Three key metrics which strongly suggest that silver remains far from a bubble if not undervalued. The first is silver’s real price today adjusted for the inflation of the last 31 years. Silver’s real high in 1980 was $130 per ounce – more than double the price today (see chart above). The second is the gold silver ratio which has averaged 15 to 1 throughout history due to geology and the fact that there are 15 parts of silver to every 1 part of gold in the earth’s crust. The third metric is comparing silver’s current bull market to that of the 1970’s. Silver has risen by a factor of 10 in the last 9 years – from near $4 in 2001 to over $41 today. In its bull market from 1971 to 1980, silver rose by over 3,199% or by a factor of more than 32 in just 9 years culminating in the blow off top in 1979. Today, the physical supply of silver bullion is much less than in the 1970’s. Also there is the ‘Asian factor’ and 3 billion people with growing incomes, many of whom see silver as a store of value against currency depreciation. Demand for silver in Asia has been increasing and in China alone silver demand is increasing from a near zero base. The demand was not present in the 1970’s.
During the last FOMC meeting, we learned that the number of dissenting hawks at the Fed has increased to a whopping 3. Well, make that 2 after Minneapolis Fed's Kocherlakota just basically stuck his tail between his legs. To wit: "the disinflationary pressures of 2010 should soon reappear in the form of a sharp decline in current and expected core PCE inflation rates. In that eventuality, increasing policy accommodation might well be appropriate." One dissenter down, two to go. This also means that as we have been saying forever, all that would take for QE3 is another "deflationary" market flush: not a low-volume algo driven levitation, not a sideways move, a plunge. And when that happens, the Fed will do QE3. The rest is just posturing.
Goldman is not used to being snubbed when it comes to its policy recommendations. Which is what essentially happened during the Jackson Hole speech in which Bernanke left the QE3 door slightly open... but not enough to appease Bernanke's Goldman alum superior at the New York Fed. As such, since at least a few days have passed without Goldman reminding of who calls the shots, here is probably the most comprehensive summary of the Jackson Hole aftermath, and what the market will now expect to come out of the Fed on September 21. Whether Bernanke will go ahead and listen to Goldman, is unknown - the Fed risks incurring the wrath of Goldman at its own peril. What is perhaps most interesting about self-Q&A are the Goldman proposed "radical" measures that the Fed could consider to employ in addition to LSAP and Twist which so far have proven to be ineffective: "There are three main ways in which the Fed could be more radical: (1) an extension of the QE program into markets other than Treasuries and agency MBS, e.g., private sector securities, (2) a much bigger QE program, up to the extreme version of a promise to buy as many securities as needed to hit a specific yield target (i.e. a "rate cap" further out on the yield curve as then-Governor Bernanke suggested back in 2002), and (3) an explicit or implicit change in the Fed's policy targets." If these are truly hints as to what the Fed should do, then we hope readers have their gold $3000 calls firmly in place.
While Ben Bernanke has tried to exude confidence, he is now clearly discouraged. As well he should, since none of the Fed's "suite of tools" have worked as intended and almost every forecast the Fed has given since the Crash has been wrong. We are forecasting a stagnant economy and come the elections it is likely that unemployment will remain high. Like all Fed Chairmen, it will be hard for Dr. Bernanke to resist calls from politicians to "do something." He will earn his moniker as "Helicopter Ben" and unleash more quantitative easing, a dangerous and regressive policy.
With ZIRP, real interest rate on fixed income investment gives a negative return after inflation...
Europe's Funding Scramble: Peeking Below The Calm Surface Waters Of French Bank Liquidity (And Lack Thereof)Submitted by Tyler Durden on 08/29/2011 00:14 -0400
That European wholesale, and particularly dollar, funding has been "problematic" in past weeks is an understatement. One merely needs to look at the Fed's recent expansion in its transatlatnic swap lines to figure out that someone, somewhere is struggling to meet their USD-denominated obligations. However, is it just one bank, as recent data out of the ECB suggest, or is this merely a symptom of a far more acute underlying cause? Alas, as Barclays' Joseph Abate confirms by looking at the transformation in funding patterns within that most fulcrum of European banking systems - that of France - the threat is far more prevalent than has been speculated. In fact, based on the rapid transition in funding from unsecured to secured lending markets within French banks in general, and one name in particular, it seems that while SocGen stock may have avoided its daily rout courtesy of the extension in the short selling ban, there is a far greater concern for the bank: one of maintaining orderly daily operation funding. And there is little that European stock market regulators can do to restore liquidity, aka confidence, once it starts evaporating. Which it has... although mostly in unsecured markets... for the time being. Should secured funding (ABCP and Repo) wilt next, then it gets really, really bad. To wit: "Bank funding worries have flared up again with the news that the Federal Reserve’s currency swap line with other central banks has been tapped at least twice this month. The trivial amounts borrowed belie significant wholesale funding stresses for some institutions in dollar markets." Let's take a look at what "some" means...
