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COMMENTARY for all articles by
Gordon T Long
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SULTANS OF SWAP: Gold Swaps Signal the Roadmap Ahead
SLIDE REFERENCE PAGE:
Shadow Banking
  The
news rocked the global gold market when an almost obscure line item in
the back of a 216 page document released by an equally obscure
organization was recently unearthed. Thrust into the unwanted glare of
the spotlight, the little publicized Bank of International Settlements
(BIS) is discovered to have accepted 349 metric tons of gold in a $14B
swap. Why? With whom? For what duration? How long has this been going
on? This raises many questions and as usual with all $617T of murky
unregulated swaps, we are given zero answers. It is none of our
business!
Considering the US taxpayer is bearing the burden of $13T in lending,
spending and guarantees for the financial crisis, and an additional $600B
of swaps from the US Federal Reserve to stem the European Sovereign Debt
crisis, some feel that more transparency is merited. It is particularly
disconcerting, since the crisis was a direct result of unsound banking
practices and possibly even felonious behavior. The arrogance and lack of
public accountability of the entire banking industry blatantly
demonstrates why gold manipulation, which came to the fore in recent CFTC
hearings, has been able to operate so effectively for so long. It operates
above the law or more specifically above sovereign law in the un-policed
off-shore, off-balance sheet zone of international waters.
Since President Richard Nixon took the US off the Gold standard in 1971,
transparency regarding anything to do with gold sales, leasing, storage or
swaps is as tightly guarded by governments as the unaudited gold holdings
of Fort Knox. Before we delve into answering what this swap may be all
about and what it possibly means to gold investors, we need to start with
the most obvious question and one that few seem to ask. Who is this Bank
of International Settlements and who controls it?
READ MORE |
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EXTEND & PRETEND: Stage I Comes
to an End!
The Dog Ate my Report Card
Both
came to an end at the same time: the administration’s policy to Extend &
Pretend has run out of time as has the patience of the US electorate
with the government’s Keynesian economic policy responses. Desperate
last gasp attempts are to be fully expected, but any chance of success
is rapidly diminishing.
Before we can identify what needs to be done, what the administration is
likely to do and how we can preserve and protect our wealth through it, we
need to first determine where we are going wrong. Surprisingly, no
one has assessed the results of the American Recovery & Reinvestment Act
2009 (ARRA) which was this administration’s cornerstone program to place
the US back on the post financial crisis road to recovery.
We can safely conclude either:
1-
The administration completely under estimated the
extent of the economic crisis, even though we were well into it when the
ARRA was introduced.
2-
The administration was unable to secure the
actually required stimulus amount which was likely four to five times that
approved.
3-
The administration failed to implement the program
in a timely manner.
4-
The administration failed to diagnose the problem
correctly and that in fact it is a structural problem versus a cyclical
and liquidity problem, as they still insist it to be.
I personally believe it is all four of the above.
READ MORE
POPULAR ARTICLES:
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RED ALERT |
AMBER ALERT |
ACTIVITY |
MONITOR |
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POSTS: WEEKEND 07-31-10
GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN
IRAN
ISRAEL
KOREA
|
SOVEREIGN DEBT & CREDIT CRISIS |
GREECE
A Greek City Just Defaulted On $275 Million Of Debt -- Can The
State Be Far Behind BI
SPAIN / PORTUGAL
Spain Jobless Rate up to
20.09 Percent CNBC
IMF urges more "credible" fiscal targets in Spain
Reuters
FRANCE
GERMANY
Germany’s Missing Link: Consumer Spending
WSJ
ITALY
Hours After Passing Austerity Bill, Berlusconi Government Rocked
By Schism BI
UK
Spending cuts drive consumer morale to 11-month low
Reuters
ICELAND
Iceland Says It's `Far From Defaulting' as Rating Nears Junk
BL
JAPAN
More Japan workers lose jobs, factory output falls
AP
CHINA
China aims to make yuan convertible
Xinhua
Special Yuan Page
USA
GDP slows in second quarter to 2.4% rate
MW
BEA
Recession in U.S. Was Even Worse Than Estimated, Revisions Show
BL
Economists Expect Slower Growth in Second Half
NYT
Double
Dip Odds
CIBC
GDP Misses Expectations, Comes At 2.4%, Plunges From Revised Q1
GDP Of 3.7% ZH
| Double dip confirmed as Q2 GDP plunges from revised Q1 number:
GDP comes in at a below consensus 2.4%, which a huge drop from the
revised Q1 number which came in at 3.7% (from 2.7%). The GDP Price
index comes at 1.8%, the core PCE comes at 1.1%, from 0.7%
previously. Per the revised GDP numbers, the US economy has now
shrunk by 4.1% from Q4 2007 to Q2 2009, compared with the 3.7%
previous estimate. From the BEA: "The increase in real GDP in the
second quarter primarily reflected positive contributions from
nonresidential fixed investment, exports, personal consumption
expenditures, private inventory investment, federal government
spending, and residential fixed investment. Imports, which are a
subtraction in the calculation of GDP, increased." |
David Rosenberg's GDP Analysis VIA ZH
The economy underperformed expectations in the second quarter
with the initial estimate of real GDP growth coming in at a 2.4%
annual rate. The revisions to the back-data also showed the Great
Recession to be even greater than initially thought with the
economic loss now totaling 4.1% from 3.7% previously. And the
revisions also reveal a policy- and inventory-induced recovery
that is now losing steam at a faster rate than was thought before,
especially with respect to consumer spending – the 2.4% GDP pace
is down from 3.7% in the first quarter and 5% in the fourth
quarter of last year.
