Fri, 06 Feb 2009


SOTT Focus
Free Market Capitalism - Morally and Financially Bankrupt

Simon Davies & Donald HuntSOTT.netThu, 05 Feb 2009 12:11 UTC

© UnknownWhile the world slithers into the black hole of economic collapse, those that head the institutions that sit astride its nations and peoples met in Davos, Switzerland last week for the World Economic Forum. Attendance was, as always, by invitation only and that included the press so we can be sure that whatever came out of Davos 'on-the-record' was intended to. In case you doubt the ability of conference organizers to manage the information flow consider two things; there are numerous "off-the-record" briefings throughout the conference the details of which we never hear, and all those attending, including journalists, want to be invited back for they are members of the Inner Circle and rely on their membership for their place in life. We were not invited which is somewhat galling given that in October 2005 (The Economic Collapse: An Insider's View) and then again in August 2006 (Signs of the Economic Apocalypse - Update) sott.net (or signs-of-the-times.org as it was then) was hosting podcasts in which the forthcoming collapse of the free market capitalist system was discussed in detail as well as our consistent warnings over the last five years. It is even more galling to find that Nouriel Roubini is being treated as some sort of god for saying exactly the same thing as sott.net after we said it. The upside of not being invited is that you, dear reader, can rest assured of our continued independence of both mind and spirit. In a conference brimming with talking points the quote of the week award, bestowed for demonstrating a total disconnect from reality so striking that his psycho-pathology shines through, has to go to David Rubenstein co-founder and managing director the Carlyle Group, one of the most powerful and financially aggressive companies on earth who said in an interview:-
"There are six billion people on the face of the earth, and probably about five billion participated in what went on," Rubenstein said in an interview. "Everybody participated in some way or shape or form." This is the same David Rubenstein whose private equity company grew due to his extraordinary political and financial connections through the use of every aggressive financing tool that Wall Street could invent, tools that relied on the availability of limitless amounts of cheap debt and the financial engineering made possible only by derivatives. He is not a stupid man but he is clearly psychotic and delusional having a complete inability to empathise or see the reality of the lives of billions on this poor planet; the very notion that any more than a very small handful of already wealthy people and perhaps a few who gathered the crumbs from their table benefited from the debt driven private equity bubble is beyond comprehension. Rubenstein was ranked by Forbes magazine as the 165th richest person in America in 2007. The Carlyle Group has over $90 billion of funds under management (with many times that amount of debt at its disposal), is notorious for being the company with which both Bushes and bin Ladens are affiliated in various ways and boasts current and former employees ranging from Nicholas Sarkozy's brother Olivier to James Baker, former US Secretary of State, and Karl Otto Pohl, former President of the Bundesbank (the German central bank). These are the men who run our world, the men who have created the financial 'crisis' and who plan to profit from it as Rubenstein himself said recently to the Wall Street Journal :-
In a keynote speech at the 15th annual venture capital and private equity conference at Harvard Business School, Rubenstein laid some of the blame for the private equity industry's troubles on investment banks, who competed with each other to see who could offer the cheapest debt with the loosest terms. But he admitted that the buyout industry got carried away, too. "I analogize it to sex," Rubenstein said. "You realize there were certain things you shouldn't do, but the urge is there and you can't resist." The top priority now is "to make sure deals from 2004 to 2007 don't go bankrupt," he said. To that end, buyout firms will focus on cutting costs, including through layoffs, buying back the debt on their portfolio companies and holding the companies longer, "So, when the world comes back, you'll have an asset that you can use." [ ] "Ultimately, the best private-equity deals of all time will be done [during] this time," Rubenstein said. While the IMF's chief economist declares that, "We now expect the global economy to come to a virtual halt." we have Rubenstein and his ilk licking their lips at the cheap pickings that are soon to be available to those who created this 'crisis'. The sage words of Warren Buffett are worth remembering when he referred to Rubenstein and private equity firms of his genre as "porn shop operators", "You can sell it to Berkshire [Buffett's fund], and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever. Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it." Talking of crisis, the truly global extent of the current collapse is striking:-
IMF expects global economy to come to "virtual halt" in 2009. The International Monetary Fund (IMF) said yesterday that it expects world economic growth this year to be the lowest since World War II. The Fund's latest update to its 2009 World Economic Outlook forecasts global gross domestic product (GDP) growth of just 0.5 percent - sharply lower than the 2.2 percent annual growth it expected last November. IMF chief economist Olivier Blanchard declared: "We now expect the global economy to come to a virtual halt." The global slump is being led by the advanced economies, almost all of which will experience major economic contractions. The US economy is expected to decline by 1.6 percent, the eurozone by 2 percent, Japan by 2.6 percent and Britain by 2.8 percent. On average, output in the advanced economies will fall by 2 percent - the first such collective contraction since the 1930s. Economies classified as "emerging and developing" will grow by an average of 3.3 percent this year, down from 6.3 percent in 2008. Countries in Eastern Europe, Latin America and Asia are expected to experience the sharpest slowdowns. China and India remain the fastest growing, with expected 2009 growth of 6.7 and 5.1 percent respectively. In neither case, however, is the projected growth rate sufficient to generate enough jobs for the rapidly growing Chinese and Indian