 | | The Daily Reckoning | Tuesday, May 24, 2011 |
- Romans join in as the Greek tragedy unfolds,
- Precious metals: a big bet against the world's Bernankes,
- Plus, Bill Bonner with reckonings from either side of the English Channel...
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|  | | | From Greek Debt to Gold Money | | Wishful Thinking in the World Economy | |  | | Eric Fry |
Reporting from Laguna Beach, California...
Global investors rediscovered Greece yesterday, which means that they might soon rediscover gold and silver as well.
The state of Utah is ready!
Headlines about the Greek government's desperate financial condition buffeted financial markets around the globe yesterday, as investors seemed to acknowledge, en masse, "Yes, this situation in Greece is grim." The Parthenon may be in ruins, but it is a pristine high-rise compared to the Greek government's balance sheet.
Your editors here at The Daily Reckoning have been mentioning from time to time that the Greeks were sliding toward an inevitable default...or something that closely resembles a default. As early as 15 months ago and as recently as last Friday, we warned that the Greeks would fail to pay their bills, despite receiving a €110 billion bailout from the European Union and the IMF.
But global investors did not seem too troubled by this grim prospect...until yesterday. Greek stocks slumped to another new 14-year low, while Greek bond yields jumped to another new all-time high. The Greek government's 10-year bond yields a hefty 17%...in theory.
A little to the north of these modern-day Greek ruins, all the major European markets posted losses. Asian markets also fell, while the Dow Jones Industrial Average dropped 131 points to its lowest level in a month.
But the Greeks don't deserve all the blame for yesterday's carnage...
According to the newswires, the Romans were responsible for yesterday's selloff, not the Greeks. Standard & Poor's downgraded Italy's finances from "stable" to "negative."
"Italy's current growth prospects are weak," S&P declared, "and the political commitment for productivity-enhancing reforms appears to be faltering. Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy's prospects for reducing its general government debt have diminished."
The mini-panic that ensued knocked the Italian stock market down about 3%, while shaving about 1% off the value of the euro. Meanwhile, gold and silver regained investor interest, as both metals inched higher.
The precious metals probably deserved a bigger rally yesterday, given the gravity of the unfolding sovereign debt problem/crisis. On the other hand, the recent volatility in the silver market may have undermined its "safe haven" allure for the moment.
But if, as we suspect, the fiscal distress in Greece triggers some sort of crisis in Europe and beyond, the precious metals will regain their luster...and then some.
The state of Utah is ready. While the "Beehive State" may not be famous as a trendsetter, it has made a big splash from time to time. Utah's Mormon settlers, for example, practiced polygamy for decades. But this "plural wives" craze never really caught on nationally.
Now comes Utah with another counter-cultural idea: "plural currencies." The Utah state legislature is the first in the country to legalize gold and silver coins as currency. (Let's call it, "ploygmoney.") The law also will exempt the sale of the coins from state capital gains taxes.
"Earlier this month," the Associated Press reports, "Minnesota took a step closer to joining Utah in making gold and silver legal tender... North Carolina, Idaho and at least nine other states also have similar bills drafted.
"Making gold and silver coins legal tender sends a strong signal to Congress and the Federal Reserve that their monetary policy is failing," said Ralph Danker, project director for economics at the Washington, DC-based American Principles in Action, which helped shape Utah's law. "The dollar should be backed by gold and silver, so we have hard money."
Ah, yes, but "should be" is not the same thing as "is." What's that expression: "If wishes were fishes, the sea would be full"?
We wish the dollar were backed by gold or silver. It isn't.
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| | The Daily Reckoning Presents | | Silver...Still Precious | |  | | Jeff Berwick |
We buy gold and silver as a way to protect ourselves from the TEOMSAWKI (The End Of The Monetary System As We Know It) to come.
We live in a literal financial house of cards. It is all paper. That house of cards has been in the process of collapsing since 2008. Astute market participants realize this and are buying bullion, one of the only financial assets with no counterparty risk, as a way to protect themselves from the coming storm.
Silver has more than doubled since Ben Bernanke began his high level terrorist attacks against the US dollar with "Quantitative Easing II," announced in August of last year. Silver jumped from $18 to nearly $50.
The rise in gold and silver was likely making Bernanke feel a bit uncomfortable about his "there is no inflation" story and a phone call was likely put into the COMEX. Five margin increases in rapid succession later, and the COMEX had increased initial margin requirements by a substantial 84%.
Therefore, anyone who had purchased silver futures using leverage was forced to pony up a lot more cash to maintain the position...or sell out. Since many participants lacked the necessary cash, they were forced to immediately sell their silver futures. The result was a drop in silver futures prices from near $49 to below $34 in a matter of days.
This volatile rise and fall in silver has most of the world saying that silver was in a bubble and now that bubble has popped. Those who say this don't know what a bubble is.
If you look at the silver price in US dollar terms, its recent spike does look quite parabolic, or bubble-like. However, in the context of a longer-term timeframe, silver's recent run-up doesn't seem bubble-like at all.
Check out the chart below, which details the price increase of various items since 1980. Can you spot which one of these items is in a bubble? Hint: It is not silver!
In nominal dollar terms, silver's recent rally looks parabolic and unsustainable. But when compared to other assets over the last thirty years, silver has been in a very long bear market and has done relatively nothing compared to any other assets.
And compared to the growth in US Federal Government debt, silver has underperformed by a factor of five. One bubble is about to pop... and it isn't silver.
Regards,
Jeff "The Dollar Vigilante" Berwick,
for The Daily Reckoning
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| | | | Bill Bonner | | The Pain of Restoring Investor Confidence | |  | | Bill Bonner |
Reckoning from London, England...
What's wrong with this country? England.
It was warm in China, warm in the USA, and warm in France. But here in London, it's cold and windy.
