Agriculture Update

It is obviously apparent that the use of ethanol has, and will continue to push corn prices higher. I don't want to get into the details of this, but you can refer to previous posts on the topic for more information

What I want to do in this email is look at some more side effects that the production of ethanol has on the farming community.

The high price of corn has caused a higher amount of corn to be planted and more acres deterred from other types of crops. In fact, this year we will see the largest corn crop since World War II.

This will push prices up for other farming crops, because the supply will shrink. Last year the amount of wheat acreage dropped 7.3% to 13.81 million acres from 14.9 million acres. We are seeing the same thing happen to soy beans.

We are seeing another side effect in the meat market. Livestock herds are being taken to the slaughter house prematurely because of high expectations in the price of corn, being that corn is the main use of feed for cattle. Expect to see the price of beef rise.

Expect companies that dwell in farm machinery, fertilizer, and seed see increased profits. Also expect other corn based goods, like tortillas to rise in price.

You have to understand that the ethanol policies applied by politicians are highly inflationary, and it's not limited to just corn. It will go through levels. First it was just corn and corn based goods. Then it was the items that go into the production of corn and farmer land values. Now we are watching the effects of land being taken away from the production of other farm goods. Once these items start to effect the consumer more and more, we will see it spread to basically every aspect of life.

China's Reaction

I told you that China wasn't going to be happy about the new duties, and that we shouldn't anger them either. I am going to throw you a quote from Bloomberg:

"China's commerce ministry said U.S. tariffs on imports of coated paper are unacceptable and it reserves the rite to take 'necessary' action."

"Necessary" action could very well mean a pending trade war. I want to compare this situation with an analogy, how about a game of poker.

Imagine that the U.S. is playing China in a poker game. The problem is that China has 4 aces and the U.S. is playing with a pair of 3's. In this crazy game of poker China knows the U.S.' hand and the U.S. knows China's hand. The U.S. just placed a bet on the table with its pair of 3's knowing that it has the losing hand. I expect China to take that bet and make a raise on it. In a nutshell, the U.S. is bluffing the losing hand when and both sides know it.

I'm not sure what the U.S. is really trying to do. All China has to do is stop buying bonds/treasuries and diversify its reserves. The just have to flip over the winning hand. Now this might have some negative impacts on the Chinese economy, but it will be disastrous for the U.S. economy.

The media is really trying to spin this off as China being the bad guy here. They are saying that China broke World Trade Organization (WTO) rules by illegally subsidizing goods in which China exports. These subsidies are true, but whether or not they are illegal is another story. I'm not well read enough on WTO regulations to make a judgement on the situation.

The final point I would like to make on the topic is that China is a very nationalistic country. They will not be pushed around by the U.S. or any other country for a long time. I expect them to make a strong statement in their counter actions to these duties.

As this whole situation plays out, look for the dollar to move much lower. This might be the final push that moves the USD index below the ever important 80 level. I expect gold to fly high on this news and future actions from China's commerce ministry. Also remember that the U.S. made it sound like this isn't the only tariff that they will slap on Chinese imports. Stay tuned...

Are we Stupid?

I say "we" meaning the United States of America, and I say "stupid" in reference to the new duties on Chinese imports. I had heard rumors of this, mostly from the new Democrat majority in congress. It has happened, and let's look at the impact of such a bill.

First of all, these duties range from 10.9-20.3% on steel companies, textile producers, and other manufactures facing facing competition from China. What does this all mean? It means that it will be harder for the U.S. to sell its debt to China. In other words, we are cutting off our own lifeline. The old saying goes, don't bite the hand that feeds you, and the U.S. just took a big chomp off of the thumb of China. This bodes quite poorly for the USD.

Let me tell you how I came across this little item of interest. I was on one end of campus doing some readings from a couple financial journals. It was time for me to leave and head to my statistics class on the other end of campus. Before I left, gold was having a nice day up around $4.50 /oz. The USD index was up slightly around .05. I flipped open my laptop, and in the fifteen minutes it took me to ride the bus from one end of campus to the other, the USD index had declined sharply by .38. I started thinking to myself, what could be the cause of such a sudden change. I decided to go to Bloomberg.com, remember that I had been there maybe 30 minutes ago, and sure enough the first headline I see is "Commerce Department Applies New Duties Against China." Wham, I definitely didn't see this coming, at least not yet.

Let me tell you why this is so very bearish for the USD. Like I said, China, among other countries, but mainly China, is our life line. They allow us to fight our wars, and finance our politicians agendas. Without them, we are forced to do one thing, monetize our debt our print money. They are essentially the same thing.

Printing money is self explanatory. Monetizing the debt, if you recall one of my previous posts, is the process in which the U.S. government creates bonds/treasures, and the Federal Reserve prints the money and buys the debt.

Both are so very inflationary and very bearish for the USD. Now the USD is sharply down against the yen and the euro.

I have one final point that I would like to talk bout. These duties, for lack of better words, are going to piss China off real bad. Basically, the U.S. is taxing China. That's what duties and tariffs are. I don't think we want to anger a country that not only holds are future in its forex reserves, but also is the future super power of the world.

I would like to end this post with a quote. It is not my quote, and I can't recall the author either, but it's a good one and ever so prevalent here. "China, like all super powers of the history of the world, will mind its own business, until it can afford to mind everyone else's business." In other words, like the U.S., when China can afford to impose its will around the world it will...militarily. China will use its $1+ trillion of forex reserves for securing future supplies of essential commodities to sustain its growth, and to build a large technologically superior army. They will remember these duties, and they will remember how we opposed them in their fight against Taiwan. If I were in Washington right now, I would get out the knee pads, because there is going to be a whole lot of graveling in the future.

