Saturday, November 6, 2010

Massive and record volumes at the gold and silver comex..More silver lawsuits filed.

Good morning Ladies and Gentlemen:

 

Before beginning, it is my pleasure to introduce to you our new entrants to the banking morgue, having taken their last

breath Friday evening:

 

Bank Closing Information – November 5, 2010 
These links contain useful information for the customers and vendors of these closed banks.

First Vietnamese American Bank, Westminster, CA 
Pierce Commercial Bank, Tacoma, WA 
Western Commercial Bank, Woodland Hills, CA 
K Bank, Randallstown, MD

http://www.fdic.gov/

 

end.

 

 

Gold closed up $14.60 to $1397.30.  Silver had an even better day rising by 70 cents to$ 26.74.  Gold is on the verge of breaking into the 1400's and silver is poised to enter the 27 dollar range.  The gold comex open interest rose to record levels with the reading of 647,341( which is basis Thursday night.) for a gain of a monstrous 33,444 contracts.  Earlier they reported  that the OI rose to 628,327 but that was corrected to 647,341 late in the day.  The silver comex OI rose to 163,693 for a gain of 6506 contracts. Both silver and gold have record open interests and thus the sell side represents the total massive shorts engineered by the banks.  I would now like to give you a detailed picture of comex trading yesterday and how these numbers shaped the resultant price action in silver and gold.  Herein are the numbers.

For gold:

Total comex open interest as mentioned 647,341 vs Thursday's reading of 613,897

The front delivery month of December saw its OI jump from 377,000 to 391722 much to the shock of the bankers.

The front options delivery month of November saw its OI contract a bit to 70 contracts from 107.

The volume on the comex Friday was estimated at a huge 275,697 contracts.  You can bet the farm that on Monday it will rise above the 300,000 mark.

The confirmed volume on Thursday was in excess of 287,065 contract.  At 4:30 pm yesterday, the comex thought its volume was 225,000 but this morning this is been adjusted upward.

 

For silver:

All I can say is my goodness when you look at the volumes.
As mentioned the total open interest at the silver comex rose from 157,187 to 163,693.
The front delivery month of December saw its open interest skyrocket to 90,536 totally unnerving our bankers.
The front options delivery month of November saw its open interest fall to 41.  And now the volumes numbers:

The original estimated volume on the comex trading for Friday at 4:30 pm was revealed as 98,488.  It has been updated this morning to read an

astounding 109,521 a record volume for trading on silver.
The confirmed volume on Thursday was 96,702 which is itself simply mindboggling.

 

Here is a chart on the 5th of November for gold and silver comex inventory changes and deliveries.

 

Silver

Withdrawals from Dealers Inventory 

  zero oz

Withdrawals from customer Inventory 

1007,341 oz

Deposits to the dealer Inventory

 5227 oz

Deposits to the customer Inventory

 zero

No of oz served  (contracts= 1

5,000 oz

No of oz to be served. 41

 205,000 oz

Gold

Withdrawals from Dealers Inventory 

 zero oz

Withdrawals from customer Inventory 

 1158 oz

Deposits to the dealer Inventory

  3599  oz

Deposits to the customer Inventory

30,073 oz

No of oz served (contracts= 18

1800oz

No of oz to be served 70

 7000 oz

:

 Let us start with silver:
Please note that we witnessed zero oz of silver withdrawn to settle upon our anxious longs. However we did see massive withdrawals of silver

from the customer to the tune of 1.007 million oz.  Something is surely scaring these people to leave the comex. Actually the departures were from 3 customers:
1. customer No 1  426,205 ozs

2.customer no 2    580,133

3.customer no 3      1003 oz

total no of oz of silver leaving registered comex vaults was 1,007,341 oz.

The comex notified us that 1 notice was sent down for options exercised for a total of 5000 0z of silver. The total number of notices sent down so far this month total  440 or 2,200,000 oz of silver.  The number of notices that remain to be serviced is 41 or 205,000 oz.

Thus the total number of silver oz standing in this non delivery month of November is:

 

2,200,000 oz +  205,000 =  2,405,000 oz.  As promised this number will rise until the November month concludes on Nov 29.2010.

