Compromised Global Markets Thwart Any Possibility of Economic Recovery: Gold to Benefit

James West
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By James West
MidasLetter.com
September 19, 2011

My argument is that the “disappointing recovery” that began in July is nothing less than the exhausted temporary stopgap effect of stimulus, zero interest rates, and TARP, and not, as stipulated in the mainstream, the onset of a “double dip”, or “economic weakness”. The injection of upwards of $2 trillion U.S. dollars into the global banking layer that blankets national economies created the illusion of growth by manifesting as corporate earnings among banks and Fortune 500 companies. All that the creation of all that capital has done is create more debt – which is exactly its purpose. But more than the debt issues, or rather, overshadowing the effect of debt deterioration on economic vitality, is the fact that markets – stock market index futures, derivatives and futures in all commodities – have been so thoroughly compromised as to become completely untrusted.

So lets ignore the uninformed commentary of journalists and perception-purposed output of elected officials in Europe, the United States, China and Japan, and instead, lets focus on data that we can categorize as “legitimate”. For the purposes of today’s discussion, that does not include the quoted performance of futures and options exchanges, stock indices, or bond yields and prices. From our standpoint, these numbers are managed to create the perception of a benign economic slowdown, as opposed to the accelerating destruction of the financial system that started in 2008. There are a lot of people, who think of themselves as superior, who are benefiting from the various financial crises roiling humanity at this point in our evolution. They will, at some point in the future of history, be correctly categorized as criminals. For now, however, they are our “leaders”.

Here’s what I mean by compromised markets:

On Monday September 12, the first market to open, was, as usual, the Tokyo stock exchange. The most followed index of that exchange, Nikkei 225, lost 201.99, or 2.31% from its Friday close. Following the exchanges from east to west that day, they all closed with losses above 1%, except those in the United States. For some reason, suggested by variously by news sources as “hopes that China will buy Italy’s bonds” (CNN) to the tech sector, as trumpeted by the Wall Street Journal to explain the increase:

“Technology stocks were a source of relative strength throughout the session. Chip stocks fared especially well after Broadcom agreed to acquire NetLogic Microsystems for $3.7 billion. NetLogic soared 16.21, or 51%, to 48.12, while Broadcom shed 38 cents, or 1.1%, to 33.06. Intel gained 58 cents, or 2.9%, to 20.28, leading the blue-chip Dow. Micron Technology led the S&P 500, rising 34 cents, or 5.3%, to 6.69.”

So despite Bank of America’s announcement that it was going to ay off 30,000 employees – as sure a sign of the struggling financial sector as was Goldman Sachs and HSBC planned mass layoffs – and despite the fact that the words ‘Greek’ and ‘Default’ were being more frequently paired, and despite the absence of any shred of positive fundamental economic data, the U.S. markets miraculously closed up.

And just as flabbergasting, despite the news that Obama was going to facilitate the injection of more cash into the economy through tax cuts and incentives to hirers, assuring that not only was the U.S. not going to reduce debt in the next quarter, never mind the next decade, but that there is virtually no possibility for them to do anything but to print more money, and thereby debase their currency relative to gold, gold lost $20 an ounce. And continued to shed value until the end of the week.

Never mind outright accusations against the President’s Working Group on Capital Markets, or Gold Cartels, or the Exchange Stabilization Fund. The glaring source of such artificial demand can only be government-sponsored market interference. And its not secret – its overt!

HELICOPTER BEN DUMPING DOLLARS ON EUROPE
The creation of capital and credit is by signature. The U.S. dollar loans made available to the European Central Banks last week is essentially the Federal Reserve participating in the bailout of Greece, Italy, Spain, Ireland, Portugal and any other debt-threatened feeble state, while blocking China’s participation, which would further the yuan, and diminish the dollar.

According to the Guardian on September 15:
“The Bank of England joined the US Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Japan on Thursday to announce that they would flood money markets with dollars over the coming months.”

“Under the terms of the deal, banks will be able to bid for unlimited amounts of US dollars at fixed interest rates in three separate auctions. The first of these will be on 12 October.”

