Commentary for the Week of March 8

Jitters over Greece’s increasingly dire financial plight are waxing yet again, taking Wall Street traders by surprise if no one else. The Dow Industrial Average dove 303 points Friday on speculation that Greece would fall into default when the new week began. As of late Sunday night, however, there was barely a word about Greece on Google’s news page – only a story about rioting in the streets following enactment of a new, $2.7 billion property tax in the name of austerity.  That’s the relatively good news. The bad news is that France, of all countries, was generating scary headlines of its own: Woes at French Banks Signal a Broader Crisis, declared the Wall Street Journal.  “France’s largest private-sector banks will likely suffer further credit-rating downgrades this week, the latest sign that the debt crisis on the euro zone’s periphery is slowly infecting the core of the region’s financial system,” noted the article.  Just when we thought the panic was about to engulf Spain and Italy, the spinmeisters insert France into the picture as a buffer, a default risk calculated to be at least somewhat less thinkable than the one threatening to inundate France’s two large neighbors to the south. We doubt the diversion, if that’s what it is, will last for long, however, since, as everyone but the Powers That Be seems to understand by now, we’re all in this together -- Europe, the U.S., China, Japan, South America, Russia et al.  That fact hasn’t stopped U.S. banks from choking off lending to their European counterparts in recent weeks in a delusional attempt to distance themselves from the coming euro-implosion. Do Citibank, J.P. Morgan, Chase, Bank of America and their ilk actually believe their timid, eleventh-hour avoidance maneuvers will keep the blood-dimmed tide at bay when market forces ultimately

[ Wayne Razzi's  guest commentary drew quite a response, so I am running it for a second day. I'll have something to say about the President's latest jobs proposal when Shadowstats reports that U.S. unemployment has fallen below 20 percent.]  Parents have many responsibilities and as nothing matters more to me than the wellbeing of my four children, I take my fatherly responsibilities very seriously.  Educating and guiding my children are two of the most important of those as I see it, and yet my confidence in addressing these responsibilities is decidedly losing a battle to anxiety. John 8:32 accounts that “…the truth will set you free.”  And it seems that it does most certainly achieve that, even in small doses, but it doesn’t assure that you that you’ll find a better place as a result, which is exactly where I am at present.  Aside from the birds and bees and related topics, I never anticipated that I’d have to hesitate so frequently when answering the questions put to me by my children, who range in age from 7 to 12. However, there isn’t a day in which I do not have to either frame my responses quite craftily, or quite honestly tell them that I’ll properly answer a particular question when they are older.  The frequency at which this is occurring is increasing significantly and that is what led to me thinking about just how pervasive the dystopian matrix has become.  I suppose the real problem lies with me in refusing to deceive my children by offering up pat answers to them. Here a few anecdotes.  The smart bunch that y’all are, I expect that you’ll need nothing beyond these to see my point.  Each question is followed partly by some of what I said and some of what I thought.

[It was nearly a year ago that our good friend Doug Behnfield, a financial advisor based in Boulder, Colorado, lucidly described here how America was headed  into an economic coma that would last for many years. With the financial phase of the crisis winding down, says Doug, we are about to enter a prolonged period of asset deflation, high joblessness and stagnant-to-negative GDP growth. A chief cause of this will be by-now-unavoidable, drastic cutbacks baby boomers must make in their retirement plans. For a close-up look at what to expect, read Doug’s essay, below. RA] Now, let's get this straight. We are in the early stages of a secular credit collapse following the biggest credit bubble in human history. The credit expansion that began in the late 1930s finally became a bubble as a result of a universal, irrational and linear belief in real asset appreciation that developed in the 1990s and reached its glorious peak in 2007. The credit collapse began with the financial crisis of 2008. That was followed by all the king's horses and all the king's men brandishing marvelous new tools trying, but failing to put Humpty Dumpty back together again. We got a pause in the collapse and a spectacular bear market rally, but now we are rolling back into contraction. Six months into the transition, it is time to deliver a forecast for the next stage in the new paradigm that began with the inflection of the secular credit cycle. The First Stage was the Financial Crisis. The Second Stage is the Economic Crisis, with all its attendant deflation and GDP contraction. I am reminded of a quote that Art Zeikel included in On Thinking. The quote was from economist Dick Stoken: "Because human psychology is slow to change, a broad economic move usually