urban populations. The IMF's extraordinary world forecast underscores the inability of world governments to mitigate the economic crisis. The Fund's revised outlook takes into account the various stimulus packages enacted internationally. It warns: "Given that the current projections are predicated on strong and coordinated policy actions, any delays will likely worsen growth prospects... Downside risks continue to dominate, as the scale and scope of the current financial crisis have taken the global economy into uncharted waters. The main risk is that unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth." While advocating aggressive monetary and fiscal policies to try to stimulate global demand, the IMF warned that stimulus spending threatened to blow out governments' budget deficits. In advanced economies, these deficits are forecast to reach 7 percent of GDP this year, nearly double the 2008 level. "The sharp increase in the issuance of public debt could prompt an adverse market reaction, unless governments clarify their strategy to ensure long-term sustainability," the IMF report stated. In other words, while stimulus packages are now required to prevent a deflationary spiral of declining economic activity, in the longer term pressure will build for austerity programs involving deep cuts to social programs to cover government debts. The world crisis is plunging hundreds of millions of working people deeper into poverty. The International Labor Organization (ILO) released its annual Global Employment Trends report yesterday. It forecast that as many as 51 million workers could be laid off this year, potentially pushing the global unemployment rate to 7.1 percent (up from 5.7 percent in 2007). ...Mass unemployment is but one aspect of the growing social hardship being experienced internationally. The ILO forecast that the number of "working poor" - or more accurately, the working destitute, given that the category's criteria is earnings of less than $2 a day - may rise to a total of 1.4 billion people, or 45 percent of the world's employed. Up to 20 percent of those now living marginally above the poverty line may fall back into extreme poverty. "The ILO message is realistic, not alarmist," Director-General Juan Somavia said. "We are now facing a global jobs crisis. Many governments are aware and acting, but more decisive and coordinated international action is needed to avert a global social recession. Progress in poverty reduction is unraveling and middle classes worldwide are weakening. The political and security implications are daunting." At the risk of actually being invited to Davos next year, we think that the IMF's forecasts are too optimistic. If the statistics are not manipulated we expect the US, Japanese, Eurozone and British economies to all contact by over 5% and possibly significantly more in the next year. That assumes no external event such as cometary impact, Israel's initiation of a nuclear holocaust in the Middle East or the complete collapse of the free market capitalist system all of which are more than possible in which case all bets, including the next World Economic Forum, may well be off. What is clear is that while the production of "goods" will be down, the escalation and expansion of suffering will be up this year. The economic system is psychopathic in nature, pushing suffering downwards through society and profits upwards. Two very telling incidents last week in the United States, one of the wealthiest countries in the world, illustrate the problem and the extent to which the capitalist system has degraded human bonds and humanity in general. In Bay City, Michigan, Marvin Schur froze to death sometime between 13th and 17th January, the local municipal electricity company having installed a device on his house to limit (to nil?) his electricity because of unpaid energy bills. This "limiter" cut power to his house, and Marvin eventually died from hypothermia amidst a bitter cold front that descended on Michigan that week. Nobody made any effort to tell Marvin that the 'limiter' had been installed much less how to restore electrical power to his home. Marvin was 93. Following his death city officials, the police, the electricity company and the local newspaper seem to have done their best to bury the story; it only being due to the leg work of the a World Socialist Web Site reporter that the story eventually surfaced:-
The director of the local state welfare agency in Bay County, Bernell Wiggins, refused to be interviewed for this article. Wiggins would not answer questions about services the state of Michigan provides to the elderly in Bay County. His employees are prevented by a state gag order from communicating with the press. [ ] The callousness of the city, which is dominated by the Democratic Party, is indicative of a social system that regards the market principle - defense of the profit system at the expense of social need - as the holiest of the holies. In fact, even in the wake of Schur's death city officials continue to operate dozens of "limiters" across the city, and have shut off power to scores of households this winter, many of which are doubtless inhabited by the elderly and small children. Similar suspensions are taking place across the country and regularly result in house fires, asphyxiations, and freezing deaths. These deaths result directly from the policies of the US political and economic elite, which regard heat, water and electricity not as basic human rights, but as lucrative sources of profit for the financial aristocracy. In another tragic incident, by no means isolated, a Southern California man who lost his job killed his wife and five children and then himself. Ervin and Ana Lupoe both worked for a health company, Kaiser Permanente West Los Angeles which had sought to take action against them following representations they made to "an outside agency" regarding their employment in relation to obtaining some benefit related to childcare. Ervin was told by his administrator at Kaiser Permanente on December 23, "You should not even had bothered to come to work today, you should have blown your brains out." Both Ervin and Ana were eventually fired by Kaiser Permanente in a manner such that they wouldn't be eligible for unemployment benefits and the company withheld their licenses thereby preventing them obtaining other similar employment. With five children under 8 Ervin clearly felt he had no other options; he faxed a suicide note to a local media office then shot his wife and children before turning his gun on himself.