Consumer Spending, What's the Deal?

The consumer spending report came out today and it grew by .6% last month which was double the predicted .3%. That is fine and dandy, I strongly expect consumer spending to fall off the face of the earth sooner than later. This is due mainly in part, but definitely not limited to, housing woes.

On the other hand, the Reuters/University of Michigan's financial index of consumer confidence came out earlier this week and it was down to 88.4 from 91.3. So my question is, what's the deal with consumer spending?

Consumers are spending more while their confidence in the economy is declining. Most rational people save money instead of spending money when they feel that rough waters for the economy lie ahead.

U.S. consumers just don't get it. Their spending is completely out of control. Is it because they can't resist that fancy new SUV, or they just can't say no when their kid wants the new playstation of xbox? I don't know, but i bet that it has to do with that and many other things as well. Consumers are addicted to a lifestyle that is out of control and unsustainable.

This lifestyle has been obtainable because of rising house values allowing the consumer to take out more and more equity out of their homes and spend it on goods that depreciate in value, such as cars, boats, and other toys.

The longer it takes consumers to adjust to a new lifestyle that requires them to actually pay for their toys with actual money and not debt from their home, the harder the transition will be.

To use a bad credit pun, U.S. consumers are maxed out, and they still want more. I want to say that U.S. consumers need to realize that the economy is slowing, and will soon turn backwards, but they are already starting to realize it. The consumer confidence levels tell us that they are starting to realize that everything isn't hunky dory any more. They need to act on these notions and not ignore them buy spending, spending, and more spending.

More Money for War

This past week the House passed a war spending bill, and this was the worst of its kind. The president had already asked for $103 billion, when the democrat majority congress added $21 billion of pork barrel spending.

That $21 billion includes $200 million for dairy farmers, $74 million for peanut farmers, $25 million dollars for spinach farmers. Also, this bill includes $2 billion for what I consider to pretty much be unconstitutional foreign aid for Lebanon and Eastern Europe.

That $21 billion of extra kick backs included in this "war spending" bill is completely used for the democrats to buy votes at tax payers expense. This is what American politics has come to. So and so won't vote unless his business gets x dollars in subsidies and kick backs.

Folks you have to realize that politicians no longer run Washington, but the large companies, who are completely unelected, run the show. Don't think for a second that high level politicians and political economists care for American citizens. Your family cares, your true friends care, and the government most certainly does not care.

Sorry to get political and preachy but this is a subject that I am very passionate about. I promise you that change will come...eventually. Change will come after the economy is ran into the dirt at the expense of the American consumer. Please protect yourself, and your wealth, buy gold.

Secular Bear

That's right, the stock market is in a secular bear market. If you read my blog, you have heard me reference this in other posts, but not actually go into detail on the topic. This post is way over due and now let me share with you they "why" of the whole equation.

First of all market tends to go in long large cycles lasting approximately a third of a century. In other words, a market cycle lasts about 33 years. In that cycle, although bull markets and bear markets last about the same length of time, bull markets out gain the bear market losses.

I believe we entered a bear market in 2000. In that 7 years, the S&P is down 4%, the NASDAQ is still down 50 freacken percent, and the DOW is up a modest 9%. These are absolutely horrible gains for a 7 year period.

Lets look at the last major bear market which occurred in the 70's. I would love to show you the graphs I am looking at right now, but I don't know how to do that being my computer savvy is quite limited. Anyways, I'm looking at a graph of the DOW 30 superimposed from the 70's to the present. The action in the graphs is strikingly similar. With this graph, the peaks of 1973 are almost exactly the peak of today's graph. What happened in the following couple years? Well, the DOW lost approximately half of its value (somewhere between 45%-50%).

One thing that the talking heads on CNBC argue is that the p/e ration and overall dividend yields are still rather low, running at around 16.7x for the p/e and 2.4% for dividend yields. Well the numbers in 1973 were all too similar at 18.7x for p/e and 2.7% for yields earnings. Another very strong similarity to the lead up to the market decline of the 70'2.

Obviously the markets eventually recovered and pushed stronger. I would like to talk about an important point. In 1966 the DOW 30 was trading near 1000. In 1983 we were trading near 1025. Knowing inflation, can you imagine if the DOW was trading at in and around 12000 a decade from now. Wealth will be destroyed and we will see a lot of retirees with a whole lot less money than they expect going into retirement. Don't forget that retirement costs are rising at around 6% per year.

I would like to note a few important items in closing. Secular bears are long periods of sideways trading. If the DOW corrects 45-50%, it would put the DOW 30 at approximately 6500-7000...wow. Remember that secular bears historically run between 16-17 years and we are only 7 years into it. The amount of wealth that will be lost will be massive due to high levels of inflation. In the same period that the DOW corrected in the 70's gold nearly tripled, and gold stocks followed suit. You DO NOT want your money in the general stock market right now.

More Than...Less Than...

I'm going to give you a two for one in this post. The first is from yesterday, second is from today, but I they are definitely intertwined.

"Purchases [of new homes] dropped 3.9% to an annual pace of 848,000 last month. Economists had forecast they would rise to 985,000."

"Consumer confidence in U.S. drops more than forecast as fuel prices climb."

First off, some of the drop in consumer confidence might be partially attributed to high prices at the pump, but most likely, they are attributed to the recent volatility in the market and even more on declining home prices.

The supply of unsold home rose to a 16 year high. This supply, along with tightening credit standards, continues to push prices of homes down. One thing that you can always hear the talking heads on CNBC talking about is the amount of money lost in the market correction. I don't have the exact numbers but they say $100 billion dollars lost in equity markets.