[In the guest commentary below, Rick's Picks forum regular John Skerencak (aka 'John Jay') sounds a note of deep despair as we wait for the other shoe to drop, economically speaking. There are no white knights about to ride to the rescue, nor could our corrupt, entrenched political system even implement a good idea if one were up for discussion.  The best we can do, says John, is to hope that Japan and Europe flame out before we do.  RA] Resolved:  Nothing is going to change, so let’s pray that Europe and Japan crash before we do. Will the existing political system change things? No, it will not.  The entire process is corrupt beyond redemption.  Just look at the slate of cartoon-like characters offered by the Republicans -- excepting Ron Paul, who is already invisible to the mainstream media. Will the States rise up and confront the Federal Government? No, they won’t.  Various state governors have their pet complaints -- immigration, gun control, national IDs, etcetera -- but they all want the Federal money. As much of it as they can get. Even Texas Rick Perry seems to have balanced his budget with Federal stimulus money. Will outraged citizens call a Constitutional convention? No, they won’t.  Anyone who has read Kurt Vonnegut’s Slaughterhouse Five knows why. Americans all want to be the boss and will criticize any potential leader to death. Remember Ross Perot and Pat Buchanan? Will Col. Kurtz stage a military coup? No, he will not.  Ah, my favorite dream:  Col. Kurtz and an elite force of heavily armed, outraged, active-duty military Patriots descend on the next State of the Union Address to bring the traitors to justice.  In reality anyone above the rank of captain has been thoroughly vetted and is only interested in promotions, outstanding performance

[In the essay below, Rick’s Picks forum regular Robert Moore explains why a resource so very abundant as silicon could have value, but also why, like so many other physical things, most particularly gold, it is continually increasing in value relative to the U.S. dollar. RA] Why all this recent focus on value? There is so much banter and opinion circulating today about “intrinsic value.” Most often, I see the term being applied to competing monetary instruments: Gold versus government-issued paper currency. Everyone insists that their monetary instrument of choice somehow has more intrinsic value than the competition. While I find these arguments entertaining, I can’t help but dwell on the fact that both points of view are completely short-sighted and arbitrary, to wit: 1) Gold has value as an electrical conductor that does not corrode. In fact, a ship wired with Gold would be able to sail the oceans for millions of years. This makes Gold vastly superior to copper, which corrodes and loses its conductivity exceptionally fast in the presence of saltwater. Now, just imagine an entire Internet wired with Gold -- such a knowledge base would be nearly as timeless as the Universe; and 2) paper has intrinsic value in the fact that if we did not produce it, there would be far more trees around, and therefore less atmospheric CO2. So, paper is incredibly valuable to those who wish to preserve the fear factor that humans are destroying our planet via climate change. Okay, the above points are intentionally facetious, but they are meant to drive home the point that value itself is subjective, and that arguing about it might forever label you as a fanatic (especially if the basis of the argument is a certain yellow metallic substance) When people argue “value” in monetary terms,

[Our longtime friend Tom McCafferty, a veteran commodity trader and author of numerous books on the subject, knows a thing or two about making hay when stocks and commodities turn volatile. In the essay below, he explains why the markets have been so nervous lately.  Fortunately, in the violent swings that have been occurring from day to day and week to week, he sees the trading opportunities of a lifetime. RA] Recently, Rick did some of that great technical analysis he is known for, and after he studied the formation the bones made on his sacred cloth and cut open a few toads to check their entrails, he came to the conclusion that the Dow Industrial Average is headed for a bull rally.  Next we took a look at the fundamentals – the European banking situation, upheaval in Africa, labor problems and loss of competitive edge in China, the U. S. job and housing markets—and we grew very bearish.  In other word, today’s Market is like a Joyce poem: you can read into it just about whatever you want. We become further confused when we see so many strong companies sitting on tens of billions of dollars, and, at the same time, they are laying off staff.  With their fat bankbooks, there are just too many of them striving to get leaner and meaner.  On top of that, quarterly earnings are pretty damned good.  We needed a good reason for this behavior. Then it dawned on us.  It was so simple we were embarrassed.  The whole world is suffering for a “Compliancy Complex.”  You will not find that dysfunction described in any medical textbook, but we know in our heart of hearts what it is.  There is just too much unexplainable information overwhelming us at one time, to wit: •          

