DJ30 – 10.940   up 141
US Treasury 10 Year Bond – 1.91%    up 0.12%
USDEUR  -  1.3347
Gold – $1640  up $25
Oil – $79.76    up  $4.09

Gold went down to $1600 twice yesterday, and has confirmed that price level as a true support for the gold price.  Gold continues to consolidate and to go up.

Update on Greece and Europe…….

The news from Europe continues to drive the stock markets around the world – including the US.  But, now it appears to be “good” news.  It’s good in the sense that it isn’t pointing to the European banks going bankrupt – but rather to them surviving for the time being.

Yesterday, there was news coming out of Europe that the Finance Ministers of the EU nations agreed that they would “backstop” the European banks.  This means that they will be propping up those banks to avoid them going bankrupt in the case of a sovereign debt default (think Greek debt).  This news caused the massive 400 point rise in the DOW yesterday – from negative to positive.

How much money was needed?  Well, the amount of 200B Euros ($260B) was mentioned by the IMF.  I personally don’t believe this amount as any numbers coming out of Europe are always on the “low side.”  However, given the idea of banks having 10 times the loans as they have capital reserves – the addition of $260B would mean they could take on loans of $2.6 TRILLION – and this seems reasonable to me.  The downside of this thinking is that if the loans lose more than 10%, the banks are bankrupt again.

And in fact, they are bankrupt today – and they don’t have this additional $260B today – so these are words (just jawboning) that mean nothing in fact.

The European troika (EU, IMF and ECB) have saying that Greece will “probably” get its 8B Euro tranche of money and the Greek Finance Minister said that Greece will not run out of money (= default) until mid November – giving Europe a little breathing room to work out the rescue.  This is all good news as far as markets are concerned – but it doesn’t change the fact that Greece will default sometime in the future.

In the meantime, the Greek civil servants all went out on strike on Tuesday – shutting down all the rail services and air travel services, and everything else as far as that is concerned.  It isn’t pretty in Greece right now.

Another minor news article is that Moody’s downgraded Italian debt 3 steps yesterday – and the Italians shrugged it off, as they “expected” it.  There is nothing that the Italian government can do to avoid the downgrade (just like there was nothing the US government could do to avoid our downgrade).  Italians are spending more than they collect in taxes – so their debt and deficits are growing.  Ever with austerity (something the US government has not agreed to yet), the Italians are losing ground – and they are now the bogeyman in Europe (the one who will bring the house of cards down), rather than Spain (who could raise its ugly head soon.)

The IMF also said yesterday that it would buy sovereign debt alongside the EFSF (the European debt fund).  I consider this very dangerous – as the US is the major contributor to the IMF, and it is causing an obligation to US taxpayers without our approval or representation.  Think about that a minute.  What happens when those bonds to bad, and the IMF must write off the debt?  Where did the US money go that they lent out?  It went to “money heaven” of course.  I haven’t heard anyone in Congress talk about protecting Americans from the IMF actions.  Why is that?  I think it is that Congress is too focused on their own issues to look outside of itself – and maybe they trust little Timmy Geithner to protect Americans on this issue.

To give you an insight into European banks – consider the Dexia Bank.  It is now in deep trouble (again as it was bailed out in 2008 by Belgium and France).  Dexia currently holds a bunch of Greek and Italian sovereign debt, and can’t get day to day funding from other banks.  Dexia is very important in France as it is the main lender to French towns.  The solution this time around is to split the bank into a “good bank” and a “bad bank” and place the toxic assets in the bad bank.  How many toxic assets?  Well, they say (can I believe it?) 180B Euros (or $250B).  Now compare this number of $250B in toxic assets to the numbers the IMF was touting above.  Also remember that these toxic assets have some value (maybe 10%?), but even then the loss is enormous.  And Dexia is only ONE BANK.  What about all the other ones?  These numbers should scare you – it certainly has scared the banking markets (stock market and CDS market) – and you can actually learn from what the market is saying (risk, risk, risk.)  In the end, any loss to the owners of Dexia would fall on the Belgian and French taxpayers – as it is governmental agencies that own the bank in the first place.