 

And now for gold:

Please note the rather tranquil activity in the gold vaults.  This is very surprising as we are heading in December, the largest delivery month of the year for gold. We are witnessing zero oz of gold leaving the dealer to settle upon longs.  There was a tiny 1158 oz leaving the customer.  Again something is scaring these guys.  (for completeness, the withdrawals for the customer was made up of 2 transactions:  1. a withdrawal of 32 oz and 2. a withdrawal of 1126 oz..total 1158 oz).  The dealer did receive 3599 oz of gold and some of that no doubt went to the customer who received in total yesterday 30,073 oz. We got another of those famous adjustments.  Actually there were two separate transactions:

 1.a repayment of some sort of liability on the part of the dealer back to the customer of 60,104 oz (maybe a lease repayment? maybe a GLD settlement?)
2.a lease from a customer to the dealer of 2112 oz.

 

The comex notified us that 18 notices from options exercised were sent down yesterday for a total of 1800 oz of gold. The total number of notices sent down so far this month  total 766 or 76600 oz of gold.

The total number of notices remaining to be served looks like it has been raised to 70 contracts or 7000 0z of gold.

 

Thus the total number of gold oz standing in this non delivery month of November is as follows;

 

76,600 oz (already served) +  7000 oz (to be served upon)=  83,600 oz or 2.6 tonnes of gold. 

 

Now we shall head over to the commitment of traders report released at the close of the stock market Friday night:

 

First, the gold COT report:

 

 Posted Friday, 5 November 2010 | Digg This ArticleDigg It! | Share this article | Source: GoldSeek.com 

Gold COT Report - Futures

Large Speculators

Commercial

Total

Long

Short

Spreading

Long

Short

Long

Short

282,707

52,479

82,527

184,286

460,898

549,520

595,904

Change from Prior Reporting Period

-446

8,412

2,635

10,029

4,206

12,218

15,253

Traders

210

76

65

45

52

287

170

 

 

Small Speculators

 

 

 

Long

Short

Open Interest

 

 

68,861

22,477

618,381

 

 

 

-1,419

-4,454

10,799

 

 

 

non reportable positions

Change from the previous reporting period

 

COT Gold Report - Positions as of

Tuesday, November 02, 2010

 

 

These figures are basis Tuesday before the big explosion in gold so we will not glean much information from this report.

Those large speculators that were long gold lessened those positions by a tiny 446 contracts.

Those large speculators that were short gold increased those positions by a huge 8412 contracts and thus took a huge drubbing in the days to follow.

And now for our famous commercials:

 

Those commercials that were long gold and they are the swap dealers and intermediate bankers increased their gold longs to the tune of 10,029 contracts.

They are very close to gold and it paid off for them.

Those commercials who are perennially short gold and subject to the lawsuits, namely JPMorgan and HSBC increased their shorts again by 4206 contracts.

 

The small speculators that are long gold got a little spooked last week and covered a tiny 1419 contracts.

Those small speculators that were short, saw a light and covered a good sized 4454 contracts. 

 

And now for the silver COT report:

 

Silver COT Report - Futures

Large Speculators

Commercial

Total

Long

Short

Spreading

Long

Short

Long

Short

52,625

12,834

44,377

31,152

87,200

128,154

144,411

-393

325

5,107

995

-823

5,709

4,609

Traders

93

41

49

33

38

152

110

 

Small Speculators

 

 

 

Long

Short

Open Interest

 

 

30,479

14,222

158,633

 

 

 

-56

1,044

5,653

 

 

 

non reportable positions

Change from the previous reporting period

 

COT Silver Report - Positions as of

Tuesday, November 02, 2010

 

 

Those large speculators that have been long silver lessened those positions by a tiny 393 contracts.

Those large speculators that have been short silver increased those positions by also a tiny 325 contracts. Not much action by the large boys this week.

 

Let us see what the commercials did:

Those commercials like the smaller bankers and the swap dealers, increased their longs by 995 contracts and thus these guys were on the winning side when silver exploded on Thursday and Friday.

And now for our two famous bankers, JPMorgan and HSBC: these guys are always short but they got a little nervous last week and covered a tiny 823 contracts.

 

The small speculators that were long silver covered only a very tiny 56 contracts.  However those that were short increased those positions by 1044 contracts and these guys got fleeced by the end of the week.