Although we waxed skeptical here the other day about Warren Buffett’s just-announced $5 billion stake in Bank of America, we allowed for the possibility that the deal will provide a handsome payoff to him no matter what happens to the bank.  B of A could implode, after all, a victim of sinking collateral values for its mortgage loans, and of litigation over its securitized-lending business.  There is also the wild card of homeowners challenging lenders in court to show clear title to properties that are in line for foreclosure. In fact, this issue alone has the ability to capsize the global financial system, since “clear title” is exactly what ceased to exist when the feather merchants of the banking world leveraged out real estate to-the-max earlier in the decade to create an $800 trillion derivatives edifice – the Mother Lode of Digital Money, as it were. All of that sum must be viewed at the moment as deflationary overhang, by the way – not to mention, a key stumbling point for those who argue that The Great Economic Crisis must eventually precipitate out as hyperinflation. So, how do you produce even mild inflation, let alone hyperinflation, with the housing market in a full-blown Depression?  Most surely not by expanding the capacity of banks to make mortgage loans. That’s been tried to death – first moderately, then aggressively, and finally desperately -- with zero success. Despite trillions of dollars worth of mortgage stimulus and supports both implied and real, the residential market looks even grimmer than it did a few years ago.  Existing-home sales fell 3.5 percent in July despite the fact that prices were 4.4 percent lower than in July 2010. Now that’s deflation. There’s also the $6.6 trillion loss of home equity that has occurred since the onset of the

Placing one’s chips on the “Don’t Pass” line when Warren Buffett holds the dice may seem ill-advised, but we’re not so sure about that $5 billion bet he just made on Bank of America.  The news media inferred with all its might that it was a vote of confidence -- not only in B of A, but in the U.S. banking system. Yeah, well, maybe. But it would be just like Buffett to make the kind of deal that will return all of his capital come hell or high water while allowing him to reap a windfall if the bank should rise from the grave.  In the meantime, the six percent dividend he’ll be collecting each year is a lot better than most hedge funds have been doing lately.  Buffett could also become the bank’s biggest shareholder if he is able to exercise warrants to purchase 700 million shares of common stock for $7.14 a share over the next ten years.  Had he been able to do so yesterday, it would have been quite a score – worth about $357 million in instant profits -- since mere news of the deal caused B of A to gap up to $8.80 a share on the NYSE opening.  The stock had settled the night before at $6.99 after trading as low as $6.01 earlier in the week.  The hysterical price leap was undoubtedly due to short covering, since it’s hard to imagine anyone but bears caught in a deadly squeeze paying a 47% premium for the stock just because Buffett had signed on. For all we know, he shares our opinion that B of A, like all of the other money center banks, could conceivably fail.  All that’s needed to make it happen, as Buffett must know, is for confidence in Federal Reserve notes

It seems like a terrible waste of energy to haul gold down by nearly $200, as has occurred this week, only to run it back up to new all-time highs next week.  Or will it be different this time?  Show of hands: How many of you think the POG will never, ever reach $2000 an ounce?  That’s what we thought.  Still, you can’t blame bulls for grumbling when DaBoyz decide to let the bottom drop out for a couple of days.  And that’s exactly what they did, presumably because they had grown wary of chasing gold who-knows-how-high. And make no mistake, it is bulls who caused this week’s carnage, including the $112 selloff that occurred so swiftly yesterday.  It’s not as though a bunch of sellers panicked and dashed for the exit all at once, trampling the strong hands who have sponsored gold’s rise from $250 an ounce.  No, it was a case of buyers simply going AWOL – for just a short while, we are pretty confident. There was no conspiratorial meeting in a smoke-filled room to arrange all of this, just a tacit consensus that gold was ready for a breather before it launches its inevitable assault on $2000. Yesterday’s “breather” should have scared the pants off speculators and investors who had grown complacent about the trend. But that is what bull markets are supposed to do:  punish bulls and bears alike. Otherwise, it would be too easy for all of us to get rich.  Thus do we see bursts of virile strength punctuated by devastating swoons. Losses are often recouped so quickly that even hard-core bulls are left in the dust, too bewildered and dazed to climb back aboard.  And yet, more than anyone else, they understand that the monetary forces that have been pushing bullion relentlessly