The San Jose Mercury News quotes Carmen Adame, who said, "Their employer led them to this." She said Lupoe and others in their community were being forced to work under unreasonable conditions. "Employers are abusing this economy because people don't want to lose their jobs," she said. Another Wilmington resident, Xavier Hermosillo, told city officials, "People are frustrated with their government. This is a societal decline." [ ] Wilmington, a working class neighborhood located between the ports of Los Angeles and Long Beach, has a population of about 55,000. The annual income of more than half of its households is less than $30,000. Home prices are collapsing, and more than 1,000 homes went into foreclosure from January 2007 to September of last year. Foreclosures are expected to increase significantly when the full impact of the crisis begins to be felt. Many Wilmington residents who previously worked at the nearby docks have lost their jobs as dock traffic has plummeted in recent months. Longshoremen working on a casual basis have not found work since the end of November. The official unemployment rate for Los Angeles as a whole stands at 9.5 percent, a 14-year high. Following the Lupoe murder-suicide, investigations into Ervin Lupoe's personal finances showed how this economic climate, combined with the loss of his and his wife's job, was plunging him into debt and increasing desperation. He was at least a month behind on his mortgage, owing $2,500 and a late fee, and owed thousands more on a home equity line of credit. He also owed the Internal Revenue Service at least $15,000 for back taxes, and a check he written to the agency for that amount had recently bounced. On Monday, Lupoe had called his attorney to check on money he was owed in an auto accident settlement. [ ] Within hours of the shootings, Los Angeles Mayor Antonio Villaraigosa set up a news conference outside the Lupoe home, offering his take on the devastating situation. "A man who recently lost his job allowed the despair to put him over the edge," he said. "Unfortunately this has been an all-too-common story in the last few months. But that does not and should not lead people to resort to desperate measures." The mayor was alluding to the fact that there have been five cases of murder-suicide in Southern California in the last year. The majority of the shooters in these incidents were facing work-related or financial crises. The mayor also advised people to reach out for financial advice and mental health counseling. Again, there was no mention of concrete measures to provide jobs, or to counteract the housing crisis. Ironically, the very agencies that provide such counseling are threatened with drastic cuts due to the California budget crisis. Ken Kondo, press spokesman for the LA Department of Mental Health, said that calls to the department's hotline have more than doubled since last year, with 22,000 calls specifically related to economic stress received in the last six months alone. "Since the rise of foreclosures and unemployment we have seen a huge increase in calls," Kondo told Deutsche Press-Agentur. He said the cuts "would have a terrible impact, especially with the amount of traumatic incidents we are having." Some of the most brutal incidents in the region over the last year: - On Christmas eve, a man dressed as Santa Claus arrived at the home of his former mother and father-in-law in Covina, Calif. He killed his ex-wife and eight of her relatives and later killed himself. - Last October, an unemployed and financially distraught financial manager shot his wife, three children, his mother in-law and then himself in the Porter Ranch area of the San Fernando Valley. - In February 2007, an apparent murder-suicide claimed the lives of five family members in Yorba Linda. A 14-year-old son survived. These truly tragic events which are being repeated the world over even as you read this column contrast with the attitudes reported by Bloomberg in Davos this week.