But the Brits don't even notice. They wear short-sleeve shirts and summer dresses - as if it were summer.
Yesterday, the Dow continued to fall - down 130 points. Oil slipped lower too. And gold rose. Just as you'd expect. But two days a trend does not make.
And what's in the news this morning?
"Europe left reeling as the people revolt against austerity measures," says a headline in theTIMES.
Spain's ruling Socialists got hammered at the polls. Borrowing costs are rising - pushing Italy, Spain and Greece closer to default. There is really no way out. The IMF - under DSK - made things worse by lending more money to governments that can't pay it back. And now, day by day, the whole smelly pile of European government and bank debt gets closer to the fan.
Of course, debt deflation - writing down, defaulting, foreclosing - is what a Great Correction is meant to do.
In America, except at the household level, the authorities have been able to push off the moment of truth...apparently indefinitely. The feds have a 'little technology called the printing press.' And they're ready to use it!
In Europe, it's not so easy. The Germans don't want to see their cash cheapened so that the lazy Zorbas, carefree Guidos, and sun-browned Rauls can continue to live in a style to which they have become accustomed.
Naturally, the Greeks are miffed. A Reuters report provides more detail:
...a large majority of Greeks reject more austerity, according to a poll published on Saturday, which also shows the ruling socialists losing their lead versus the conservative opposition for the first time since their 2009 election victory.
"Debt restructuring is not under discussion," Papandreou said in an interview in Sunday newspaper Ethnos.
One year into its EU/IMF 110-billion euro bailout, Greece is struggling with weak revenues and deep recession, fuelling speculation that it will have to restructure its debt to pull itself out of the fiscal mess that triggered a euro zone crisis. Everyone sees this tension between the strong center and the weak periphery as a 'weakness' of the European system. We see it as a strength. Not being able to debauch your currency is not a bad thing.
But over on the editorial pages of The New York Times, Paul Krugman tells us that austerity is a losing battle. He refers to people who call for spending cutbacks - in the US as in Europe - as the "pain caucus."
As usual, Krugman sees the superficial mechanics of the system, but misunderstands its deep moral structure. Pain is for losers, he seems to say, as if enlightened economists could rid the world of suffering forever.
Sensible, solid finances bring forth long-term investment, capital formation and real growth. But not without some pain. Everyone makes mistakes; owning up to them is always painful. Ask Dominique Strauss- Kahn (more below). By taking some pain now economies will be able to rebuild confidence...and thereby encourage greater investment and prosperity in the future. That's the argument in favor of austerity measures. After all, banks and governments of the European periphery states borrowed too much and gambled too recklessly during the boom years. They need to pay for those mistakes before their economies can build on a more solid foundation.
Krugman ridicules the idea. He believes there is no payoff to austerity. He must think the 'austerians' want pain for its own sake.
"The confidence fairy hasn't shown up yet," he writes.
What does he expect? You don't get confidence overnight. Besides, what have the Europeans done to deserve it? Like their American counterparts, they've generally listened to simpletons like Krugman. They've bailed out their banks, run public deficits, and added to their debts.
And now 'confidence is plunging,' says Krugman. Well, yes. Investors don't know what to expect. Will there be another round of bailouts? A 'soft default' by restructuring and 're-profiling' debt? Will Greece be booted out of the EU? Who could have confidence in this?
Krugman worries that the ECB will show some backbone - refusing any more bailouts to Greece. Then, "it's all too easy to see how it could start financial dominoes falling across Europe." That would be a disaster to the Nobel winner. Just like the failure of Wall Street banks...and Fannie Mae...and Freddie Mac...and GM...would have been disasters.
The man learns nothing. Central banks have spent the last 4 years trying to prevent a reckoning of the worlds' debts. And the debts just get larger.
And more thoughts...
At 5AM Paris begins to rouse itself. This time of year there is already a half-light. The tourists are still asleep in their beds, but the concierges, the taxi drivers, the bakers, the bus drivers, and the café owners are all astir.
The trash collectors begin to move early too - before the streets fill with commuters. All up and down the street, the concierges bring out their trash containers, setting them on the sidewalk for collection. Then, the trash trucks go up the street, making as much noise as possible.
We hailed a cab, took the road along the river up to Chatelet, and then up to the Gare du Nord. It was still about 5:45AM. Gay men stumbled out of a bar. They wore madras shorts and tight t-shirts...showing off boyish chests and undeveloped arms. One laughed hysterically on the corner. Others locked arms and made their way down the street towards the river.
*** Business class tickets are not worth buying. Not on the Eurostar. The seats are less comfortable than in economy. And the meal is a distraction. But the business class lounge is a pleasant and convenient place to await the train. You can enter if you have an AMEX platinum card.
In the lounge, we gathered up copies of today's newspapers. The French papers are obsessed with Dominique Strauss-Kahn. DSK is one of the elite. A leading candidate to replace Sarkozy in the next elections. The French media can't believe how he is being treated in the US...especially in the US media. They expect the media to show some reverence for one of their own class. But DSK is just another perp to the US press. And a frog perp at that.
"He is sick...and a jerk," said a French friend, not waiting for the court's verdict.
What a delight this story is! DSK is not only one of the French elite. He is a socialist, who claims to be acting on behalf of the poor, minorities, and the underprivileged. How marvelous that he is charged with trying to rape a poor African woman! Just what we'd expect of a world improver.
Meanwhile, the big news in France is that the first lady is pregnant. With twins, no less. But while the French left brain is childlike and primitive, the right brain of the Frog is highly developed and extremely cynical.
"They planned the pregnancy very carefully, to coincide with the next election," says our source. "It was probably part of a deal. I wouldn't even be sure that he [Sarkozy] is the father."
Regards,
Bill Bonner
for The Daily Reckoning
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