My conclusion:  Europe is being forced to face its debt crisis – and to deal with it.  The US doesn’t appear to be aware that we are in worse shape than Europe – but we will be told about it sometime in the future.  Watch the bond market for that signal.  It was sovereign bond interest rates that caused Europe to act, and I believe that will happen in America too.

Ben Bernanke Speaks……

Ben was talking to Congress yesterday, and he said four thinks of note:

1. He said the US economy was “close to faltering” – I guess he is finally getting that we are going into a recession.  He is the last one to acknowledge this fact.
2. He said that “operation twist” would reduce the Fed Funds rate the equivalent of 20 basis points (0.20%) – and this is good for banks – so bank stocks went up on the news.
3. He said that “operation twist” was meaningful, but not enormous support for the US economy – this was a way of saying he didn’t expect “operation twist” to be the panacea many are looking for.  In other words, if the FED is to come to the rescue of the US economy when Big Ben says the economy is in the toilet, he will be doing something else (think QE3, or equivalent that means printing money).
4. He said that the Chinese currency is valued too low and it is causing our trade deficit to be impossible to balance.  I completely agree with Ben on this issue, and think that past and present President’s have been “weak knee’ed” when dealing with China on this issue.  I believe we should take a very tough stance and negotiate through a position of strength, rather than weakness.  They need us as much as we need them, and we could come to a more equitable arrangement if this was every addressed – and recognized by both sides.  Clearly the US doesn’t have experience or good negotiators working on this case – as China continues to gain from our relationship, and we continue to lose.

DJ30 – 11,401   down 108
US Treasury 10 Year Bond – 1.94%    down 0.14%
USDEUR  -  1.3675
Gold – $1788  down $30
Oil – $85.87    down  $3.07

Hope you are taking advantage of gold being below $1800 to make your purchases now.

The FED and Europe…….

The FED together with the European banks (Bank of England, European Central Bank and the Swiss National Bank) and the Bank of Japan have agreed to flood US Dollars into the European banking system.  Since the loans will be in US Dollars, and the FED is doing this at the request of the ECB, you can bet that the US taxpayer is on the hook if anything goes wrong.

Why is this happening?

As I’ve stated previously, the European banks were having great difficulty getting US Dollars as loans from the US Money Market – so a liquidity crisis was happening with European banks.  This is exactly what happened in the US in 2008 when Lehman Bros went bankrupt.  The solution is the same this time around – flood the banks with so much money that they are swimming in it.

How much money?

No one really knows as this is a “FED secret” – but in 2008, the amount was about $800B.  This time around you can bet that it is at least that amount.

Why now?

Well, it looks like the FED learned something during the Lehman crisis.  They learned that they were “late” in getting the money to the party.  So, they are trying to head off the crisis early this time and sending the money over before the European banks start collapsing.  Would they really collapse?  No, not really.  They would be bailed out by their national governments first – but that would look bad.  And the amount of money for some countries would be multiples of that countries’ GDP – so the bailout would look a little phony – just printing money.

Printing money?

Yes, you got it.  Where are all these billions coming from?  From the FED printing press.  If the money gets spent, it will cause inflation.  Naturally, that is not the FED’s plan.  They plan that these loans will be repaid, and the money will go to “money heaven” so basically, nothing happened.  Get it?  But, the world is a financially dangerous place, and anything could happen.  So, stay tuned to the news.

What’s coming up this week at the FOMC (FED Open Monetary Committee) meeting?

You can bet that this topic of loans to all the European banks is the number one agenda item.  We all thought that they would be talking about QE3, or something like a “bond twist” – but that will now take second agenda item.  This FOMC meeting will be the big news for this week.

What about Europe and Greece?

Well, it continues to plug on.  The key questions are “Will the Greeks get their next loan installment payment?” and “What are the Germans going to do?”

I think the Greeks will get their money as something will get worked out.  The threat of a Greek default is what’s causing the European banks to have this liquidity crisis.

The German question is the big question.  Merkel wants to support the EU and the Euro, but the German population doesn’t want to be the taxpayer for the rest of Europe.  Merkel, being a politician first, knows this, and is putting her in a pickle.  This will be the “wild card” that might set the world afire in a financial crisis.  You can see that the FED is doing everything within its power to avoid a meltdown of European banks.  More on this coming….