Davos Delegates in 'Denial' as $25 Trillion of Wealth Vanishes Regret is cheap for some delegates at the World Economic Forum in Davos, Switzerland. Redemption for their role in the worst economic wreck since the Great Depression comes at a steeper cost. "Nobody in Davos wants to get near a negative like redemption," said Robert Dilenschneider, chief executive officer of the Dilenschneider Group, a public relations firm in New York. "But the truth is that everyone here is part of the problem, and the public will soon begin demanding a pound of flesh." "No banker or businessman wants to take responsibility," said Dilenschneider, who counts 40 Davos delegates as clients, their identities shielded by confidentiality agreements. "It's their view that everybody else did something wrong." Questions about responsibility, blame and contrition hang in the cold mountain air at the glitzy Alpine resort this week like so much exhaled breath. With $1 trillion of bank losses and $25 trillion of market value gone missing since the start of the financial crisis, there's much to account for. "There's a 'Great Gatsby' quality to Davos," said Niall Ferguson, a professor of history at Harvard University in Cambridge, Massachusetts, referring to the novel by F. Scott Fitzgerald. "When people look back at this gilded age, I'm sure there will be images of the investment bank parties at Davos, just as people looked back at flappers after the 1920s. People are still in denial." Ferguson, author of "The Ascent of Money: A Financial History of the World," and a first-time Davos delegate, said "There's a sense of 'let's have the party anyway,' and 'let's talk about the post-crisis world,' as though that could be soon." 'Stupid Things' At a panel on leadership yesterday morning before hosting a reception with champagne and canap s at the Hotel Europe Piano Bar, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon expressed frustration at those who seek to pin all the blame on bankers. "I take full blame for all the American banks and all the things they did," said Dimon, 52, the only CEO of a major U.S. financial institution to attend the conference this year, adding that he knows that's what people want to hear. Regulators, he said, should share some of the blame. "God knows, some really stupid things were done by American banks," Dimon said. "To policy makers, I say where were they? They approved all these banks." Stephen Green, chairman of London-based HSBC Holdings Plc, also criticized regulators at a panel about capitalism on Wednesday. Green, 60, a Church of England lay minister who has written a book about reconciling a life in banking with his belief in God, called for "an overhaul of the regulatory environment." He also talked about the need for self-regulation, saying that "no amount of rules is going to enforce good behavior." 'Everybody Participated' At a press conference on Jan. 28, he dodged the question of personal responsibility, saying only that "the banking industry" has "something to apologize for." [ ] No Innocents Ruben Vardanian, CEO of Russian investment bank Troika Dialog Group, said just saying sorry is not enough. "Our values became miserable," Vardanian said. "We are all guilty, and the scope of attrition is large." Suzanne Nora Johnson, a former vice chairman at Goldman Sachs Group Inc. and a director of American International Group Inc., took a similar view: She said there are no innocents walking Davos's icy streets. "There's no immunity in any sector," says Johnson, who heads the World Economic Forum's Global Agenda Council on Finance and Business. "No one did a good job." Spreading the blame around is one thing; whether bankers are ready to atone for their actions is another. Abu Eesa Niamatullah, executive director of the Cheadle Mosque in Manchester, England, who is in Davos to tend the spiritual needs of global business leaders, says Islam calls its cleansing process "expiation" and that he doesn't expect any takers. Redemption "Bankers don't want redemption for the moral wrongs they've committed against humanity," said Niamatullah. "Redemption is a heavy word for Davos Man because remorse must come with sincerity and the desire to atone for the transgression. There are no sincere acts of sorrow in Davos." That may be because Davos has no time for redemption, says Barry Gosin, CEO of Miami-based global real estate firm Newmark Knight Frank. "If a shark bites your leg off while swimming in the ocean, can you condemn the shark? This was not an intentioned plan to destroy the world. Wall Street was designed to make money." If atonement is difficult, retribution may prove "brutally difficult," Starwood Capital Group CEO Barry Sternlicht said in an interview in Davos. As Sternlicht sees it, "everyone wants a head, and that's not reasonable. To do that, you'd need to take out the top 20 executives at the 300 biggest financial firms." Humility, Transparency The forum's chief redemption officer, John DeGioia, hasn't figured out how to make the moral component a useful part of any economic stimulus package. "This moment requires a real humility about the fact that we built these systems and are responsible for them," says DeGioia, president of Georgetown University in Washington and head of the forum's Global Agenda Council on Society and Values. "None of us has demonstrated the leadership required and humility necessary to respond to the depths of this crisis." John Studzinski, a 52-year-old senior managing director of Blackstone Group Inc., the New York-based private equity firm, says Davos delegates need more than humility. "People can't be transparent until they start being transparent with themselves," Studzinski said. It takes a certain mindset to be able to talk with such contrition yet avoid the obvious, a mindset that Walter Bromberg, noted psychiatrist and criminologist, summarised in Crime and the Mind (1965):-