 

In other physical news, our two ETF's rebounded strongly in positives to their NAV with the central fund of canada registering a reading of 8.6% basis Thursday and the PHYS fund rising to 4.14%. There was strangely no change  in  GLD inventories.  Here is John Brimelow reporting:


CEF jumped to an 8.6% premium to NAV (Wednesday 5.2%) and PHYS rose to 4.14% (3.5%). GLD, in its idiosyncratic way, reported no change in gold holdings of 1,292.1895 for the third day running.

 

 

There was a big change in the SLV inventories as it rose another 2 million oz:  (from the SLV website)

 

Ounces of Silver in Trust

327,799,643.000

Tonnes of Silver in Trust Tonnes of Silver in Trust

10,195.71

 

end.

 

 

There are many big economic stories released yesterday.  The big story was release of the jobs numbers and the headline number was a gain of 151,000 jobs.

Here is the report courtesy of Reuters:

U.S. payrolls jump in Oct, jobless rate steady

WASHINGTON, Nov 5 (Reuters) - U.S. employment increased more than expected last month as private companies hired workers at the fastest pace since April, offering more signs of an up-tick in a sluggish economy.

Nonfarm payrolls increased 151,000 in October, the first increase since May, as a 159,000 jump in private employment more than offset a 8,000 drop in government payrolls, the Labor Department said on Friday. In addition, the government revised payrolls for August and September to show 110,000 fewer jobs lost.

Economists had expected payrolls to increase 60,000 last month, with private employment rising 75,000.

Concern over the anemic job market was a factor behind the Federal Reserve's decision this week to pump an additional $600 billion into the economy through government bond purchases to push interest rates down further and stimulate demand.

The U.S. central bank, which cut overnight interest rates to near zero in December 2008, had already bought about $1.7 trillion in government debt and mortgage-linked bonds.

October's strong jobs growth, however, failed to make a dent in the lofty unemployment rate, which remained at 9.6 percent for a third straight month, in line with market 
expectations.

Analysts say the economy needs to create at least 125,000 jobs a month to start bringing the unemployment rate down, but economic growth remains rather sluggish nearly 1-1/2 years into the recovery from the worst recession since the 1930s.

Anger over unemployment helped the Republican Party to wrest control of the House of Representatives from the Democrats in Tuesday's election, which was viewed as a vote on President Barack Obama's economic policies.

ACTIVITY FIRMING

But there are early signs growth is firming somewhat, with activity in both the manufacturing and service sectors rising in October. Economists said this bodes well for employment.

Employment in October was supported by the private service-providing employment, which jumped 154,000. Temporary help services, a harbinger of permanent hiring, increased 34,900 from 23,800 in September.

But manufacturing payrolls fell 7,000 after declining 2,000 in September. Construction unexpectedly added 5,000, helping the goods-producing sector payrolls to rise 5,000 after falling 4,000 in September.

The average work week increased to 34.3 hours from 34.2 hours in September.

Local government payrolls, which contributed to sinking government employment in September, fell 14,200 in October. Overall government employment dipped 8,000.

-END-

 

However let's see how John Williams sees the numbers: (from Jim Sinclair commentary )

 

 

Jim Sinclair’s Commentary

Here is the truth. John not only defines reality, but if and when a true change takes place you will see it on his site first. Isn’t that enough reason to pay John his small fee?

Where is the beef? His long report is the location of the beef.

- Baloney Payroll-Employment Data: Seasonal Adjustments Become Primary Driver of Jobs Creation?  
- October Household-Survey Employment Fell 330,000  
- October Unemployment Rates: 9.6% (U.3), 17.0% (U.6), 22.5% (SGS)  
- Fed Move to Debase U.S. Dollar Will Generate Higher Inflation But No Recovery  
- Election Results Do Not Alter Basic Economic or Inflation Outlooks

http://www.shadowstats.com/

 

end.

 

With the huge plug B/D number and huge seasonal adjustments there was no job creation.  Actually a private household survey saw employment

drop by 330,000 jobs.  The key number is Williams  SGS unemployment at 22.5%.  Even the government's own U6 is still at 17%. The official number was thus a joke.