What about the amount of money and liquidity that's being taken away in declining housing prices? It's rather important to note that a lot more people own homes than own stocks. Homes are often the only investment of some consumers. These declining home prices are leaving the consumer pinched because they can no longer take equity out on their homes.

Last year the savings rate in the United States was -1%. People spent more money than they made. Even Bernanke said the economy can ride consumer spending to moderate growth. So much of that consumer spending, which accounts for 70% of GDP, is due to their ability to take out equity on their homes. Those days are coming to a home, and expect the number of folks with negative liquidity to rise.

Uranium Update

With the flooding at the Ranger operations, we have seen, and will see, a stronger pinch to an already tightly supplied market. This past week, the wasn't much noise in the uranium price.

I don't expect that that quietness to hold. In the coming week, a U.S. producer is putting up 100,000 pounds of U3O8 for sale at a sealed bid auction. I expect the bidding to be aggressive as buyers look to get there hands on U3O8 at a fixed price. This auction might be the push that gets us into triple digits here. Stay tuned...

Fed Update

It seems, through some clever wording, that the Fed is gradually changing there stance on the economy and the future of the Fed Funds Rate.

They almost had me fooled...not. From the very beginning, I have said that the Feds saying that inflation is their main concern is a joke. It should be their main concern, but it isn't.

You can very clearly see the game that they are playing. Remember, that the Feds are a real spin factory. Their real concerns are keeping public credibility, rising equity markets, and keeping the bubble alive. All three of these things are impossible at this point.

The equity markets are rising. True and great, except not really. They are not rising on the wings of an enormous amount of liquidity. Liquidity in the form of the Yen and Swiss Franc carry trade, and the huge global growth in the mentary base. There has never been a bubble in the history of the world that hasn't collapsed, and this is the biggest bubble yet. These stock gains aren't based on anything that is real and, no matter what the Feds do, they will correct. I expect this correction to be sharp and near 40-50%.

The housing bubble still has a long way to go before it has "bottomed out." Housing prices usually rise at 1-2 points above inflation. They don't double in 6 years. Before I found a true interest in economics, I figured that it was impossible for housing to deflate. All you have to do is go to Detroit where you can buy a house for the same price as a new car to realize that that's not true.

Bloomberg and CNBC have loved the increase in housing starts. They say that it shows confidence in home builders. Who cares about home builders, how about home buyers. The last thing the housing market needs is more supply. As lending standards begin to tighten at all levels, prime included, expect home prices to continue to drop. Expect the U.S. consumer spending to fall of the face of the earth as they can no longer use their homes as a credit card. With the fall of consumer spending comes the fall of GDP growth. Like I said earlier, all bubbles pop.

Pardon my language, but when "shit hits the fan," expect the Federal Reserves' credibility to fall like the housing market. The main goals of the Federal Reserve, in actuality, are impossible to achieve. At best they can post pone what is to come, only making it worse. Expect a cut or two in the Fed Funds Rate in the coming twelve months. This will be disastrous for the economy and the USD, but great for gold. The reduced rates won't last too long before the feds will be forced to raise the rates higher to obtain some economic stability.

What have the Feds actually been doing and saying? Well, the haven't been doing much but they have been saying a whole lot. They are ever so careful in their wording. They originally said that inflation was their main concern. Well how can you cut interest rates, which is what they'd like to do, if inflation is running wild. In the most recent FOMC meeting, the Feds stayed away from discussion about housing and sub-prime and inflation, instead focused more on the moderate growth looking ahead. Basically, but not really mentioning it in a strong context, they unofficially said it wasn't their main concern. That was step number one. Today Federal Reserve Bank of Philadelphia President Charles Plosser said, "Inflation and inflation expectations are likely to be lower and more stable." WHAM, just like that, it's no longer the number one concern of the Feds.

If your saying, "Hold up a second here, it doesn't work like that...does it?" Well, that is a great question and the answer is yes it does and no it doesn't. The public believes it...for a period of time. What happens when the CPI numbers, and new wage numbers, and all of that good stuff comes out next month, and its higher? It might be a slam to their credibility, but probably not. The general public will take it stride, and if the Feds are good at one thing, it is spinning the data to the general naive public.

For me, the Feds never had any credibility in the first place so I don't really care what they say. I know what they are thinking. If you think they all those Ph. Ds in economics sitting over there don't know the dire circumstances of our economy today than your kidding yourself. I promise you that the objectives of the Federal Reserve are NOT in the best interest of the U.S. citizen. Protect yourself from the inevitable, and protect yourself from the Federal Reserve, buy gold.

The Boiling Cauldron

It looks like the heat has been turned up on the boiling cauldron that is the middle east. This mourning, at about 10:30 A.M Iraqi time, Iran seized 15 British sailors and marines who were conducting a routine boarding operation in Iraqi waters.

The British ship was conducting a routine check of a merchant ship when it was surrounded be Iranian vessels and escorted into Iranian waters. Tony Blair, as expected, has called for the immediate return of the soldiers and ship.

This news comes on the eve of a United Nations Security Council vote of a draft that would freeze assets of an Iranian state owned bank. The draft would also include a halt to some exports. Coincidence, I don't think so.

As a result of this incident, oil is trading in and around $62.50 /barrel. We can expect to see little incidents like this cause a spike in oil prices, but let's look at the big picture. What happens if Iran were to capture some U.S. or Israeli soldiers. Believe me when I say, we are BEGGING for an excuse to invade Iran. Iran has inadvertently attacked the U.S. by supplying arms to local insurgents, and the same story goes for Hezbollah and Israel. The cauldron is boiling and don't expect it to cool down anytime soon.