DJ30 – 11,559   up 19
US Treasury 10 Year Bond – 2.18%    down 0.09%
USDEUR  -  1.4465
Gold – $1842     up $50
Oil – $88.86    up  $1.59

Stocks sideways, bonds up (interest rates down), gold way up, Dollar level to down, and sneaky oil is going back up.

FED Member Evans Speaks…..

FED member Evans spoke out publicly today and said that he thinks that more quantitative easing is needed to help the economy.  He said he would follow the lead of FED chairman Bernanke, but it is his job to speak out with ideas on how to help the economy.  He went on to say that previous quantitative easing did not result in inflation or inflated prices.

I am astounded that a FED member can say that monetizing debt – which is FED-speak for printing money – does not cause inflation or inflate prices.  QE2 definitely caused commodity prices to go up, and to say otherwise is either misleading, or not well educated – and I don’t believe either of those with respect ro Mr. Evans.

This is more than my personal opinion.  The traders on the floor of the Chicago Board of Trade stood opened mouthed when Evans made his statement.

More positively, I can state that there is a voice at the FED advocating more quantitative easing, and this is good for gold prices.

As shown in the minutes of the August FED meeting, there was a big disagreement with the action taken.  Many members wanted to take bolder action.  This backlog of support for something greater – like a QE3 – is positive for gold too.

Confidence level drops…….

The confidence level came in at a very low, low level this morning with not having it this low since 2009 – right after the market shocks.

While this measure is one that I generally ignore because it is so subjective and fickle, I believe it does reflect the general public’s concern for the US economy and it does portend a drop in consumer purchases – and this will directly lead us into recession.

What’s Happening with Gold…….

Gold has tested its low in the last downdraft – and hit about $1700 twice – forming a nice support level.  This is the low for this time in the gold rise.

Now gold is going back up, and must break through the $1900 to $1910 level that it hit at the high.  I can bet that gold will test that level in the next week or so, and the gold bullion banks will be doing everything in their power to make sure gold doesn’t go through that level.  It will be a titanic battle.

If gold goes through $1900, it will go straight up to $2000.  If it can’t make it through, it will go down again, and probably go sideways for a month or so.  Time will tell.

DJ30 – 11,240   up 429
US Treasury 10 Year Bond – 2.18%    down 0.18%
USDEUR  -  1.4338
Gold – $1740     up $20
Oil – $80.41    down $0.90

The markets corrected today after yesterday’s massacre.  Today also demonstrated that the US market leads the world’s markets, and not the other way around.  Us was down yesterday, and then around the world – they were down.  Today, we are up – changing the direction.

All the markets reversed their direction – except gold which kept going up.  Gold hit an ALL TIME HIGH early this morning at $1787/ounce.

Stocks went straight up after the FED Meeting announcement, as did gold.  Bonds increased with lower (lowest) interest rates.

The FED Meeting……

The FED met today for their one day meeting, and here is what came out of their meeting.

Some Background – Remember that they are facing the meltdown of the stock market and that bothers Bernanke who thinks he is responsible for keeping shares high – as high stock prices means consumer sentiment stay higher and people spend more – in other words, it is good for the economy.  His approach in the past was QE2 which pumped money in the markets, and (coincidentally?) markets rose. One last point.  All those gains in the stock market from QE2 were lost completely as of yesterday.

Also remember that the FED is facing a possible double dip recession, and knows the numbers better than we do.  We have a very weak GDP growth rate, a very high unemployment rate, and a very recent S&P downgrade.

Today’s message from the FED – is as follows:

1. No change to the FED Funds Rate – zero to 0.25%
2. To maintain low rates through mid-2013.
3. Slower rate of recovery than previously thought – so are projecting a slower growth in the future years.  A long, slow recovery.
4. Inflation will settle at a low level and won’t be a problem.
5. 3 dissenting votes on this conclusion – this is historic.
   

There was NO mention of QE3, or anything like this.

The FED is saying you can buy 2 month through 5 year bonds with no problem – as rates will be kept low for two years (mid-2013).

This is a very depressing outlook on the US economy.