 

Pending home sales dropped by 1.8% last month.  Here is a report courtesy of Reuters:

September pending home sales fall 1.8 percent

WASHINGTON (Reuters) - Pending sales of previously owned U.S. homes fell unexpectedly in September, a report showed on Friday, and activity may remain volatile for months as troubles with foreclosures disrupt the market.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in September, fell 1.8 percent to 80.9 from an upwardly revised 82.4 percent in August.

Economists polled by Reuters had expected a 3 percent rise.

The data reflects home sales contracts, not closings, and is seen as a leading indicator of housing market trends.

"Existing home sales have shown some improvement but the foreclosure moratorium is likely to cause some disruption and contribute to an uneven sales performance in the months ahead," NAR chief economist Lawrence Yun said in a statement.

Several major U.S. mortgage lenders temporarily halted foreclosures in October as attorneys general in all 50 states investigated whether banks had submitted faulty paperwork to back evictions.

-END-

 

Here are two reports on what it will cost to fix Fannie and Freddie:

 

US mortgage finance fixes may reach $685 bln-S&P

NEW YORK, Nov 4 (Reuters) - Costs to "resolve" U.S. mortgage finance giants Fannie Mae and Freddie Mac, and capitalize a new entity to replace their roles in supporting the nation's housing market, could reach $685 billion, credit rating company Standard & Poor's said on Thursday.

Under current conditions, it is unlikely that the housing and mortgage markets can operate normally without substantial government involvement, S&P analysts said in a report.

The debate on mortgage finance reform is expected to take center stage early next year as the Obama administration is set to outline remedies for the two companies, whose losses on loans they guaranteed have cost taxpayers some $148 billion.

U.S. Treasury support for the companies could reach a total of $280 billion, S&P said, before Congress decides how to overhaul the mortgage finance system.

Another $400 billion from taxpayers would likely be needed to establish a new mortgage "intermediary," capitalized at 7 percent of total assets, analysts Daniel Teclaw and Vandana Sharma wrote in the report dated Nov. 4.

Further losses at Fannie Mae and Freddie Mac are likely given a build-up of seriously delinquent loans that could go to foreclosure, they said. What's more, the companies will probably see credit losses from current investments and guarantees for another three to five years, they said.

S&P's estimates include some successful loan modifications, and proceeds as lenders repurchase faulty loans from Fannie Mae and Freddie Mac guarantee programs.

The Federal Housing Finance Agency, the main regulator for Fannie Mae and Freddie Mac, last month estimated the companies' total needs from the U.S. Treasury would be between $221 billion and $363 billion through 2013.

 

and this report on Fannie (courtesy of James Sinclair commentary)

 

The longest train wreck in US history.

Fannie seeks $2.5 billion from U.S. after 3rd-quarter loss 
Fri Nov 5, 2010 5:12pm EDT

NEW YORK (Reuters) – Fannie Mae (FNMA.OB), the largest provider of financing for U.S. residential mortgages, on Friday said it lost $3.5 billion in the third quarter on foreclosure and other credit expenses, sending it to the U.S. Treasury for more capital.

The government-sponsored company said it would need $2.5 billion from Treasury to cover a $2.4 billion net worth deficit. More than 85 percent of that shortfall was dividend payments back to Treasury, it said in a statement.

Fannie Mae said credit-related expenses, which include provisions for losses and foreclosed property expense, rose to $5.6 billion in the quarter from $4.9 billion in the second quarter. Among factors, it lowered the value of repossessed homes it owns, it said.

Revenue increased 13 percent to $5.1 billion in the quarter as interest income on its portfolio rose.

Fannie Mae and rival Freddie Mac (FMCC.OB) are at a crossroads where Congress is debating changes to their businesses — or their very existence — after decades of providing the lion’s share of U.S. home loan funding. Both political parties have said their current models that are costing taxpayers to billions of dollars must be abolished though are split on the level of future government support.

More…

 

 

end.

 

 

Last night ,we got a 3rd big law firm commence legal action in the silver fraud.  Here is this release courtesy of Marketwire:

 

Press Release via Marketwire
Thursday, November 4, 2010

Kaplan Fox Sues JP Morgan and HSBC on Behalf of Investors for Silver Futures and Options Contract Losses Caused by Market Manipulation

http://www.marketwire.com/press-release/Kaplan-Fox-Sues-JP-Morgan-HSBC-o...