There are legions of economists out
there who claim that it is normal to see the economy take a
breather at this stage of the cycle, but in truth, what is
“normal” in the context of a post-WWII recovery is that four
quarters into it, real GDP expands at over a 6% annual rate. That
puts 2.4% into a certain perspective. And with the revisions now
showing the downturn deeper, the level of economic activity in
real terms is still 1% below the pre-recession peak. Again, when
you look back at 55 years worth of post-war data, what is normal
2-1/2 years after a recession begins is that by now we are at a
new peak already (breaking above the prior high in GDP by 8%, on
average).
The big story in the second quarter as has been
the case for much of the past year was the contribution from
inventories – there was a “build” of $75.7 billion and this added
over a percentage point to headline GDP growth. This follows a
“build” of $44 billion in the first quarter so this is no longer
the case that companies are merely reducing the pace of inventory
withdrawal. Businesses actually added to their stockpiles at the
fastest rate in five years. And with sales lagging behind, this
inventory contribution is likely to fade fast in coming quarters.
Real final sales – representing the rest of GDP (excluding
inventories) – came in at a paltry 1.3% annual rate last quarter
and has averaged 1.2% since the economy hit rock bottom a year ago
in what is clearly the weakest revival in recorded history.
Normally, real final sales are expanding at closer to a 4%
annual rate in the year after a recession officially ends. Then
again, we haven’t heard anything official just yet about the one
that began in December 2007 – and so the fact that it is averaging
at around one-third that typical pace in the face of unprecedented
policy stimulus is rather telling. And frightening.
Looking
at the components of GDP, it appears as though the economy is set
to slow even further and a flattening in Q3 and perhaps even
contraction by Q4, barring some positive exogenous shock, cannot
be ruled out. First, one of the primary contributors to the
renewal in economic growth, business capital spending, which has
expanded at a double-digit annual rate for three quarters in a row
– expanding at a 22% annual rate in Q2 – is starting the current
quarter at a pace that is closer to high single-digit growth. That
alone may trim a halfpercentagepoint from headline growth this
quarter.
With durable goods inventories-to-sales ratios
rising to eight-month highs and most manufacturing diffusion
indices rolling over, it would stand to reason that the inventory
contribution to growth is over. Though to be fair, that will also
mean that the import boom will subside and provide some offset
(foreign trade actually subtracted 2.8 percentage points from GDP
growth last quarter). The government sector added 0.9
percentage points to second-quarter GDP growth with an apparent
seasonal skew from defense spending and there was a rare increase
in state & local spending, which is hardly going to be repeated
this quarter as the budgetary cutbacks deepen. The housing tax
credits triggered – get this – a 28% annualized surge in
residential construction in the second quarter and while a tiny
share of the economy now, this still added 0.6 percentage points
to the headline. All the incoming data point to a huge reversal in
the real estate sector in the current quarter.
In the final analysis, it is the consumer that is key.
With a 70% share of GDP, even a tepid 1.6% annualized growth rate
in Q2 – the consensus was looking for 2.4% – can end up adding 1.2
percentage points to GDP growth (which is almost as much a
contribution as a 22% surge in capital spending).