In the area of business crimes, ethics are not so neatly applicable: here the zone of gray, lying between the black and white of right and wrong, becomes significant. Sharp business practices, chiefly by large corporations or cartels, once considered ethical in the larger frame of private enterprise began, on scrutiny, to appear suspiciously like criminal actions. Manipulations arising out of cartels, subsidiaries and monopolies, overemphasis or omissions of vital facts in economic competition, short cuts, circumventions and skimpiness in complying with laws and regulations, self-assigned indulgencies in the matter of exploitation, connivance with governmental officials - all touched on criminal categories. This mindset is underpinned by one of the greatest slights of hand ever perpetrated upon society; corporations have the legal rights and protections of 'natural persons' but are not held to the same responsibilities. The US Supreme Court even ruling that "business practices and callings are above the law", as Walter Bromberg commented, "The notion that a corporation could be immoral seemed an idea foreign to American thinking". This was summarised by E.A. Ross in Sin & Society (1907), a corporation is "an entity that transmits the greed of investors, but not their conscience". With the viral spread of just this "American thinking", we see today the results upon the outlook of those at the pinnacle of world power; a thinking that can only be described as "without conscience" and therefore by definition, psychopathic. All those in attendance at Davos and all the commentators in the mainstream media are imprisoned in their self interest such that they cannot venture to conceive the obvious; that what is at fault is the entire system not the actions or inactions of any one group or groups of players. Whichever stone one turns in examining this 'crisis' one ultimately has to face the fact that the capitalist system as practiced today is morally, ethically, socially and financially bankrupt. It is bankrupt because that is it's nature. We have been researching the history of the ethics of business and in particular the role of religion in the rise of capitalism. This research is ongoing but one thing is becoming abundantly clear - whatever system of morals and laws that has been conceived at whatever time in history, there has always been a yawning chasm between the purported morals and laws and the daily practices of the time. The medieval ban on usury was easily bypassed by clever framing of contracts and business arrangements and was totally ignored by the Church, Kings and Princes when they needed funding for their pet enterprises and especially in the financing of wars. In our own time, we have a plethora of morals and laws which stand in stark contrast to the daily actions we see around us and in complete isolation when compared to the actions of those at the forefront of free market capitalism. We should not be surprised for the god of love has been replaced for many centuries by the god of money and power. Markets
The markets this week (to Feb 2nd)
Previous week's close
This week's close
Change
% change
Gold (USD)
901.90
928.90
27.00
2.99%
Gold (EUR)
695.43
725.02
29.60
4.26%
Oil (USD)
45.90
41.66
4.24
9.24%
Oil (EUR)
35.39
32.52
2.88
8.13%
Gold:Oil
19.65
22.30
2.65
13.48%
USD / EUR
0.7711 / 1.2969
0.7805 / 1.2812
0.0094 / 0.0157
1.22% / 1.21%
USD / GBP
0.7249 / 1.3795
0.6878 / 1.4539
0.0371 / 0.0744
5.12% / 5.39%
USD / JPY
88.779 / 0.0113
89.920 / 0.0111
1.141 / 0.0002
1.29% / 1.77%
DOW
8,078
8,001
77
0.95%
FTSE
4,052
4,150
97
2.40%
DAX
4,179
4,338
159
3.81%
NIKKEI
7,745
7,994
249
3.21%
BOVESPA
38,132
39,301
1,168
3.06%
HANG SENG
12,579
13,278
700
5.56%
US Fed Funds
0.19%
0.19%
0.00
0.00%
$ 3month
0.10%
0.23%
0.13
130%
$ 10 year
2.62%
2.85%
0.23
8.78%Africa The World Bank is projecting lower growth this year (around 3.5%) due to falling commodity prices. The way the free market system works, 3.5% growth would be regarded as fine for developed countries, but for the poorest and most under developed, where all the benefits of growth go to a minute percentage of the population, much higher growth and much more equitable income distribution would be needed to avoid suffering. Because African countries mostly export raw materials, the sharp drop in commodity prices is hitting them hard. Since most African countries cannot afford large stimulus packages, the World Bank official in charge of African programs called for developed countries to chip in some of their stimulus money:
Obiageli Ezekwesili, the World Bank's vice president for Africa, told reporters today at an African Union summit in Addis Ababa, Ethiopia. "Africa did not create this problem. Africa should not be left to suffer the impact of this alone." Many governments on the continent don't have the flexibility for stimulus plans that would add to deficits, the official said. Industrialized nations should divert 0.7 percent of their measures to Africa to soften effects of the crisis and improve roads, electric lines and infrastructure, she said. There's not much chance of the wealthy countries diverting any of their stimulus money to Africa. South Africa, with one of the strongest economies on the continent, plans to implement a $69 billion infrastructure program in hopes of restarting growth; few other African countries can afford to do the same. Asia Chinese stocks are holding up well, leading to some optimism about China weathering the storm. Speaking to people we know in China it does seem that aside from the low end manufacturing, there is still reasonable activity within China. Companies which have previously relied on foreign banks for as much as 60% of their funding are finding that as these foreign banks pull back from lending, so far the Chinese banks are stepping into the gap. One company we talked to reported that this year it expects Chinese banks to provide up to 80% of their funding needs. China's World-Beating Stocks Keep BlackRock Bullish on Economy The world's largest money managers say China's steepest monthly stock gain in more than a year shows the fastest-growing major economy will avert a recession.