NEW YORK -- On November 2, 2010, Kaplan Fox & Kilsheimer LLP (www.kaplanfox.com), a leading plaintiffs' firm, filed a class-action complaint in the U.S. District Court for the Southern District of New York on behalf of an individual investor against JP Morgan Chase and HSBC in connection with their alleged conspiracy and manipulation of the market for silver futures and options contracts traded on COMEX.

To view a copy of the complaint:

http://www.kaplanfox.com/templates/kaplanfox/images/content/pdfs/silver%...

The complaint alleges that around June 2008, when JP Morgan acquired Bear Stearns, including Bear Stearns' short positions in silver futures, JP Morgan and HSBC commenced a conspiracy to manipulate, and did manipulate, the market for silver futures and options contracts on COMEX. Specifically, the complaint alleges that around this time, JP Morgan and HSBC, pursuant to their conspiracy, acquired massive short positions on silver futures contracts in an effort to artificially depress the price of the silver futures market. The defendants realized substantial illegal profits in connection with their scheme, while investors who had no knowledge of the scheme, lost substantial amounts of money because of the defendants' conduct.

The complaint further alleges that the defendants' illegal scheme continued until around March 2010, when a metals trader based in London, publicly exposed the scheme. This trader has reported the scheme to the Commodity Futures Trading Commission ("CFTC"), and both the CFTC and the Antitrust Division of the United States Department of Justice are investigating the alleged conspiratorial and manipulative activities of the defendants.

If you have any information concerning any of the defendants' conduct, or wish to learn more about the litigation, please contact Kaplan Fox attorneys Robert N. Kaplan or Jason A. Zweig at 800-290-1952.

-END-

 

The university of Michigan's consumer confidence number which is a very important gauge as to whether the consumer will spend showed a big dip last month.  Here is this big Reuters story:

 

 

NEW YORK, Nov 5 (Reuters) - About half of Americans say they are less confident in their central bank now than they were five years ago, according to a survey released on Friday.

This lack of confidence comes at a critical juncture for the Federal Reserve, which on Wednesday announced a bold but risky program to pump more money into the economy to support the U.S. recovery.

The program's success hinges on the Fed's hard-won credibility that it can keep prices stable and bring down unemployment over the long run.

Just 7 percent of people said they had more confidence in the Fed in 2010, below the 12 percent in 2009 but the same percentage as in 2008, the Thomson Reuters/University of Michigan survey showed.

"The loss (of confidence) will affect perception of the Fed's ability to keep prices stable," said Richard Curtin, the survey's director.

People in the middle-third income group reported the least positive views of the Fed, with 58 percent saying they were less confident.

Overall, 49 percent said they were less confident in the Fed now compared with five years ago, the same as in 2009.

The question was not asked at any time in which the Fed enjoyed widespread credibility and was asked only once before, in 1987, following the stock market crash.

"While it is thus hard to judge the true extent of the recent loss in confidence in the Fed, it is hardly reassuring that half of all consumers reported that they were now less confident," Curtin wrote.

-END-

 

There are three major stories on the quantitative easing II of the Fed and its impact.

 

The first major story is from the UK Telegraph and the author is Ambrose Pritchard Evans:

 

Doubts grow over wisdom of Ben Bernanke 'super-put'

The early verdict is in on the US Federal Reserve's $600bn of fresh money through quantitative easing. Yields on 30-year Treasury bonds jumped 20 basis points to 4.07pc.

By Ambrose Evans-Pritchard, International Business Editor
Published: 7:58PM GMT 04 Nov 2010

The early verdict is in on the Fed's $600bn blitz of fresh money, the clearest warning to date that global investors will not tolerate Ben Bernanke's policy of generating inflation for much longer.

Mr Bernanke is targeting maturities of 5 to 10 years with purchases of Treasuries. Photo: GETTY

It is the clearest warning shot to date that global investors will not tolerate Ben Bernanke's openly-declared policy of generating inflation for much longer.

Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason: because they are a safer asset class than bonds at the start of an inflationary credit cycle.

Meanwhile, the price of US crude oil jumped $2.5 a barrel to $87. It is up 20pc since markets first concluded in early September that 'QE2' was a done deal.

This amounts to a tax on US consumers, transferring US income to Mid-East petro-powers. Copper has behaved in much the same way. So have sugar, soya, and cotton.