Gold Update

Gold has broken out above its resistance of $660 /oz. This is a very positive technical break through. In the coming months I expect gold to push to a new multi-year high. It appears that the excess liquidity in the market has been flushed and the price is in the hands of the bulls now.

I'm not completely ruling out one FINAL small correction back to the $640 level, but I say the odds are against that happening. I would like to note a couple items of importance regarding the gold market right now. Precious metals have seemed to follow the general stock market up and down over the past month or so. It will be very important for this correlation to be broken before gold can move higher (remember I'm quite bearish on the stock market over the coming years.) I'm most confident that the correlation will be broken. People have temporarily forgotten that gold is a flight to safety when the markets are in turmoil. In the market declines of the 70's, gold tripled in price. I don't see any reason why history won't repeat itself now.

The Next OPEC

The title of this post actually has nothing to do with OPEC. Maybe I should have entitled it "The Next Cartel," because that's exactly what's on its way. This cartel has nothing to do with crude. We are talking about natural gas here.

Although the countries that will be involved aren't finalized yet, some of the mentioned ones included: Russia, Iran, Qatar, Venezuela and Argentina. Although the actual impact of such a cartel is impossible to tell, we could see pump and heating prices go through the roof.

The date for the cartel to commence is set for April 9. I believe it is also important to note that like OPEC, the majority members of this cartel will be enemies of the United States. It is just another example how the allocation of energy commodities is potentially the ultimate weakness for the U.S.

Believe me when I say that anything Russia can do to hinder the U.S. and strengthen its stance against the West, it will do. To throw a few statistics as you, Russia has the largest natural gas reserves in the world at 48 trillion cubic meters. That is 27% of the world reserves. This cartel would hold 73% of the world reserves and 41% of the world production of natural gas.

It is important to note that natural gas contracts are generally long term. When this cartel organizes, it probably won't be able to have a huge initial market effect, but it will eventually wiggle its way into a stance with a much stronger market influence.

Uranium Price

The price of one lb of U3O8 has jumped $6 from $85 to $91. This came out after the Energy Resources of Australia (ERA) stated that the Ranger operation in the Northern Territory has been flooded by Cyclone George. It appears that, once again, water seems to be the nemesis of the uranium industry. Whether it be too much, or lack there of, it has been a rather persistent problem. These are the types of risk you take when purchasing stocks in mining companies.

It's important to note that just the very preliminary news of this has come out and the amount of damage has not been assessed yet. The ERA is in the process of figuring out how to take care of its customers who have already made orders.

Trade Tech has stated that active supply (amount of U3O8 for sale) this month will be approximately 2 million pounds. Active demand (buyers currently seeking uranium) will be 4.4 million pounds. To give you a look at how big this Ranger operation really was, Trade Tech stated that active demand could double if Ranger can't get back online soon. Side note: Cyclone George is heading inland and dissipating quickly, but they are still expecting heavy rains Sunday and Monday in the Norther Territory.

This is coming harder and faster than I imagined. Once again, we can all laugh at my prediction of $100 /lb of U3O8 as it looks like it will more likely encroach $150 /lb this year. Either way, SXR and Denison, actual producers of the yellow cake, will be great hold as this market pushes on.

More Than...Less Than...

"U.S. consumer prices rise more than forecasted."

Inflation continues to rear its ugly head. There was a .4% increase in the CPI putting overall prices 2.7% higher than they were at the same time last year. The article on Bloomberg regarding this statistic is really focused on what Chairman Bernanke is going to do. It sounds like they were looking for an interest rate cut, but these statistics that are coming out continue to make justification for an interest rate cut harder and harder. I hate to beat this to death but we are sprinting towards stagflation here. Inflation continues to rise faster and faster, while growth and consumer confidence continues to decline.

On an interesting side note. Last month we saw a near 40% jump in the minimum wage. At the same time we saw a 6.6% rise in labor costs. Now we see a .4% jump in the CPI. I've said it before and I'll say it again, the only things that a minimum wage law does is cause inflation and unemployment. We continue to see politicians make poor economic decisions to appeal to the ignorance of the American voter (see post on ethanol as well).

Billy the Kid

The million dollar question: What do Billy the Kid and the USD have in common? The answer: They are both outlaws. As of March 21, in Iran and North Korea, it will be illegal to hold USDs. The day after the announcement, Malaysia followed suit. The penalty is jail, and I would imagine in such countries as N. Korea and Iran, the penalties could be much worse.

This means that the approximate 4 million barrels of oil per day that Iran exports will no longer be able to be sold in USD. This puts the monopoly that the U.S. holds on oil sales being denominated in USD at strong risk (approximately 70% of all the oil in the world is held in USD).

And what does that mean? Well, one of the main reason the companies like China, Russia, and the other OPEC countries buy our debt and hold USD is to buy oil. It will be harder and harder for the USDs that are floating around the world to find a home. This, my friends, is bearish for the USD. I expect some other countries to eventually follow suit, although this is most unnecessary. There will be little reason to outlaw the holding of USDs when nobody wants them anymore.

Monetizing the Debt

Let me tell you folks, this is slimy business. The government wants to spend money, but doesn't have any. It also doesn't won't or can't sell bonds to foreign investors. This is what they do:

While total fed credit was down a tiny $1.7 billion dollars last week, the Federal Reserve managed to buy up $1.3 billion dollars in U.S. securities. After seeing the numbers, let me tell you what actually goes on. The fed creates, out of thin air, some bonds. It then prints U.S. dollars and buys up those bonds. Just like magic, the government now has $1.3 billion more USDs to spend.

Like I said, this is nasty business that is very bearish for the USD. As U.S. bonds and treasuries become less and less appealing for foreign investors such as China and Japan, expect a lot more monetizing of debt.

