King World News: March 2012

 

This is a site we follow. It’s principal focus is on how precious metals and mining stocks are behaving in the markets. They’re good to listen to if you have this bias. They also touch on other topics of high relevance to today’s principal events in economics, finance, and geopolitics. We will try and make key observations if you don’t have the time to listen. Note that we do not link all audio and blog files. If you do listen, the first minute or so is advertising which you might want to skip. The links appear chronologically from most recent for the month, backwards.

  • 20120331 The KWN Weekly Metals Wrap (19:25 minutes)
    • Nothing much has changed from last week.
    • Gold and silver have to hold above 1680 and 33 before they can move higher.
  • 20120330 Rob Arnott (13:18 minutes)
    • We append an email to Rob and his reply below.
  • 20120329 Nigel Farage (12:39 minutes)
    • QE – a giant Ponzi scheme – has pushed the EU crisis down the road. Fundamentally, nothing has changed.
    • In Spain, there are 1.6 million houses either empty or incomplete.
    • The UK national debt will rise 40% over the next 5 years.
    • If the QE route continues, serious inflation will emerge.
  • 20120327 Jim Sinclair (18:51 minutes)
    • Sinclair discusses the financial warfare being waged by the US against Iran and any country dealing with them. The current weapon has been the SWIFT transfer system which Iran has been shut out of and India has been threatened with.
    • The result has been to force barter using local currencies in these countries.
    • The long-term effect will be to reduce the USD’s importance as a contract settlement system, the possible creation of SWIFT replacements, a weakened USD the rise of gold as a transmission mechanism.
    • US Treasuries are threatened along with the dollar.
    • He expects a response by June.
  • 20120324 The KWN Weekly Metals Wrap (21:44 minutes)
    • Actual inflation is much higher than what the government projects.
    • Gold: good support at 1630-1640. Need to get above 1680 to flush out shorts and get it moving up. If 1630 breaks, it will go quickly to 1600 in  a day.
    • Silver: Needs to hold above 32.50 to break the current down trend after which it will head for 33 or 34. On the down side, it will move to 30. That will trigger extensive buying.
  • 20120324 Art Cashin (12:17 minutes)
    • Historically, the insertion of large liquidity into the system has been highly inflationary.
    • Watch for an increase in money velocity which as a precursor to any inflation. Look for M2 to increase relative to the monetary base.
    • The yield in Treasuries recently moved up reflecting a large bond sale. The money did not move into other assets but remained in cash. It was likely the Chinese.
    • The hyper-volatility in 2011 has been replaced by a narrow range-bound trading.
    • War in Iran will create chaos in markets: a massive spike in oil, a huge rush into the dollar and a 1000 point drop in equities in a day.
    • Stocks are making newer highs while the number of companies making newer highs is dropping. This is market top activity.
  • 20120318 Gerald Celente (15:50 minutes)
    • Discussion on the price of oil.
    • The last 7 post-war recessions were preceded by spikes  in oil.
    • They believe the Chinese will stay on the sidelines in a war with Iran. The Russians may offer some support, politically if not militarily.
    • The economic embargo on Iran is an act of war.
    • The Fed is building another bubble with low interest rates. This is a consumer debt bubble and it will burst soon.
  • 20120317 The KWN Weekly Metals Wrap (20:17 minutes)
    • A weekly update of the PM market action.
    • We are in the early stage of the 2nd phase (out of 3) of the bull market.
    • Gold and silver have stabilized but are not very solid.
    • Monetary authorities want investors to get out of PMs and go into stocks.
    • The economy isn’t strong enough to justify stock prices.
    • Gold stocks seem to be getting washed out. They would seem to be near a bottom.
    • Gold has held 1640 but it won’t be a firm base until it moves through 1680. 1640 and 1620 remain as support.
    • Silver has to to hold 31.75 or else it’s heading for 30. 33.50 is resistance. 31.50-31.75 is support.
  • 20120310 The KWN Weekly Metals Wrap(19:35 minutes)
    • A weekly update of the PM market action.
  • 20120310 Caesar Bryan (13:19 minutes)
    • The major European problem is the uncompetitiveness of labour in southern Europe. This won’t be fixed by current monetary policies.
    • There is not much inflation now but it could come in sharply as a result of the money creation – $1 trillion euros in the last 6 months.
    • Don’t give up on the gold miners.
    • Better economic news in the US could create some weakness in gold.
  • 20120309 Jim Sinclair (14:59 minutes)
    • Expects a reserve currency based on a large basket of currencies tied to gold. Individual countries would have to agree to a percentage gold backing based on their M3 money supply relative to the global M3.
    • Central banks are not trying to suppress the price of gold but control it’s increase to prevent a ballistic rise.
    • A breakout above 1764 will send it towards 2100.
  • 20120308 Paul Brodsky (11:31 minutes)
    • The US has its gold. Trust the military is right.
    • Gold is a savings vehicle not an investment vehicle.
    • The fundamentals in the marketplace are most people are trusting the buying power of fiat currencies.
    • Holders of PMs will be the big winners – some day.
    • The fewer people involved in a trade, the higher it can go.
    • The catalyst to create a lack of confidence in paper money is unknown., but it has to come based on the unrestrained growth of the global money supply.