The dollar plunged yet again. That may have been the Fed's the unstated purpose. If so, Washington has angered the world's rising powers and prompted a reaction with far-reaching strategic consequences.

Li Deshui from Beijing's Economic Commission said a string of Asian states share China's "deep bitterness" over dollar debasement, and are examining ways of teaming up to insulate themselves from the tsunami of US liquidity. Thailand said its central bank is already in talks with neighbours to devise a joint protection policy.

Brazil's central bank chief Henrique Mereilles said the US move had created "excessive dollar liquidity which we are absorbing," forcing his country to restrict inflows. Mexico's finance minister warned of "more bubbles."

These countries cannot easily shield themselves from the inflationary effect of QE2 by raising interest rates since this leads to further "carry trade" inflows in search of yield. They are being forced to eye capital controls, with ominous implications for the interwoven global system.

In London and Frankfurt the verdict was just as harsh. "In our view, this is one of the greatest policy mistakes in the Fed's history," said Toby Nangle from Baring Asset Management.

"The Fed is gambling that the so-called 'portfolio balance channel effect' – pushing money out of government bonds and into other assets – will lift risk asset prices. The gamble is that this boosts profits and wages, rather than simply prices. We remain unconvinced. How will a liquidity solution correct a solvency problem?" he said.

"A policy error," said Ulrich Leuchtmann from Commerzbank. The wording of the Fed statement is "potentially dangerous" because it leaves the door open to a further flood of Treasury purchases if unemployment stays high. "It is a bottomless pit," he said.

Of course, it is precisely this open door that has so juiced risk trades, from Australian dollar futures, to silver contracts, and junk bonds. Goldman Sachs thinks QE2 will ultimately reach $2 trillion, with no exit until 2015. Such moral hazard is irresistible. It is the Bernanke 'super-put'.

Yet the reluctance of investors to leap back into the US Treasury market as they did after QE1 is revealing. The 30-year segment of the Treasury market is too small to matter, but symbolism does matter. Vigilantes sniff stealth default. "If long bond investors continue to throw their collective toys out of the cot, it risks upending the Fed's policy," said Michael Derk from FXPro.

Mr Bernanke is targeting maturities of 5 to 10 years with purchases of Treasuries. These bonds have behaved better: 10-year yields fell 14 points on Thursday to 2.48pc. However, Mark Ostwald from Monument Securities said foreign funds may take advantage of QE2 to dump their holdings on the Fed, rotating the money emerging markets rather than US assets.

Bond funds are already restive. Pimco's Bill Gross says the great bull market in bonds is over, denigrating Fed policy as the greatest "ponzi scheme" in history. Warren Buffett has chimed in too, warning that anybody buying bonds at this stage is "making a big mistake",

Fed chair Ben Bernanke uses the term 'credit easing' to describe his strategy because the goal is to lower borrowing costs. If he fails to achieve this over coming months - because investors balk - the policy will backfire.

No clear rationale for fresh QE can be found in orthodox monetarism. Data from the St Louis Federal Reserve show that M2 money supply stopped contracting in the early summer and has since been expanding at an accelerating rate, topping 9pc over the last four-week bloc.

The Fed has used the 'Taylor Rule' on output gaps as a theoretical justification for QE, but Stanford Professor John Taylor has more or less said his theories have been hijacked. "I don't think (QE) will do much good, and I also worry about the harm down the road," he said.

It has not been lost on markets that the Fed's purchases of $900bn of Treasuries by June (with reinvested funds from mortgage debt) covers the Treasury's deficit over the same period. The slipperly slope towards 'monetization' of public debt beckons.

Global investors mostly accepted that the motive for QE1 was emergency liquidity, and that stimulus would later be withdrawn. But there are growing suspicions that QE2 is Treasury funding in disguise.

If they start to act on this suspicion, they could push rates higher instead of lower, and overwhelm the Bernanke stimulus. That would precipitate an ugly chain of events for the US.