The U.S. isn't going to get up and leave there military operations because China won't fund them anymore. Yes, they eventually will be forced to take that option unless they want to turn into Zimbabwe. I promise you, they're going to drive the car until the tank runs out of gas.

More Than...Less Than...

This is a good one: "U.S. producer prices rose in February by the most in three months, a higher than forecasted increase."

The Producer Price Index (PPI) is a preemptive judge on inflation to come. The input costs that go into making a good/service always shows in the output price that it is sold at. With rising commodity values, the PPI is going up. The PPI rose by 1.3%.

This will carry a couple of results, and before I go on, it is important to realize that this is a direct effect of government fiscal and monetary policy. We will see the increased cost of input goods result in the inflationary prices of those goods or services. The other effect will be job cuts. The producers will start cutting jobs or wages to fight the increasing costs.

If you are a regular reader, you have heard me say something along the lines of the government is robbing its citizens wealth by inflation. Increased taxes are not popular in war times, especially for an already unpopular war. So, the government uses debt and the printing press to finance it. This results in higher inflation, which results in increased prices and/or job/wage cuts. So you also see why inflation effects the poor first and the hardest.

The other question that comes up again is what will the Feds do? They were really trying to set the table for an interest rate cut dinner. The volatile market supports this, slower consumer spending supports this, and the decreasing number of new jobs available supports this. An interest rate hike is supported by the rising and rampart level of inflation. There stuck between a rock and a hard place, but I'll tell you what they should do.

They should most definitely raise interest rates, but they won't. I expect an interest rate cut sometime late this summer. An interest rate cut is going to move us closer and closer to stagflation. Each interest rate cut that ensues will be one more nail in the coffin. It will be the beginning of the collapse of the U.S. dollar and gold will absolutely soar. When all else fails, they will begin to run the printing press. We need Paul Volcker.

More Than...Less Than...

"Retail sale in U.S. rose less than forecasted."

Retail sales rose a weak .1% in February. Consumer spending continues to slow as job growth declines and tons of Americans are put in a crunch because of the housing slowdown. This statistic might now seem like as big of a deal as some others, but I beg to differ, and Mr. Bernanke begs to differ.

If you recall, Mr Bernanke said that he expects mid-year GDP growth to increase a little mainly because of consumer spending. This is not an exact quote, but he essentially said that the economy is riding on the wings of consumer spending, and that consumer spending will carry us through the recessions in manufacturing and housing. It looks like consumer spending is losing altitude and won't be flying so high in the future. This have harsh results on the economy and I expect GDP growth to continue to decline.

Sub-Prime Update

The Mortgage Bankers Association writes, "Sub-prime borrowers fell behind on their mortgages at the highest rate in four years in the forth quarter and delinquencies rose on all types of U.S. home loans."

U.S. mortgages entering foreclosure rose to an all time high of .54%. Sub-prime delinquencies rose to 13.33% from 12.56% in the third quarter. Overdue payments rose to 4.95% from 4.67% which is the highest number since the second quarter of 2003. These delinquency rates are an indicator of future foreclosures.

On another note, New Century Financial Corp. stated that it will not be able to pay its lenders, including Morgan Stanlel, Citigroup, Goldman Sachs, and many others. They are also under the process of criminal investigation.

Accredited Lenders' share value has dropped in half as stock holders are FINALLY realizing that mortgage lenders are the absolute last place on earth that you want your money. Accredited Lenders were forced to come up with $190 million to pay for the buy back of stocks. They are the 15th largest U.S. sub-prime lender and I would not be surprised at all to see them on the chopping block at all in the coming months.

Japan's Future

This past quarter Japan's economy grew at an annualized pace of 5.5%. That is over double the U.S.' 2.2%. A large part of the higher than anticipated growth is said to be due to a strong increase in capital spending. Tech companies such as Tokyo Electron Ltd. and Canon Inc., are planning to build new factories this year. This will result in continued high numbers of GDP growth. Also, consumer spending has been strong as well.

So what does this all mean for the global economy? Well, a group of Japanese economists have set a desired goal for short term lending rates at 2%. That's 4x the current .50%. Let's talk about some of the politics of this whole thing. The most recent GDP growth statistic that came out was 5.5%. Inflation was a measly .1%. Side note: Last year the central bank of Japan (BoJ), took a page out of Clinton's book and their official CPI slid .50%. There inflation is definitely low, but not .1% low. After the Asian Crisis, deflation is still fresh on the minds of the Japanese. Higher short term interest rates means lower inflation and a stronger Yen. Their GDP numbers cry for an interest rate hike, while their CPI says no way.

For Japan to be economically respectable at all, they have to have higher interest rates. But, I promise you that the main worry, more important than the above mentioned, is the Yen carry trade. Higher interest rates will result in a ton of liquidity being ripped from the market. I mean, you saw what happened after the 25 point hike from .25% to .5%. So the same folks who decided to tamper with the Japanese CPI in order to prevent an interest rate hike, are very worried about the next 6 months in the Japanese economy. This will be very interesting to watch, but there is at least 1 or 2 rate hikes to be expected by the BoJ this year. Stay tuned, because right now this is the biggest story in global economics.

Baby Steps

China has announced that it is in the process of setting up a government controlled agency to manage its $1.07 trillion USD of forex reserves. Lou Jiwei flat out said that the majority of their reserves are in USD denominated assets, and they are losing money on the investments as the Yuan gains in value. In other words, they don't want USDs any more. As they use these USDs to buy other assets, the value of the dollar will begin to decline sharply. They have stated that some of their investments will go to overseas technology companies, oil fields, and mining companies. I wrote about these speculations a long time ago. I believe the post was titled, "If You Don't Believe me, Believe China." Once again, China is making investments in uranium, precious metals, base metals, and oil. I will look to add my holdings in Chinese mining companies, because I believe that as they increase their forex holdings of gold, they will get as much as they can domestically. The initial amount that the new investment fund will handle is $200 billion USDs worth.