As the announcement came in, stocks fell from gains to losses immediately, and gold shot up.

What does this mean?

1. Nothing has changed as far as the FED is concerned – except
2. Rather than thinking interest rates would rise in 3 months time, they are saying it will take 2 years.
3. This is good for gold as low interest rates encourage money going into gold since you can’t make anything in a bank savings account.
   

The riots…..

Have you been reading about the riots in the UK?  They are out of control for more than one night.    I am bringing this to your attention because the economy is fueling the riots – and it could happen in the US too.

Oops – it is occurring in the US.  Have you been reading about the riots in Philadelphia?  They are underreported – so the news feeds are continuing to not do their job.

Question for the Day……

Do you know what the biggest company is right now – as measured by market value?  It used to be Exxon Mobil – but no longer.  It is now Apple.

DJ30 – 12,447   down 59
US Treasury 10 Year Bond – 2.91%    down 0.01%
USDEUR  -  1.3973
Gold – $1565     up $16
Oil – $96.63    up $1.48

Gold hit an ALL TIME HIGH today after the FED minutes were released (see below).  Oil also jumped on that news.  The Euro remains very weak, but the Dollar is also weak – so currencies like the Yen, etc. are rising.

June FED Minutes……..

The June FED minutes were released today and they said clearly that some members of the FED were in favor of further easing – also known as QE3 – if the economy doesn’t strengthen as they were assuming.

Well, last week’s unemployment and new employment numbers were just a disaster, and certainly met the requirement of the “if” in the FED minutes.

Accordingly, gold and oil shop upward immediately upon the news.

Other FED members disagreed, and said that if inflation continued, that monetary tightening (increase in interest rates) should be done sooner, rather than later.

This FED minute confirms my (and others) contention that there will be a QE3 on the cards in the future, and inflation will rise after that new money is released.

DJ30 – 12,108   down 80
US Treasury 10 Year Bond – 2.99%    up 0.01%
USDEUR  -  1.4350
Gold – $1547     up $1
Oil – $94.66    up $0.49

Stocks were up all day until Bernanke talked about how poorly the economy is doing – then stocks tanked.

Greece and its Implications……

Greece voted yesterday to maintain its Prime Minister in office in a vote of confidence.  Even this vote rattled the markets around the world.  What does this result mean?  It means that Greece will be voting in its Parliament to enact stricter budget cuts and sell off of state assets.  When will it vote?  Probably on July 3rd. (just as we go into our 4th of July celebrations.)

Will these budget cuts get passed by the Greek Parliament?  After all, there are riots in the streets of Athens.  And there are more riots planned as well as union actions like electricity cuts across the Greek nation.

Yes, probably the budget cuts will be passed by the Greek Parliament – because:

1. The Greek Prime Minister sacked his Finance Minister and replaced him with the head of his rival party – a shrewd move to get more votes.
2. If the Greek Parliament doesn’t approve the budget cuts, the other EU nations won’t bail them out.
3. They are expecting about 11B Euros sometime in July, and another 110B Euros later this year.
4. Bankruptcy for Greece is a major unknown to the Greek politicians, and they think that would be worse than the riots in the streets today.
   

But, what if Greece does default (go bankrupt?)…….

Now, that is the real question, and the one that is moving markets today around the world.

The real problem is the “unknowns” in this scenario.  Here is what we know:

1. the Greek banks would be declared bankrupt.
2. the Greek bonds would be defaulted upon – either wholly or partially.
3. the holders of those Greek national and bank bonds would need to write down the value of those bonds.
4. the French banks are the major Greek bond holders, and the German banks come in second.
5. French and German banks are now as “transparent” as US banks, so no one knows what would happen if anything is marked down by those banks – another big unknown.
6. the political discussions between Merkel and Sarkozy has been all about this problem.  They don’t want a problem inside of their banks.
   

There are two BIG possibilities, and they BOTH could happen.

1. the French and German banks would call for payment by the Credit Default Swap (CDS) holders on the loss on the Greek bonds.  The European banks are not stupid and have taken out insurance (CDS) on that possible loss.  But, who would have to pay on the CDS?
2. the US banks who have placed Money Market Funds in Europe would pull back on those funds.  There is about $1 TRILLION in US Money Market Funds in Europe.
   

