that nature. But they don't seem to be working. And our founding fathers actually thought about having a federal statute-- a federal corporate chartering statute. I think we probably need one because if some of the states step up and say improve their governance provisions, corporations will move to another state. So the state system I don't think can prevail.

So a federal standard of fiduciary duty which demands that our pension trustees and our mutual fund directors make sure that those pension funds and mutual funds are operated in the prime interest of those who have entrusted their money to them. And that includes responsibility for corporate governance. And it will ultimately turn to be focused more on long term investing.

When I came into this business in the 1950's, it was a business focused on the wisdom of long term investing. We changed in that period to a business that is focused on the folly of short term speculation. And think about this for a minute. If you're a true investor holding a company for the long term, you're well aware that the value in that company is company's earnings compounded over time, developing new products and services, developing efficiencies-- trying to size up the proper corporate strategy, you know, making the company more valuable. But, in the folly of short term speculation, you're just thinking will that stock be worth more or less six months from now or a year from now?

Give you a very specific example. In the first 15 years I was in this business, the average mutual fund held the average stock for seven years. Call that long term investing. Now, the average mutual fund holds the average stock for one year. That's short term speculation. So, if you're a speculator, you don't care much about ownership interest. You don't care so much about corporate governance. Why vote a proxy, for example, if you'll not even be holding a stock in three months?

The other part of it is,and this is really makes it a very difficult problem to solve. And that is a little about of — I guess it's Pogo — we have met the enemy and they are us. These mutual fund companies-- these management companies are now owned largely by corporate America. Or international corporations — Deutsche Bank — AXA, big international companies who have bought their way into the US financial system, which is-- don't mean to demean that. But, they own these public corporations-- giant public corporations like insurance companies, big banks-- foreign insurance companies and banks own 41 of the 50 largest mutual fund managers.

Now, what is the job of a corporation when they buy into a mutual fund management company? It's to earn a return on the capital they invest in that company. It's not to earn a return on the capital of the investors who invested with that mutual fund. Now, in fairness, they want to earn as much money as they can for the fund shareholders. But, not at their own expense.

What we've done is have you know, what I call in the book, a pathological mutation of capitalism from that old traditional owners' capitalism to a new form of capitalism, which is manager's capitalism. The evidence is quite compelling that today corporations are run in a very important way to maximize the returns of its managers at the expense of its stockholders.

BILL MOYERS: Its CEOs.

JOHN BOGLE: Its CEOs, well, the upper level of five or six top officers. And they get enormous amounts of pay for actually doing very little. I'm a businessman. Listen, we all-- we chief executives get an awful lot of credit that we don't deserve. Real work in companies is done by the people who are getting themselves together and doing the hard work of making companies grow--

BILL MOYERS: And, yet, these--

JOHN BOGLE: every day.

BILL MOYERS: These are the people who most often get laid off, right?

JOHN BOGLE: They get laid off. And, of course, the ironic part of that is they often get laid off — used to be called downsizing. But, of course, in today's America, it's called right sizing. They get laid off. That reduces expenses. That increases earnings and that means the CEO gets more.

Just think about the country for a minute. For an agricultural economy, 95 percent, 98 percent agricultural when this country came into existence. And even by 1850, half agricultural. Now it's about, they moved from agricultural economy, to a manufacturing economy, to a service economy. And now to a financial service economy. And the financial service economy is what troubles me. Because it's diverting resources from the investors to the capitalists. To the entrepreneurs. To Wall Street. To the investment bankers. The hedge fund managers. To mutual fund managers. And that is a negative to our societal values.

Where agriculture and manufacturing and services, I mean, I'm perfectly willing to give a high value, for example, to art and poetry and literature. They add value to society. It may not be easy to measure it in a society that measures too much of what's not important. And not enough of what is important. As the sign in Einstein's office says-- "There are some things that count that can't be counted. And some things that can be counted that don't count."

BILL MOYERS: John Bogle, thank you for joining me.

JOHN BOGLE: My pleasure.