Unlimited? An unlimited amount of U.S. dollars will be made available to banks so debt-encumbered as to see the cost of insuring their bonds rising into the double digits?

Sounds like there is not a bid that will be refused, and lo and behold, besides bailing out over-extended and underwater Eurobanks, the loans will finance the continued artificial support of European and North American indices through long index futures contracts purchases. So get ready for a campaign whereby in the face of continuing degradation of real economic numbers, stock markets, anesthetized into a state of vapid optimism, will rise. Stock indices, led by the nose by index futures, infuse the market with false calm and induce a Zoloft-like will to shop.

But these are all just optical bandages to improve the superficial symptoms. Once again, we resort to solving the problem of excess debt with more debt. And we resort to solving the problem of low real investment by targeting stock market index numbers. Instead of addressing the root problem of an over-capitalized system by tightening central bank balance sheets, and balancing budgets and trade deficits, we continue to over-capitalize.

The complete absence of meaningful participation in risk markets is a direct result of that interference. Nobody trusts the government, or ratings agencies, and now, markets. This is one of the largest barrier to renewed economic growth out there. Who is going to put a dollar down when you know the guy running the roulette wheel has a little switch under his table to stop the ball wherever he wants?

The main problem with such massive market interference is that all investment models based on pattern recognition and fundamental data are broken, and thus, even the big guns are jamming, causing losses to everyone from Warren Buffet to John Paulson.

In an article in Reuters last week, the gist of which was that “even the smart money is getting burned”, we read,

“Gross exposures have come down industrywide and large bets in either direction have also decreased because of the volatility,” said Robert Francello, head of equity trading a Apex Capital, a hedge fund in San Francisco.

Most are unlikely to dive back in given fears over Europe’s debt crisis and fears of a second recession in the United States that sent equity markets sliding over the summer.

The $2 trillion hedge fund industry — often seen as the smartest of the smart — will ultimately play an important role in whether stocks can rise over the long-term. Uncertainty there means more of the same churning action and precipitous falls without that wall of money to act as a back stop.

Thus, the ‘volatility’ induced by market interference has sidelined even the “smart” money. And how couldn’t it? Instead of a broad and steady decline, as current economic circumstances suggests in logical, we have a bunch of monkey’s jiggling the numbers on the meters, creating ‘volatility’.

Note to Fed Chairman Ben: Volatility breeds Uncertainty, Uncertainty breeds Fear, Fear breeds Paralysis, Paralysis breeds Stagnation, Stagnation breeds Revolution. What the hell are you guys doing?

GOLD IS THE BENEFICIARY OF STIMULUS AND BAILOUTS
So we know that the global response to excessive debt and capital is more debt and capital. And we have seen that the effect of more debt and capital fabrication has been a gold price that has risen by 500% in ten years. Here’s the question of the day: What then, must be the outcome of yet more debt and capital creation?

Of course. Higher gold prices.

You had to laugh when Tiny Tim Geithner, all puffed up in his finest rooster threads, harangued the assembled European ministers of finance on the merits of stimulating the Eurozone economies.

According to Bloomberg:
“We have slightly different views from time to time with our U.S. colleagues when it comes to fiscal-stimulus packages,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing the meeting yesterday in Wroclaw, Poland. “We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.”

“We are not discussing the increase or the expansion of the EFSF with a non-member of the euro area,” he said. German Finance Minister Wolfgang Schaeuble spoke of a “very intensive but friendly discussion” and Austrian Finance Minister Maria Fekter found it “peculiar” to be lectured by the U.S., a country with higher aggregate debt than the euro area.

So instead of the Euro finance ministers, Bernanke will do it himself.

Watch for gold to rise through $2,000 an ounce in the weeks ahead as the coordinated effort to befuddle investors ultimately fails yet again. This situation, despite what is being proposed as solutions, has no solution, and continues to worsen.

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Midas Letter is the Journal of Investment Strategy of the Midas Letter Opportunity Fund, a Luxembourg-based Special Investment Fund that specializes in Canadian-listed emerging companies in the resource sector with a focus on precious metals explorers and miners. James West is the Portfolio and Investment Advisor to the fund.

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James West

James West

Editor and Publisher

I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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