But after back-to-back months of declining retail sales and
consumer confidence running at half the level it usually does in
the context of an economic expansion, the data are pointing to
virtual stagnation in household spending this quarter. In fact,
what really came to light in the revisions to the data was just
how lacklustre the pace of consumer spending has been over the
past year – so much so, in fact, that the savings rate is now
estimated to have risen to 6.2% in the second quarter from 5.5% in
the first (revised sharply higher than the prior estimate of
3.5%). We have long highlighted consumer frugality as
crucial deflationary secular theme and the revisions to the
savings rate go a long way towards bolstering that view –
underscored by the near-0% annualized trend in the pricedeflator
for Gross Domestic Purchases last quarter.
So even
though the second quarter corporate earnings season was decent,
one reason why the equity market is struggling of late is because
you can only drive and gaze through the rear-view mirror for so
long. At some point, you have to look through the front window,
and the prospects for a double-dip or some facsimile thereof were
bolstered, not hindered, by the contours of the second quarter GDP
report.
If indeed, the inventory cycle is behind us, then
what we have on our hands is an underlying baseline trend in GDP
of 1.2% at an annual rate. And if we are correct in our assumption
that the looming withdrawal of fiscal stimulus at the federal
level and the cutbacks at the state and local government level
subtract 1.5% from growth in the coming year, then it begs the
question: How exactly does the economy escape a renewed moderate
contraction over the next four to six quarters, barring some
unforeseen positive boost? In turn, how does a strong possibility
of such a contraction square with consensus views of a 35% surge
in corporate profits to new record highs as early as next year?
The answers to these questions are as painful as they are obvious. |
After Revisions, Real GDP And PCE Even Farther From Previous Peak
BI
These two graphs show the revisions for real GDP and PCE.
The recession was clearly worse than originally estimated
(we suspected this already using Gross Domestic Income).
In fact real GDP in Q2 2010 was lower than originally
reported for Q1 2010. And annualized real GDP is still 0.85%
below the pre-recession peak. This means that real GDP would
have to grow at a 3.4% rate in Q3 to reach the recession peak
by the end of Q2 2011.
Real PCE was revised down even more.
Annualized real PCE is now 1.1% below the pre-recession
peak, and would have to grow 4.4% in Q3 to reach the
previous peak by Q2 2011.
With a 2nd half slowdown, I don't expect to
reach those levels until the end of the year or in 2011.
Cleveland Fed President Sandra Pianalto
had it right in February:
[I]t may take years just to get back to the level
of output we enjoyed in 2007, just before the economic
crisis began.
If things go well, the economy will be back to
pre-recession levels later this year or in 2011. No wonder
there is so little investment. And no wonder there is so
little hiring!
|
About That Recovery You Ordered BI
Imports were a huge drag on GDP in the second quarter. It
is as if all the additional spending by U.S. consumers and
firms went to buy imported goods and services, with no net
positive contribution to the demand for domestic production.
Added purchases by the federal government provided an
important boost to the second quarter, though that seems
unlikely to continue and faces headwinds from future spending
cuts by state and local governments. Housing made a modest
positive contribution to the second quarter, though
Bill McBride expects residential fixed investment to
decline in Q3 with expiration of the tax credit.
Exports and nonresidential fixed investment were relative
bright spots. But could they be enough to carry the economy
into a sustained recovery without inventories and fiscal
stimulus? The most pessimistic participant at the
June FOMC meeting was calling for 2.9% real GDP growth for
2010 as a whole.
|
U.S. Michigan Consumer Sentiment Index Fell to 67.8
BL
Americans Less Optimistic About the Economy in July
Gallup
Goldman's Leading Indicator Plummets To A Seven-Month Low
Binsider
The ECRI Falls Even Further Into 'Certain Recession' Territory
BI
The Economic Cycle Research Institute 's leading indicator
has fallen even further.
Zero Hedge:
The ECRI Leading Indicator has just moved further into
certain recession territory, hitting -10.7 for the most recent
week (the previous revised number is -10.5). Not so sure
if 'certain recession' is the correct read here, but at the
very least the U.S. is certainly experiencing a growth
slow-down, which will probably continue. Note the ECRI's own
creators have rebutted proclamations that their falling
indicator signaled of recession'
in the past.