China holds roughly 70% of its reserves in USD and in 2006, they experienced a $3.4 billion USD loss in exchange rates. With the Federal Reserve reaching for the trigger on interest rate cuts, their losses on exchange rates will be much more significant if they continue to hold USD. Can we say "snowball effect." You betchya. That's "you bet" in the native tounge of Minnesotans if you didn't know. By the way it's a wonderful 40+ degrees here in Minneapolis today. You gotta love it.

More Than...Less Than...

Well I guess if I'm going to do the "More Than...Less Than..." I have to report both sides of the story. For the first time in a long time it looks like the "economists" were overly pessimistic. I'm shocked. A Bloomberg head line reads:

"Jobless rates in U.S. unexpectedly drops; countering slowdown speculations."

The jobless rate fell 4.5%, approaching a 5-year low. The study also showed that average weekly earnings rose, and even the trade deficit even narrowed. I'm not taking this one in stride though, I think something is up here. I found some numbers for this statistic and it shows there was a 39,000 increase in government jobs while private jobs only increased by 58,000. That is the lowest increase in private employment since October 2005. Manufacturing actually cut jobs by 14,000. The study also showed that 190,000 people have left the labor force, which helps explain the drop in unemployment. If I had to guess, I would bet that the monetary base, or money supply, has got the printing presses running on overdrive. I do make a personal guarantee: The longer that the Feds/Politicians, try and keep this economic mess "looking good," the worse this whole thing will be when it breaks down...much worse.

Let's look at the trade deficit for a second. It 3.8% from $61.5 billion to $59.1 billion. That's a monthly statistic, which means that our trade deficit falls short $197 million short EVERY DAY. That speaks for itself.

This whole thing smells fishy to me, and let me tell you why. I watch CNBC's "Closing Bell," and "Kudlow & Company" every day. Larry Kudlow is the single most economically optimistic person I have ever seen. The guy has never once acknowledged that anything is wrong in the economy. He remains amazingly bullish on the stock market and expects GDP growth to return above 3% anytime now. What I'm getting at, is that even Larry freckin Kudlow expected an ugly number to come from this report. Like I said, the whole thing smells fishy to me but I have to look into it further and I will give an updated report on the situation.

I know this post is really all over the place but I would like to talk about one more thing. It's looking more and more likely that the Feds will be cutting interest rates AT LEAST once in 2007. Now all of the Phd. economists working at the Federal Reserve know the implications this will have on the USD. They will wait until the very last minute to do cut rates. I believe that they are firmly setting the table to be able to do this and here's why:

Inflation is out there and running wild. It may not seem like anything crazy in the CPI, but wait another year or so. It's there and it can only be contained for so long. Two days ago, Bernanke spoke at Stanford University. Try not to laugh, but he said that the CPI OVERSTATED true inflation levels. Yeah, right, whatever you say Mr. Chairman. Anyways, he has to convince the public that inflation is not a dire problem in order to justify a rate cut. So you can see how he's setting the pins up to knock them right back down.

Like I said, expect a rate cut this summer, probably late summer, and another cut towards the end of the calendar year in 2007. When this happens the dollar will decline and gold will rise. Both actions will be sharp.

More Than...Less Than...

"U.S. retail February sales trail estimates on weather."

It was a cold February, but what this really says is that consumer spending is declining. The statistic his an 11 month low which makes me actually believe that the weather might have had to do something with the statistic. Knowing this, they still over estimated the amount of sales. Once again this will not bode well for GDP growth as retail sales and consumer spending continue to decline.

Despite the news, the market is up triple digits this mourning. I wouldn't be surprised if they gave it all back tomorrow when the unemployment numbers come out.

More Than...Less Than...

A Bloomberg head line states, "U.S. added 57,000 jobs in January, fewer than estimated, ADP survey says."

I'm sure you, the reader, like myself, wonder what the number 57,000 really means. Well, it's the lowest number since July 2003. It is also less than half the amount of the 121,000 jobs created in January.

The survey said that companies were putting off hiring new workers in preparation for an economic slow down. The largest declines were seen in residential housing and manufacturing. Data continues to come out showing the decline in the strength of the labor sector. I believe this Friday's unemployment statistic will be significant displaying further weakness in the labor market.

A decrease in new jobs will effect consumer spending. Consumer spending and the war efforts are the two items keeping GDP growth positive. A weakening in labor statistics will carry weight in the consumer markets which make up 70% of GDP.

Denison Mines Update

Denison Mines Corp., has signed an agreement with Pathfinder Mines Corp., a subsidiary of AREVA, to aquire 5 uranium deposits in the Arizona Strip for $5.5 million USD and a 1% royalty.

The historical resource estimates at the Pathfinder deposits total 1.3 million tons of an average grade .28% U3O8, containing an estimated 1.3 million pounds of U3O8 according to Denison.

The deposits are reasonably close to Denison's White Mesa Mill near its Arizona Strip mines. This should really step up production in this area. Consolidation continues and I love Denison and SXR as time goes on.

More Than...Less Than...

I know I just started this series, and I don't want to beat it to death, but it's a big day for the miscalculations of key economic data.

"New orders at U.S. factories tumbled by a greater-than-expected 5.6%."

That is the biggest decline in over 6 years. The Commerce Department said some of the drop was due to less orders for airplanes.