One hundred senators, 435 congressmen, one President, and nine Supreme Court justices equates to 545 human beings out of the 300 million are directly, legally, morally, and individually responsible for the domestic problems that plague this country.
The stock market is wearing a T-shirt that reads, "I broke a downtrend and all I got was this lousy pennant." Having just returned from nine glorious days camping in Washington State, I have no idea what "news" has effected the markets ("news" in quotes because the news is managed for its PR effect--the real news is what has been suppressed lest it undermine the Status Quo's carefully cultivated propaganda campaign), and so I have marked up the chart of the Dow Jones Industrial Average (DJIA) and the U.S. dollar without the "benefit" of the news flow. What pops out is a big fat pennant in both charts. Pennants can be continuation patterns--mere way points in a continuing up or down trend--or they can indicate points of trend reversals. The key feature of a pennant is the compression of price into a narrowing channel, as the relative indecision of buyers and sellers alike causes price to fluctuate less and less.
Placing one’s chips on the “Don’t Pass” line when Warren Buffett holds the dice may seem ill-advised, but we’re not so sure about that $5 billion bet he just made on Bank of America. The news media inferred with all its might that it was a vote of confidence — not only in B of A, but in the U.S. banking system. Yeah, well, maybe.
Bernanke said QE 3.0, without really saying it. The markets, seeing the enlarged schedule for the September meeting and interpreting the likelihood of heavy discussions, have gotten the message. Stocks threw off the daily mortal struggle that is life as Bank of America and bid for the QE future that is now September (good riddance to August apparently). Gold prices followed on those expectations of a resumption to the willful and wanton dollar destruction that QE purely represents. If the Chairman can influence a major market rally without ever having to face the growing dissent within the FOMC ranks, then his speech has proven to be a stroke of genius. That is the essence of rational expectations, making others believe you have magical powers so that they do your bidding without any actual work or direct engagement on your part. But there is a huge downside to waiting, and Bernanke knows it. The financial crisis grows while the economy is sliding further into contraction. Time is not on his side. So why does he wait? Simple, Bernanke and QE is in a box – conditions currently in the wholesale money markets, especially the repo market, will not suffer more QE. As the unsecured Fed funds and eurodollar markets have effectively frozen for banks outside the primary dealer network, wholesale funding has been left to repos. However, there is already a shortage of treasury bills, the prime, vital collateral of nearly all post-2008 repo funding arrangements.
It's not what he said. It's what comes next. Some clues.
Tangible stores of wealth are indeed seductive, and apocalyptic overtones add to their allure. But what is tangible can be taken. Trading in apocalyptic settings has minimal gain and even the most tangible things carry risk: there is no profit in an unshakable faith in them. The only unshakable faith should be in one’s capacity to foster a world worthy of wonderful and useful ideas, avoiding religious matters. It is here that the rules themselves change in unpredictable ways. Bureaucracies collapse: the largest predators in the food chain become extinct. The best hope is to rise out of it and rise quickly and the smaller, nimbler, and more cunning can live to see brighter days. There is no science to living in such circumstances. But perhaps there is an art in it. If the world does melt under the unlaboring stars, one should not despair of it.
Many may scoff at the Fed's report that stock prices will not recover to their 2010 highs until 2027. The migration of "baby boomers" into retirement, combined with sustained high unemployment, low savings rates and a weak economy, does not bode well for strong financial markets into the future. While there are many hopes that the economy will recover in spite of the abundance of factors building against it; the reality is that we may be dealing with the "Japanese Experience".