-END-

 

The second story is from Comstock Partners, courtesy of Zero Hedge:

 

Why Bernanke Is Gambling

Comstock Partners | Nov. 5, 2010, 4:36 AM | 740 |

In starting a second round of quantitative easing (QE2), the Fed is gambling on a program that has little potential upside and a substantial amount of risk. In the first round (QE1) the Fed bought $1.7 trillion of mortgage and Treasury bonds (beginning in March 2009) and dropped short-term rates to between zero and 0.25%. It was also preceded or accompanied by massive fiscal intervention in the form of TARP, the stimulus plan, cash-for-clunkers, homebuyer tax credits, tax cuts, mortgage modifications and extended unemployment insurance. For all of their efforts the authorities did help prevent a global financial collapse, but achieved only an extremely sluggish economic recovery that was almost completely dependent on an inventory turnaround and government transfer payments. Now, even this halting recovery is showing signs of petering out with debilitating Japanese-style deflation an increasing threat. Without further help the current economic expansion is unsustainable.

We believe that QE2 will have minimal direct effect on boosting the economy and that Bernanke knows it. This seems obvious upon reading his op-ed article in today's Washington Post, in which he states that this approach eased financial conditions in the past, and specifically mentions that stock prices rose in anticipation of the recent action. In fact he mentions higher stock prices twice in the same paragraph, as if to indicate the real reason for implementing QE2. In his own words, Bernanke says, "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending."

To be sure, the Chairman also states that lower mortgage rates will make housing more affordable and that lower corporate bond rates will encourage investment. However, according to the Fed, the planned Treasury purchases are almost all in the two-to-ten year range. We note that the two-year rate is already at 0.37% and the ten-year at 2.62%. If these historically low levels can't spur spending, we doubt that another 20 or 30 basis points will make much difference. Corporations base their capital spending decisions on overall demand for their products and services far more than on the level of interest rates, and, in any event, are already sitting on piles of cash that they aren't using. And don't forget that mortgage rates are already at record lows. That virtually leaves mainly stock prices as the Fed's real target for QE2, and Bernanke is saying that bluntly in today's column.

We doubt that the stock market will get the boost that Bernanke and the "street" widely expect. The market reacted coolly following the FOMC announcement on Wednesday, but burst upward today on the Chairman's unprecedented column. After all, when the Fed explicitly announces its intentions of jolting the stock market----a thought previously expressed only by conspiracy theorists----investors take notice. The bulls point out that stocks rose substantially during QE1, and believe that they will do so again under QE2. However, the market is in a far different position today than it was in March 2009, when QE1 began. At that time the market had declined by a whopping 57%, the S&P 500 sold at only 11 times trendline reported earnings and bears outnumbered bulls by 45% to 32%. In contrast, the market has climbed 83% since then and sells at an elevated 18.8 times smoothed reported earnings, while bulls outnumber bears by almost 2-to-1. At that time fear of a global financial collapse was rampant while now optimism is widespread as is apparent from watching the cheerleader mentality on financial TV today.

In addition to the limited upside, QE2 carries a substantial amount of risk. It has already led to a plunging dollar and far higher commodity prices on anticipation alone. Actual implementation will exacerbate these trends with potentially serious side effects. This raises costs for many American companies that buy significant amounts of commodities including energy, food and cotton. These companies would very much like to pass these increased costs along to consumers, but feel constrained by lack of demand as a result of high unemployment, limited wage increases, weakness in housing and tight credit. Already, a few companies have blamed 3rd quarter disappointments in revenues or earnings on rising commodity prices, and this tendency could snowball in coming quarters. Furthermore, to the extent that consumers have to pay higher prices for some necessities they will have no choice but to cut back on discretionary expenditures and big ticket items.

In addition, lower U.S. interest rates and a declining dollar will cause capital to flow to emerging nations, increasing the value of their currencies and hurting their economies. A number of emerging nations are taking measures to protect their exports and limit imports, possibly leading to a global trade conflict that results in less overall trade and declining economies.

Given the limited upside and potentially serious risks, why is the Fed taking this unconventional gamble? If conditions are as rosy as the stock market seems to imply, what is so dire about the economy and financial conditions that the Fed feels it necessary to take such a bold and unconventional step? Although the overall situation is exceedingly complex, the answer to this question is relatively simple. The Fed has a mandate to maintain full employment and low inflation. As it has repeatedly stated through its FOMC meeting statements and numerous speeches by Fed members, a majority of the Fed believes that the economy is growing below "stall speed" with another recession possible. It also believes that without another boost, either from monetary or fiscal policy, unemployment will remain stubbornly high, preventing a sustainable economic recovery with outright deflation a distinct threat. Bernanke also knows that the Fed has already used all of its conventional monetary weapons and that concern about increased budget deficits has all but ruled out any further help from fiscal policy. He also believes that the Fed is now the only game in town and cannot just sit there and do nothing while the economy fizzles.