"Pending sales of existing U.S. homes fell a sharper-than-expected 4.1% in January." That's a surprise...yeah right.

Side note: It seems that a combination of rather disturbing economic data combined with continued talks of recession by Greenspan have not affected the market as it is up somewhere between 80-90 points as I am writing this post.

The "R" Word

Greenspan came out again today and said that a recession is a possibility. He actually said that there is a 1/3 chance of a recession in 2007.

This whole situation is slightly humorous to me, and let me tell you why. Stepping away from the economic side of things. As Fed Chairman, you pretty much are unable to tell the truth about the economy when things aren't going so well. Americans are emotional investors and words of that nature would rock the market and send it into a spiral.

So I think that Greenspan, now 81 years of age, finally isn't responsible and can tell the truth about the economy. He doesn't have to clean up the economic mess when it comes, so he doesn't have to try and spin the situation. After 18 years of deception, the guy finally wants to speak his mind...truthfully.

More Than...Less Than...

I'm am going to start a more than/less than series. This is going to be a series of post regarding how often "economists" have been overly optimistic in their prediction, or the economy is just that much worse than expected. Each post will begin with a direct quote from Bloomberg as these statistics come out. Here we go...

"U.S. workers were less productive last quarter than initially estimated and labor costs jumped, raising the risk of faster inflation."

Productivity measures how much work an employee does in one hour of work. The productivity is down from a 3% annual rate to a 1.6% annual rate. That statistic is from the labor department. They also said labor costs rose 6.6%.

You know who really hates this news? The Fed. They really want to cut interest rates, probably this summer some time. Inflationary news makes a rate cut by the feds harder and harder to justify. Also, it looks like we might be heading towards a stagflation. Every statistic that has come out in the last month has shown increasing inflation and decreasing productivity.

In conclusion, rising labor costs and decreasing productivity is not good news.

Sub-Prime Update: New Century

All in all, the death toll of sub prime lenders is 31. That's 31 sub-prime lenders that have declared bankruptcy. I'm going to give you a short list of some of the big ones:

Freemont Gerneral, 5th largest lender
First Franklin, 11th largest lender
Ownit, 17th largest lender
MLN, 19th largest lender
ResMAC, 21st largest lender
ECC/Encore, 24th largest lender
Fieldstone, 25th largest lender

Now it looks like New Century is on the chopping block. They are the 3rd largest lender of sub prime mortgages, and it's looking like we will be singing Queen's, "Another One Bites the Dust." This is a HUGE company that is in the process of tanking.

Bloomberg has compiled a list of their debts among other statistics that I would like to share with you. Also, I have a contradiction. Bloomberg has them listed as the number one sub prime lender. Either way its a big deal. Bloomberg reports (not exact quotes, but a summary):

New Century reported on March 2nd that it faces criminal probe and will need waivers from its own lenders to stay in business. The company will probably be forced to declare bankruptcy. Bankruptcy is "more likely than not." They are running on fumes and the only way they can stay above water is if they can find a large company to provide capital in exchange for a majority ownership. In other words, a buy out.

At the end of this past September, New Century owed $1.5 billion dollars to Morgan Stanley and UBS AG. In all, New Century is said to have 16 credit lines totaling $17.4 billion. The terms of those credit lines stated that New Century had to have timely and accurate financial results. New Century failed to meet this term as it didn't produce an annual report by March 1.

They did receive some credit line extensions, because of there obvious inability to repay the money. Goldman Sachs Group Inc. and Credit Suisse Group gave New Century extensions. Some of the other creditors that gave extensions include, but are not limited to: Bank of America Corp., Barklays Plc., Bear Stearns Cos., Citigroup Inc., and Deutsche Bank AG. This is a text book example of how Chairman Bernanke was dead wrong when he said that he didn't expect sub prime problems to have a spill over into the prime sector. All of these companies denied comment or didn't return phone calls.

The company is facing criminal probe regarding its accounting and trading in securities. S&P down graded New Century's credit rating from B to BB-. Today, the stock is currenty down over $9.50, which is a 65%+ decline.

KPMG LLP, the companies auditor, stated that, "substantial doubt exists as to the companies ability to continue."

You have to look beyond the numbers and two steps ahead to really realize the implications of sub prime spill over into the prime sector. New Century is going to be delinquent on $17.4 billion dollars of debt. All of it credited by prime lenders. Those losses directly effect the lending standards of the prime market. As these companies tighten the noose on lending standards, the economy will begin to feel the strangle hold. The housing sector will be hit harder and harder as lenders make it more difficult for folks to buy a new home. The feed back loop will just be more dramatic as time passes. See the post entitled "Feedback Loop," if you need a better explanation.

Moderate Growth?

Ben Bernanke has predicted that he expects the Goldilocks economy to continue. He said that he expects economic growth to even start to increase mid year. Well, today the Institute of Supply Management's Index of non-manufacturing business, which makes up 90% of the economy, came out. And just like every other statistic that has come out in the last month, it is lower than what most "economists" expected. It fell from 59 to 54.3, which is the slowest growth in over 4 years. This statistic suggests that the slowdown in housing and manufacturing IS spreading to other sectors, which again is contrary to Bernanke's words. Half of the 18 industries surveyed, including retail, financing, and construction, reported slower earnings.

Bernanke is either lying to us, ignorant to the world (which I doubt), or the most optimistic person I know. He says no sub-prime spill over. Woops. He said the recession of the housing market wouldn't spread. Woops. He said he expects mid year increased growth. Woops. He doesn't see a recession...we will see. With me, his credibility is shrinking, not that there was much there to begin with.