The Shanghai Composite Index, the broadest measure of shares traded on the mainland, opens after a weeklong celebration of the Lunar New Year and a 9.3 percent gain in January, the best among the world's 10 biggest markets. Last year, the index fell 65 percent, the worst since at least 1996, according to data compiled by Bloomberg. Chinese shares rebounded after the central bank lowered interest rates five times since September and the government announced a $585 billion stimulus plan. China's economy is expected to grow nearly 8 percent this year even after expanding 6.8 percent in the fourth quarter, the slowest pace since December 2001, according to fund managers Richard Urwin at BlackRock Inc. and Barclays Plc's Russ Koesterich, who together help manage more than $3 trillion in assets. "China is going to do what it has to do to keep the economy humming," Koesterich, the San Francisco-based head of investment strategy at Barclays Global Investors, said in a Bloomberg Television interview Jan. 26. "They can enjoy faster growth than the rest of the world in 2009 and in 2010 as well." In Korea, the Hyundai and Kia auto manufacturers are increasingly targeting China to make up for weaker sales in the U.S. Western Europe and the U.K. European stocks rose last week led by gains in bank stocks, of all things. French workers staged a one-day general strike last week as millions took to the streets to protest Nicholas Sarkozy's policies of bailing out banks while cutting spending for people.
Sarkozy Response Sought by Unions After French Strike, Protests French President Nicolas Sarkozy is under pressure to review his response to the economic crisis after more than a million people took to the streets yesterday in the biggest protest since he was elected in May 2007. "The president said 'I hear you,'" Jean-Claude Mailly, general secretary of the Force Ouvriere union, said today on La Chaine Info. "I'd rather have 'I understand you.' With 2.5 million people in the streets, the president should be careful." Sarkozy, whose €26 billion ($33.5 billion) economic stimulus package to support banks and spur investment was passed by parliament last night, needs to do more to counter rising unemployment and falling purchasing power as the French economy enters its first recession in 16 years, the unions said. Yesterday's one day general strike disrupted transport, closed schools in large swathes of the country and, according to the police, brought 1.1 million people to the streets in cities and towns across France. Unions Confederation Generale du Travail and FO put the number closer to 2.5 million. While France has a history of street protests, the global financial crisis has sparked similar demonstrations and unrest in countries from China and Greece to Iceland. Sarkozy responded in an emailed statement after the demonstrations, saying the "concern is legitimate" and that he is ready for "dialogue." Today, his aides say he won't change his policies. "No change in direction," Raymond Soubie, the president's social affairs adviser, told RTL radio. Sarkozy "will maintain" his economic and social policies, he said. Popular Backing The government will, however, respond, Labor Minister Brice Hortefeux said. "We will respond, but not in an immediate, inarticulate way," he told reporters today. The strike had widespread backing. About 69 percent of the French people supported the strike, a poll by CSA-Opinion for newspaper Le Parisien showed on Jan. 25. "French people have turned to their president to say 'this crisis is serious and we need more protection,'" Stephane Rozes, head of CSA-Opinion, said in an interview today. "Missing that point may bring more social protest." Eastern Europe Russia raised interest rates last week to curb inflation and support the ruble. Poland announced it will delay long-term spending plans in response to anticipated loss of revenue. Poland is planning on adopting the euro in 2012 and needs to avoid large deficits. Latin America Mexico's economy probably shrank 1% in the fourth quarter of 2008, spurring talk of stimulus plans. In Brazil, President Lula announced a 12% rise in the minimum wage. United States Shocking fourth quarter 2008 Gross Domestic Product (GDP) numbers for the United States came out last week : a 3.8% drop even including inventory sitting in warehouses or on store shelves. Equally shocking was the announcement by Exxon-Mobil of profits of $45.2 billion, the largest ever in US corporate history. Gold Bubble? We conclude this week with the thoughts of Naufal Sanaullah on the possibilities of a Gold Bubble in the near and medium term:-