A Communication with Rob Arnott

In response to Rob’s comments we sent him an email suggesting that certain comments in particular were not correct.Here is our email. The red highlighted texts were referenced by Rob in his reply.

Dear Mr. Arnott,

With respect, I think your statement that

we can take the Fed Funds Rate to zero [ZIRP], we can push money out into the economy [QE] and .. hurl money out of helicopters… the toolkit for dealing with deflation is vast and can include simple things such as mailing $100, $1,000 or $1,000,000 to every American

is out of date and wrong.

In a personal blog, I published a piece Living In a Hypothesis. In it I examine the Fed’s policies in relation to unemployment (in response to Bernanke’s recent speech). Assuming there is a positive correlation between jobs and economic activity, I believe I showed that ZIRP is now an ineffective tool and that QE has failed to affect unemployment and by inference, the economy. In so doing, I didn’t refer to excess reserves residing at the Fed, money that the Fed has not been able to push out into the economy. So the first two tools are no longer available to stimulate the economy.

What no one, including yourself has indicated recognition of is that the Fed cannot, as a responsible economic policy, throw money from helicopters and cannot mail money to citizens. The reason is simple: their balance sheet. All expansionary activity to date has been monetization backed by the acquisition of high quality assets (Maiden Lane I, II and II represent qualified exceptions). The point is for every penny placed in the monetary base as a liability, there is a corresponding asset that the Fed has acquired. This gives them the tool in theory, to reduce the money supply to cool the economy and inflation should it exceed comfortable bounds. I say in theory because of late I have begun to consider the possibility the Fed can never unwind its balance sheet without destroying the economy, and possibly not at all.

The helicopter analogy – or the mailing of cheques – introduces a balance sheet liability into the economy in the form of Federal Reserve notes but gains no offsetting asset. There would be two results. The first is that their capital position would go negative. They would literally have thrown away money, never to be recovered.

The second and larger has two parts. The first would be large scale inflation since this would be new currency inserted into the economy directly into the hands of consumers and savers. The other aspect is the Fed, having produced inflation without acquiring assets, would have no means of shrinking the money supply to cool the inflation they created. They would be literally throwing money away.

I think it was a frivolous example that Friedman and Bernanke used. Water can go from the vapour phase to ice without a liquid transition: sublimation. I wonder if money can undergo a similar process from deflation to hyperinflation, bypassing a normal inflationary state?

Best Regards

And here is his gracious response:

Thanks for reaching out to me following the interview. It’s wonderful to hear firsthand from listeners who care enough to enter the dialogue.

I agree with everything you say, but would draw attention to your own words, highlighted below [actually above now], “as a responsible economic policy.” I would never recommend helicopter drops or $1mm checks to all citizens; either is worse than an irresponsible policy, it’s a catastrophic policy. I was merely demonstrating that deflation can be averted and inflation created by the Fed, very easily. Central bankers have done this again and again throughout history.

Anyone who knows me knows that I think the Fed is already on a reckless path of monetizing debt and debasing the currency. I share your concern, also highlighted below, that, “I say in theory because of late I have begun to consider the possibility the Fed can never unwind its balance sheet without destroying the economy, and possibly not at all.” I’m deeply troubled by the path we’re on.

Thanks for reaching out to me. All the best!

Robert D. Arnott

Chairman, Research Affiliates, LLC

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One Response to King World News: March 2012

  1. JR says:

    Seems to me if holders of PMs will be big winners – i.e., the price goes up – I would consider that an “investment” – at least speaking practically. But maybe I am nitpicking with words. The amount of holders of gold/gold stocks is still very minimal, and all those gold stores and gold store ads one sees in the US are **buying** gold – which to my mind, is just relieving the weak hands of their savings. When these same stores start *buying*, then maybe we can start discussing a “bubble.” But right now, all this bubble talk is, to me, just a ruse (not co-ordinated or conspiratorial in nature) to relieve people of their PMs. Same thing with some of the volatility. I still can’t help but think there is some collusion here to shake people out, maybe covers some shorts, etc.

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