Let’s look at each of these possibilities.  They are both scary.

CDS payouts triggered by Greek debt default……..

It is important to quantify the CDS exposure for the US banks.  But, that’s a problem.  The CDS market is not transparent like the stock markets around the world.  In stock markets, you know who owns the stocks.  But in the CDS market, you don’t necessarily know who sold the CDS insurance in the first place.

However, the best analysis to date that I have read shows that the US banks are exposed to a Greek debt loss – through CDS exposure – of about $100B.  Now, $100B is enough to bankrupt the US banks, but who cares?  They are bankrupt already as I’ve said so many times before.  The real question is “Will they close their doors – like Lehman Bros did?”

While $100B is a big number, it is not too big for the Federal Reserve to bail out those banks again.  I have no doubt that the FED would jump into the problem immediately with the necessary cash – freshly printed, of course.

Money Market Funds threatened by Greek debt default……

Money Market Fund managers try to get as much interest on YOUR money market money as they can get.  So, they go overseas with a big chunk of your money and invest it with European banks – mainly German, French and UK banks.

$1 TRILLION is a very large amount of money, and the FED would have trouble covering that type of loss.  But, it could if it thought it had to.

But, a $1 TRILLION Money Market loss is not the real threat to the markets.  It is the Lehman Bros effect.  What effect?  Well, if you remember during the last meltdown, the Money Markets froze.

If US Money Market managers think that European banks are threatened by a Greek debt default, they will remove $1 TRILLION from Europe.   That would cause a liquidity crisis in Europe – just like the one that hit US banks during the Lehman Bros crisis.  During that crisis, no one knew what problems existed with the assets held by Lehman Bros.  No one knew how much money Lehman Bros owed other institutions.  The end result?  No banks lent any money to any other bank – a liquidity crisis of monumental proportions.  Only the FED could solve that problem – which they did.

Remember one recent warning. UK banks have stopped lending money to French and German banks – and this has started to create a liquidity crisis already.  If the US pulled the plug, all transactions would stop in Europe – and a world crisis would emerge.

My personal feeling is that the FED is already engaged with European banks – giving them tons of money in anticipation of a possible crisis.  The FED can always get that money back if nothing happens.

What does this mean to you…….

You should keep close to this headline grabbing event as it unfolds.

Know where your money is located.  Most people have some money in a money market account.  If the money markets get frozen again as they did during the Lehman Bros fiasco, you may not be able to access those funds.  While this is a possibility, it probably won’t happen.  Just be aware.

Gold continues to provide an opportunity as these “risks” provide ammunition for a rise in the gold price.

DJ30 – 12,076   up 123
US Treasury 10 Year Bond – 3.10%    up 0.02%
USDEUR  -  1.4465
Gold – $1522     up $11
Oil – $99.64    up $2.34

The Whole Debt Story……..

So far when I have talked about the US Federal Government Debt of $14.3 TRILLION, I have been going along with the misleading story being put out by the government.  As I have stated many times, you must dig, dig, dig and find out what the truth really is.  Then and only then can you make the intelligent investment decisions needed to protect and grow your wealth.

So why do I say that I was going along with the Government’s story?

Easy.  The whole debt is much larger than reported.  Yes, the amount of US Treasury Bonds (plus some state guarantee bonds) equals $14.3 TRILLION, and this is the number that the Congress and President are talking (???) about.  But, there are some other obligations that we have as Americans and those are not included in the $14.3 TRILLION reported.  What are they?  Here are a few of the big ones:

1. Social Security
2. Medicare (Parts A, B, D) and Medicaid
3. GSEs like Fannie Mae, Freddie Mac, Student Loans, etc.
   

So, what made the curve start going up?  Well, it is no coincidence that the Federal Reserve was created just when the curve started going up.  The FED, as you know, loves inflation – and that is what has caused the terrible trend.  You can see WWII, but it was quickly paid off, as was WWI.  The rest is just wasteful spending. The graph starts going up in 1930 when the socialist policies of Roosevelt were started (like Social Security), and the ideas of Kaynes were put into effect.   But, you say, how does the FED cause the spending to start going up?  It is my contention that the FED showed the government how to spend more, and pay off the increased debt with less valuable Dollars (inflated Dollars).  All governments are seduced into more spending when they don’t have to pay the bill – and I leave the proof of this assertion to the reader by studying historic spending around the known world.