I would like to make one more brief point in this post. Every freckin statistic that comes out: inflation, GDP growth, manufacturing, new home sales, etc...economists have been over optimistic on every one. Not one economist has errored on the pessimistic side. This is what I see EVERY day. Inflation...higher than predicted. New home sales...lower than predicted. GDP growth...slower than predicted. Manufacturing/orders for durable goods...less than predicted. I would like to come out with a not so bold prediction. When the unemployment statistic comes out this Friday, it will be higher than predicted. Give me a break.

Market Volatility

The market continues to be very volatile is things progress here. The DOW started the day down, but is currently up. The markets seem to be watching the current economic situation closely. I use the word closely with caution, because I definitely don't think that they are reading in between the lines here. If they were, they wouldn't have any money in the market period.

What I'm talking about, is the strong market reactions to Bernanke's speech, economic statistics such as inflation, unemployment, and home sale. They seem to be reacting to the lending/credit sector as they continue to put out very pessimistic numbers. They also seem to react to the price of light crude oil which is down today and what I believe to be the reason that the market is trading up this A.M. New unemployment statistics come out this Friday and I believe that they are going to impact the markets. I expect the 4.6% unemployment to rise to somewhere in the range of 4.8-5%. I believe this because manufacturing and construction jobs are declining sharply. These are jobs lost in the housing market, as it continues to spiral downwards.

Foreign markets seem to be taking it the worst still. European markets are falling as we speak, and the Nikkei fell another 3% over night. If this is the big one, the global end of the liquidity bubble. We will begin to see the $340 trillion derivatives market get dragged into the mess. Yes, that's a trillion with a "t". That's a story for another day.

I would once again like to focus on the carry trade. The Japanese Yen is now at a 3 month high against the dollar, and still rising as carry traders unwind their investments. Today, the Yen has risen against all 16 major currencies of the world. It has reached its highest value against the British Pound since October, and the same story against the Euro since November. I would like to reiterate a very important point. Global markets are COMPLETELY dependant on a strong Yen carry trade and weak value of the Yen. As these go, so goes the markets.

Remember, that these ridiculous market gains seen across the world are not "real" bull markets. Real is in quotations, because they are not based on fundamental economic growth. They are based on liquidity growth in the form of a larger monetary base and easy lending standards. The global growth in money supply that we are seeing today is unique to our history, and a lot of that money is finding its way into the markets. Folks, just because you print money and throw it into the market, doesn't mean that the stocks are worth more in real terms. It means that the government is robbing you in the form of inflation instead of imposing a direct tax. Think about it...

Short Term Outlook for Gold

Gold has had a major breakdown in price. We had a double peak formation with this past July's high and we were unable to break through. It happened that the global sell off came when we were poking at this resistance and caused a sell off. This sell off has pulled us down and through the $650 /oz.

I expect a sharp decline back to $580-590 /oz. Then the major up leg will begin. I strongly believe this because we have similar double peak formations in silver, the XAU, and HUI. We will pull back to the 200 day moving average where we have found infallible support. We will move positive from there.

A sign that this up leg wasn't THE up leg, was that the HUI was leading bullion prices. In other words, the HUI index was pulling bullion prices up instead of the bullion pulling the HUI.

Also, the breakouts that we saw in gold/USD wasn't seen in all other currencies. For example the C$ didn't experience the breakouts, or fake outs as I like to call them. All of this news is trivial to me. The move down should be swift, and the turn up should be swift. In the long run I am still very bullish on gold. A lot of people will exit their positions and buy back in once we hit the the 200 day MA. Not me. I would hate to miss the market after some geopolitical event that might cause a $50-$100 jump in the price /oz of gold. Also, although I'm pretty confident in my support lines and break down points, I haven't been in the game long enough to completely trust myself.

I still hold to my prediction of gold/silver hitting record highs in 2007.

WHY!?!?

That's the million dollar question. Why have the markets all of the sudden decided to correct so sharply. I contribute this to several factors. Realize that none of these factors have anything to do with the real problems in the U.S. economy: housing market, lending sector, inflation, and government debt. The media has refused to acknowledge these things, so I assume the average investor doesn't look at them as seriously as they should. The markets relay this information. We wouldn't see the DIJA, NASDAQ, and S&P as high as they are today if the general consensus thought there was something to worry about. Albeit, there has been lots of negative statistics coming out over the last month or so, Bernanke continues to say that everything is A ok.

I have mainly contributed a couple of items. The Chinese government cracking down illegal trading which retracted a market that needed retracting. The U.S. stock market was well over due for a correction after 18 months of unprecedented growth. Greenspan's talks of recession were conveniently timed with the market correction. Those are all fine and dandy, and probably have contributed in some way shape or form to the correction that came and is still coming.

But I think the real reason is drying up liquidity due mainly to Japan and its carry trade. As each day passes, I feel stronger and stronger that this is the driving reason of the correction. I have beat to death the notion of the huge amount of liquidity on a global level and talked of how the Yen carry trade is a large driver of this force.

The day before the correction, the Bank of Japan raised interest rates to .50%, with talks of further rate hikes in the future. This will result in the further strengthening of the Yen, making the carry trade more risky and less profitable. What have the actual results been? The Yen hit an 11-week high and is continuing to strengthen against all of the major currencies of the world. The carry traders have been cashing in on the investments abroad. Which is ripping liquidity from the markets. As these markets artificially push higher and higher, it takes larger amounts of liquidity to keep them afloat.

I believe that this is the driving force of the market correction. I look to see how high the Yen goes to see how low the markets will go. This makes me believe that the BoJ will be under large pressure to NOT raise there interest rates any higher. This is a very interesting situation to me. We will see of the central banks of the world try and off set this retraction in liquidity by creating some of there own in the form of printing money or lowering interest rates. The saga continues...