With an insolvent public and no foreign demand for Treasuries, the Federal Reserve will monetize debt [ie. print money] to finance its continued bailouts and economic stimulus. This is purely created capital pumped right into the system. This is not anything new for the Fed, for the past two decades, it has kept interest rates artificially low and created massive artificial wealth in the form of malinvestment and debt-financing. In the past, the Fed has been able to funnel the inflationary effects of its expansionary monetary policy into equity values with its low rates, which discourage saving, causing bubble after bubble, in the form of techs, real estate, and commodities. The excess liquidity (the artificial capital lent and spent because of low interest rates and debt financing) was soaked up by the stock market, which gave the appearance of economic growth and production. With inflation being funneled into equity and real estate over the last two decades, illusionary wealth was created and the public remained oblivious to the inflationary risk and the much lower real returns than nominal. Now that the "artificial wealth bubble" being inflated for the past two decades is finally collapsing, one of two scenarios can occur: capital destruction or purchasing power destruction. Capital destruction occurs when the monetary supply decreases as individuals and institutions sell assets to pay off debts and defaults and savings start growing at the expense of consumption. This is deflation and the public immediately sees and feels its effect, as checking accounts, equity funds, and wages start declining. Deflation serves no benefit to the Federal Reserve, as declining prices spur positive-feedback panic selling and bank runs, and debt repayments in nominal terms under deflation cause real losses. Purchasing power destruction is much more desirable by the Fed. Its effects are "hidden" to a certain extent, as the public doesn't see any nominal losses and only feels wealth destruction in unmanageable price inflation. It breeds perceptions of illusionary strength rather than deflation's exaggerated weakness. The typical taxpayer will panic when his or her mutual fund goes down 20% but will probably not react to an expansion of monetary supply unless it reaches 1970s price inflationary levels. In addition, the government can pay back its public debt with devalued nominal dollars, which transfers wealth from the taxpayers to the government to pay its debt. Inflation is essentially a regressive consumption tax, which the government wants and the Fed attempts to "hide". Not only is the Treasury's debt burden reduced, but the government's tax revenues inherently increase. The Fed, in an effort to minimize inflationary perception, has for the last two decades supported naked COMEX gold shorts to keep gold prices artificially low. The Fed, as well as European central banks, unconditionally supported these naked shorts to deflate prices and stave off inflationary perception, as gold prices stay artificially low. This caused gold shorts to be "guaranteed" eventual profit, by Western central banks offering huge artificial supply whenever necessary, causing long positions in gold to be wiped out by margin calls and losses. [The liquidity generated by such quantitative easing (printing of money) will have a similar effect to the excess credit and liquidity boom of the last twenty years - it will seek a home and generate inflation - estimated at 300% at today's liability level before Obama gets to spend a single dollar.] In order to funnel the excess liquidity into a less harmful asset, the Fed appears to be abandoning its support for gold naked shorts, causing shorts to suffer their own margin calls and cause rapid price expansion in gold. On December 2, for the first time in history, gold reached backwardation. Gold is not an asset that is consumed but rather it is stored, so it is traditionally in what is called a contango market. Contango means the price for future delivery is higher than the spot price (which is for immediate settlement). This is sensible because gold has a carrying cost, in the form of storage, insurance, and financing, which is reflected in the time premium for its futures. Backwardation is the opposite of contango, representing a situation in which the spot price is higher than the price for future delivery. On December 2, COMEX spot prices for gold were 1.99% higher than December gold futures, which are for December 31 delivery. This is highly unusual and it provides strong evidence to the theory that the Fed is abandoning its support for gold shorts. Backwardation represents a perceived lack of supply (in this case, the artificial supply the Fed would always issue at strategic times no longer existed), causing investors to pay a premium for guaranteed delivery. On May 21, when crude oil futures reached contango, I started waiting patiently for the charts to offer a short sell trigger because the contango represented a supply glut relative to perception and current pricing. Oil was priced at $133/barrel at that time and six weeks later, on July 11, oil topped at $147, and six days later crude broke its 50DMA on volume and triggered a large bearish position against commodities that resulted in some of my most profitable trades last year. I consider gold's backwardation as a similar leading indicator to the opposite effect - a dramatic increase in prices. Crude began its most recent backwardation in August 2007 at around $75/barrel and increased dramatically over the next nine months to $133/barrel at contango levels. Backwardation, especially in the case of gold prices, reflects a lack of supply at current prices and is very bullish. But why would the Fed abandon its support for naked COMEX shorts? What makes gold such a desirable asset to attempt to direct excess liquidity into? The unique nature of gold and precious metals provides its desirability in this Fed operation. Gold has little utility outside of store of value, unlike most commodities (like oil, which is consumed as quickly as it's extracted and refined), so its supply/demand schedule has unusual traits. Most commodities and assets go down in price as the public loses