Can the increase in spending continue forever…….

No, is the short and simple answer.  The reasons for this answer are straight forward.

1. No one, either an individual, company or nation, can borrow forever and not pay back the debt.
2. When you continuously spend more than you make, there is a day of reckoning.
3. Bankruptcy ends the process as “restructuring the debt”
   
   1. For people – it means spending less on eating out, gasoline, housing costs, cable costs, and, perhaps bankruptcy or foreclosure or debt repayment plans, etc.
   2. For nations – it means reducing spending and reducing the “promised” obligations to its people, and reduced credit rating, higher future interest payments, etc.
      

Where are we going?  Let’s look at some projections for the US, and a bunch of other nations.  You see, this problem is not just America’s problem; it is the world’s problem as the world is being run on debt.

DJ30 – 12,080   down 18
US Treasury 10 Year Bond – 3.01%    up 0.01%
USDEUR  -  1.4688
Gold – $1544     up $1
Oil – $99.70    up $0.81

Stocks are definitely now on the downslide.  Bernanke’s speech killed all gains made today.   The S&P500 is trading below 1300 – a key technical level.  Bonds continue to hold their low interest rates.  The Dollar is sliding downward again – it went from 1.50 to 1.40 against the Euro, but is now back to 1.46.  Gold is very strong and approaching its last high.  Oil is hanging in at about $100.

Bernanke’s speech today…….

Here are the highlights of the FED Chairman’s speech today.   It was widely followed by the investment community:

1. The economy has been slowing over the past couple of weeks.
2. The slowdown was caused by the Japanese crisis and higher oi and gasoline prices.
3. The economy will start picking back up later this year.
4. Interest rates are to kept low for the “foreseeable future.”
5. No mention of what happens at the end of QE2.  Investors want another round of QE2 – but the FED isn’t promising anything right now.
6. No mention of what the FED might do to simulate the economy.
7. The May jobs report (+58,000 jobs) was a setback for the economy.
8. The economy will not be considered strong and stable  until a “sustained period of strong job gains.”
9. He said inflation was at 3.5% during the past 6 months – well above the 1% expected, but this would settle out with time and a stable oil and gasoline price.
   

My opinion of Bernanke’s speech is that:

1. He continues to be optimistic – a necessary characteristic for a FED chairman.
2. His plan of a better economy later this year is based on oil and gasoline prices receding as we go forward.  However, oil continues to hang in at $100/barrel.
3. The FED’s projections are based on a “perfect” world – it does not allow for disasters (Japan) or rapid rises in commodities (oil.)  All FED statements should be interpreted with this in mind.
   

The FED was also criticized for spiking inflation, and Bernanke denied that the FED had anything to do with rising prices.  (I disagree.)  The FED is caught in a very tight position with a need to increase GDP if at all possible.  One method is to increase exports and decrease imports.  A falling Dollar (another way of seeing inflation happening) accomplishes this goal very rapidly.  The Dollar continues to be weak in spite of all the rhetoric from all the “authorities.”  If the Dollar rises in the near term, it will be a technical bounce, as the fundamentals all point to a weaker Dollar.

Greece…..

Greece is approved for the bailout, but talk continues on “restructuring” its debt – that is taking existing debt and taking longer to pay it back.

The former is a new bailout by Europe and the IMF.  The latter is a form of “default.”  Time will tell what will happen.

In both cases, the unrest in Greece continues as the natives are restless.  The cuts that the Greek government is agreeing to are draconian according to the Greeks who will get their bene’s cut.

Interest Rates this coming week…..

There are four nations considering raising their national interest rates this coming week.  If any or all of them raise rates, this is a pressure point on the FED to consider raising rates.  However, I believe the FED will welcome their raising rates, and the FED will continue maintain near zero interest rates – thereby easing the pressure on exports and increasing them on imports – as the difference in national interest rates should be reflected in an ever decreasing Dollar value.