As Chairmen of the Fed he also has to pretend that all of this will work and that if it doesn't he has even more weapons to trot out. However, the last paragraph of his op-ed column shows that he knows the desperation of the measures he is undertaking. In a statement that can only be interpreted as a plea for help he says, "The Federal reserve cannot solve all the economy's problems on is own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector". Given the current political standoff such help is not likely. It is also likely, therefore that the strong market rally is based on false assumptions, as were the runs to the tops of early 2000 and late 2007.

-END-

The third paper is from Greg  Hunter of USA WatchDog:

 

Courtesy of Greg Hunter’s USAWatchdog.com

Dear CIGAs,

One day after the Federal Reserve announced a $600-$900 billion second round of Quantitative Easing (QE2), gold and silver hit fresh all-time highs.  Yesterday, the yellow metal surged more than $40 an ounce to well over $1,390 before falling back a few dollars in after hours trading.  Silver, also, had a monster move!  It was up more than a $1.50 per ounce.  It, too, retracted slightly in after hours trading.  That surge in precious metals is a debilitating rebuke of the Federal Reserve’s wild and unprecedented money printing policies.   How bad is it, really, for the Fed to feel this is a good idea?  Gold is acting like a predator that smells the blood of wounded prey.  In this case, the prey is a much weakened Fed that seems desperate to keep its banking cartel afloat from the undertow of a sea of red ink.

It is reported that Sprott Asset Management bought 6.5 million ounces of physical silver at nearly $26 an ounce.  Respected financial blog Jesse’s CafĂ© American wrote yesterday about the deal, “Some might consider the price that Sprott paid to be a ‘leading indicator’ of where silver will be going. I think when the paper Ponzi scheme actually collapses silver will be much higher than that. After all, “he who sells what isn’t his’n must buy it back or go to prison.” Unless, that is, they are running the game. Then they just pay a fine and admit no guilt.” (Click here to read the entire post from JCA.) This kind of silver buying is a big plus for the physical market and a big negative for the often questionable paper market.

Big-time buyers are driving over-sized price moves in precious metals.  Hedge Funds, Sovereign Wealth Funds, big banks (like Goldman and JP Morgan) and Central Banks are now moving the markets in gold and silver bullion.  Movements like the one yesterday are not mom and pop retail buyers looking to purchase a dozen Silver Eagles or a Gold Eagle coins to put into a safety deposit box.

More…

 

 

end.

 

 

I will leave you with this announcement, that it looks like Ron Paul will become Chairman of the big Finance Committee that overlooks the Fed.

Congress will be interesting once he takes over.  Courtesy of Reuters:

 

 

Ron Paul vows renewed Fed audit push next year

Thu Nov 4, 2010 9:33pm GMT

WASHINGTON Nov 4 (Reuters) - U.S. Republican Representative Ron Paul on Thursday said he will push to examine the Federal Reserve's monetary policy decisions if he takes control of the congressional subcommittee that oversees the central bank as expected in January.

"I think they're way too independent. They just shouldn't have this power," Paul, a longtime Fed critic, said in an interview with Reuters.

Paul is currently the top Republican on the House Financial Services Committee's subcommittee that oversees domestic monetary policy, and is likely to head the panel when Republicans take control of the House of Representatives in January.

That could create a giant headache for the Fed, which earlier this year fended off an effort headed by Paul to open up its internal deliberations on interest rates and monetary easing to congressional scrutiny.

Paul also been a fierce critic of the central bank's efforts to boost the economy through monetary policy.

"It's an outrage, what is happening, and the Congress more or less has not said much about it," he said.

Paul said his subcommittee would also push to examine the country's gold reserves and highlight the views of economists who believe that economic downturns are caused by bad monetary policy, not the vagaries of the free market.

-END-

 

I hope you all have a grand weekend, and I will see you Monday night.

Harvey

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