|
The world’s banks take a holiday from regulation
FT
New standards for capital and liquidity have been diluted, writes John
Gapper
Quantitative Easing Two
Noland
Taleb: Government Deficits Could Be the Next 'Black Swan'
BL
Fed officials clash on need for more stimulus
Reuters
The Fed Has Not Run Out of Options, As Yet
NTrust
The Fed Flashes the Nuclear QE Trump Card
Dorsch
A New Spotlight on Japanese-Style Deflation
Comstock
Deflation: The Black Swan Has Been Spotted
EW
Letting Bush Tax Cuts Die 'Not a Good Plan': Fed's Bullard
CNBC
Old Debts That Won’t Die
NYT
Weekly Credit Update
Danske
Budget
Crunch Hits Atlantic City Hard
NPR
The
states are broke
CNN
HUNGARY
IMF
Says Some Small US Banks May Need Capital
Reuters
DODD FRANK ACT
RATING AGENCIES
Rating
Agencies Hold SEC Hostage
FallStreet
|
RRESIDENTIAL REAL ESTATE - PHASE II |
Popular 'Zero Down' Mortgage Program Makes Comeback
WSJ
The
Mortgage Mess's Dirty Details
Smart Money
|
EXPIRATION FINANCIAL CRISIS PROGRAM/font>
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PENSION & ENTITLEMENTS CRISIS
|
Social
Security Jitters? Better Prepare Now
NYT
Are
the American people obsolete?
Salon
|
Zandi:
“We're headed into the third quarter with little momentum, and
most everything is tracking weaker. Because of that, I
expect unemployment to rise back to double digits, hitting 10
percent in December and staying there early next year." |
|
GOVERNMENT BACKSTOP INSURANCE |
FDIC
Securitizes Mortgages From Failed Banks
Dow Jones
OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE
Speculators Rediscover Agricultural Commodities
Spiegel
Commodities should be short-term investments Kemp
Commodity Snapshot BeSpoke
FLASH CRASH - HFT - DARK POOLS
MARKET WARNINGS
GOLD MANIPULATION
VIDEO TO WATCH
QUOTE OF THE WEEK
Fed
Bullard
“The US is closer to a Japanese-style outcome today than at
any time in recent history" |
In
a Financial Times op-ed
dated July 25, Laurence Kotlikoff, economics professor at
Boston University
"Due to the “labeling problem”--governments can describe
receipts and payments in any way they like--we are essentially
“in a fiscal wonderland of measurement without meaning.”
|
ZH - Zero Hedge - Business Insider,
WSJ - Wall Street Journal, BL -
Bloomberg, FT - Financial Times |
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Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.
© Copyright 2010 Gordon T Long. The information
herein was obtained from sources which Mr. Long believes reliable, but he
does not guarantee its accuracy. None of the information, advertisements,
website links, or any opinions expressed constitutes a solicitation of the
purchase or sale of any securities or commodities. Please note that Mr.
Long may already have invested or may from time to time invest in
securities that are recommended or otherwise covered on this website. Mr.
Long does not intend to disclose the extent of any current holdings or
future transactions with respect to any particular security. You should
consider this possibility before investing in any security based upon
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TODAY'S NEWS
WEEKEND
07-31-10
JULY
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BOND BUBBLE |
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STATE & LOCAL
GOVERNMENT |
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CENTRAL & EASTERN EUROPE |
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BANKING CRISIS II |
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RISK REVERSAL |
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COMMERCIAL REAL ESTATE |
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CREDIT CONTRACTION II |
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RESIDENTIAL REAL ESTATE - PHASE II |
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EXPIRATION FINANCIAL CRISIS PROGRAM |
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US FISCAL IMBALANCES |
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PENSION CRISIS |
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CHINA BUBBLE |
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CHRONIC UNEMPLOYMENT |
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INTEREST PAYMENTS |
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US PUBLIC POLICY MISCUES |
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JAPAN DEBT DEFLATION SPIRAL |
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US RESERVE CURRENCY. |
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GOVERNMENT BACKSTOP INSURANCE |
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SHRINKING REVENUE GROWTH RATE |
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FINANCE & INSURANCE WRITE-DOWNS |
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RETAIL SALES |
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CORPORATE BANKRUPTCIES |
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US DOLLAR WEAKNESS |
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GLOBAL OUTPUT GAP |
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CONFIDENCE - SOCIAL UNREST |
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ENTITLEMENT CRISIS |
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IRAN NUCLEAR THREAT |
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OIL PRICE PRESSURES |
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FOOD PRICE PRESSURES |
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US STOCK MARKET VALUATIONS |
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PANDEMIC |
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US$ RESERVE CURRENCY |
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TERRORIST EVENT |
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NATURAL DISASTER |
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