capital, because the public has less to consume with and that is reflected in demand destruction that leads to price deflation. Gold is not directly consumed and its industrial use and consumer demand (jewelry) is at a lower ratio to its financial/investment demand than almost any other asset in the world. As a result, gold is relatively "recession-proof," as evidenced by its relative strength in 2008. Gold prices rose 1.7% last year, which is quite spectacular considering equity values went down 39.3%, real estate values went down 21.8%, and commodity prices went down 45.0% in the same period (as determined by the S&P 500, Case-Shiller Composite, and S&P Goldman Sachs Commodity Indices, respectively). Because gold is not easily influenced by consumer spending, highly inflationary gold prices don't do any direct damage to the public and are a good way to funnel excess liquidity without economic destruction. Federal Reserve Chairman Ben Bernanke is a staunch proponent of dollar devaluation against gold and is very supportive of President Franklin D. Roosevelt's decision to do so in 1934. In the past, manipulating gold prices to artificially low levels was beneficial because it prevented capital flight into a non-productive asset like gold and kept production, investment, and consumption high (even if it were malinvestment and unfunded consumption). Bernanke's continued active support of gold price suppression would lead to widespread deflation that would collapse equity values and cause pervasive insolvencies and bankruptcies. Insolvency in insurers removes all emergency "backups" to irresponsible lending and spending, which would surely ruin the economy. Bernanke's plan seems to be to devalue the dollar against gold with huge monetary expansion, causing equity values to rise and economic stabilization. I've heard estimates of 7500 and 8000 in the Dow Jones Industrial Average as being minimum support levels that would cause insurers and banks to realize massive losses, causing widespread insolvencies in them and other weak sectors like commercial real estate that would irreversibly collapse the economy. This gold price expansion, set off by the massive short squeeze, will continue until gold prices reflect gold supply and Federal Reserve liabilities in circulation. The "intrinsic" value of gold today (called the Shadow Gold Price), calculated [by] dividing total Fed liabilities by official gold holdings, is about $9600/oz, compared to around $865/oz today. This gold price calculation essentially assumes dollar-gold convertibility, as is mandated by the US Constitution, and was utilized at various periods of American history. The near-term price expansion in gold, mainly led by abandonment of gold shorts and the first traces of inflationary risk, should show $2000/oz by the end of this year. As the leveraged deals from the pre-crash credit craze mature, with the majority of them maturing in 2011-2014, there will be more monetary expansion for debt repayment, which will structurally weaken the US Dollar (which is inherently bullish for gold) and will also provide new excess liquidity to be funneled into precious metals. This leads me to believe gold will be worth $10,000/oz by 2012. The US Dollar's strength as the equity and commodity markets collapsed was due to deleveraging and an effect of the Fed's temporary sequestration of dollars, taking dollars out of supply. That is over. Oil seems to be putting in a bottom on strong volume, no one is left to buy any more negative real yield securities the Treasury is issuing, and gold has started looking very bullish. But a good speculator always considers all situations. Even if deflation is to occur, which I see as next to impossible, gold prices should still rise to $1500/oz levels next year, because it has shown relative strength as one of the most viable assets left to invest in. In addition, the short squeeze occurring in gold will provide substantial technical price expansion, even in the absence of dollar devaluation. Because of this, I suggest gold as an investment cornerstone for the foreseeable future. ...Literally the only thing that I find suspicious in all of this is the fact that I see so many inflationists out there and I even see commercials on TV about precious metals. I usually like to stay contrarian to the public, which I consider irrational and wholly incompetent. But this enormous debt and monetary expansion is a structural problem that common sense may provide better insight for than the most complex of models and theories. I leave you with this, a quote from Fed Chairman Ben Bernanke about President Franklin D. Roosevelt's 1934 Gold Reserve Act, which was the greatest theft of wealth I'm aware of in American history: "The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience. One of the first actions of President Roosevelt was to eliminate the constraint on U.S. monetary policy created by the gold standard, first by allowing the dollar to float and then by resetting its value at a significantly lower level ... With the gold standard constraint removed and the banking system stabilized, the money supply and the price level began to rise. Between Roosevelt's coming to power in 1933 and the recession of 1937-38, the economy grew strongly." My predictions: gold at $2000/oz by the end of the year and $10,000/oz by 2012 and silver at $30/oz by the end of the year and $130/oz by 2012.