Thursday, April 18, 2013

History Tells Us That A Gold Crash + An Oil Crash = Guaranteed Recession

Is the United States about to experience another major economic downturn?  Unfortunately, the pattern that is emerging right now is exactly the kind of pattern that you would expect to see just before a major stock market crash and a deep recession.  History tells us that when the price of gold crashes, a recession almost always follows.  History also tells us that when the price of oil crashes, a recession almost always follows.  When both of those things happen, a significant economic downturn is virtually guaranteed.  Just remember what happened back in 2008.  Gold and oil both started falling rapidly in July, and in the fall we experienced the worst financial crisis that the U.S. had seen since the days of the Great Depression.  Well, a similar pattern seems to be happening again.  The price of gold has already crashed, and the price of a barrel of WTI crude oil has dropped to $86.37 as I write this.  If the price of oil dips below $80 a barrel and stays there, that will be a major red flag.  Meanwhile, we have just seen volatility return to the financial markets in a big way.  When volatility starts to spike, that is usually a clear sign that stocks are about to go down substantially.  So buckle your seatbelts - it looks like things are about to get very, very interesting.
Posted below is a chart that shows what has happened to the price of gold since the late 1960s.  As you will notice, whenever the price of gold rises dramatically and then crashes, a recession usually follows.  It happened in 1980, it happened in 2008, and it is happening again...
The Price Of Gold
A similar pattern emerges when we look at the price of oil.  During each of the last three recessions we have seen a rapid rise in the price of oil followed by a rapid decline in the price of oil...
The Price Of Oil
That is why what is starting to happen to the price of oil is so alarming.  On Wednesday, Reuters ran a story with the following headline: "Crude Routed Anew on Relentless Demand Worries".  The price of oil has not "crashed" yet, but it is definitely starting to slip.
As you can see from the chart above, the price of oil has tested the $80 level a couple of times in the past few years.  If we get below that resistance and stay there, that will be a clear sign that trouble is ahead.
However, there is always the possibility that the recent "crash" in the price of gold might be a false signal because there is a tremendous amount of evidence emerging that it was an orchestrated event.  Anabsolutely outstanding article by Chris Martenson explained how the big banks had been setting up this "crash" for months...
In February, Credit Suisse 'predicted' that the gold market had peaked, SocGen said the end of the gold era was upon us, and recently Goldman Sachs told everyone to short the metal.
While that's somewhat interesting, you should first know that the largest bullion banks had amassed huge short positions in precious metals by January.
The CFTC rather coyly refers to the bullion banks simply as 'large traders,' but everyone knows that these are the bullion banks.  What we are seeing in that chart is that out of a range of commodities, the precious metals were the most heavily shorted, by far.
So the timeline here is easy to follow.  The bullion banks:
  1. Amass a huge short position early in the game
  2. Begin telling everyone to go short (wink, wink) to get things moving along in the right direction by sowing doubt in the minds of the longs
  3. Begin testing the late night markets for depth by initiating mini raids (that also serve to let experienced traders know that there's an elephant or two in the room)
  4. Wait for the right moment and then open the floodgates to dump such an overwhelming amount of paper gold and silver into the market that lower prices are the only possible result
  5. Close their positions for massive gains and then act as if they had made a really prescient market call
  6. Await their big bonus checks and wash, rinse, repeat at a later date
While I am almost 100% certain that any decent investigation by the CFTC would reveal that market manipulating 'dumping' was happening, I am equally certain that no such investigation will occur.  That's because the point of such a maneuver by the bullion banks is designed to transfer as much wealth from 'out there' and towards the center, and the CFTC is there to protect the center's 'right' to do exactly that.
You can read the rest of that article right here.
There are also rumors that George Soros was involved in driving down the price of gold.  The following is an excerpt from a recent article by "The Reformed Broker" Joshua Brown...
And over the last week or so, the one rumor I keep hearing from different hedge fund people is that George Soros is currently massively short gold and that he's making an absolute killing.
Once again, I have no way of knowing if this is true or false.
But enough people are saying it that I thought it worthwhile to at least mention.
And to me, it would make perfect sense:
1. Soros is a macro investor, this is THE macro trade of the year so far (okay, maybe Japan 1, short gold 2)
2. Soros is well-known for numerous market aphorisms and neologisms, one of my faves being "When I see a bubble, I invest."  He was heavily long gold for a time and had done well while simultaneously referring to it publicly as a speculative bubble.
3. He recently reported that he had pretty much exited the trade in gold back in February. In his Q4 filing a few weeks ago, we found out that he had sold down his GLD position by about 55% as of the end of 2012 and had just 600,000 shares remaining. That was the "smartest guy in the room" locking in a profit after a 12 year bull market.
4. Soros also hired away one of the most talented technical analysts out there, John Roque, upon the collapse of Roque's previous employer, broker-dealer WJB Capital. No one has heard from the formerly media-available Roque since but we can only assume that - as a technician - the very obvious breakdown of gold's long-term trend was at least discussed. And how else does one trade gold if not by using technicals (supply/demand) - what else is there? Cash flow? Book value?
5. Lastly, the last public interview given by George Soros was to the South China Morning Post on April 4th. He does not mention any trading he's doing in gold but he does reveal his thoughts on it having been "destroyed as a safe haven"
It is also important to keep in mind that this "crash" in the price of "paper gold" had absolutely nothing to do with the demand for physical gold and silver in the real world.  In fact, precious metals retailers have been reporting that they have been selling an "astounding volume" of gold and silver this week.
But that isn't keeping many in the mainstream media from "dancing on the grave" of gold and silver.
For example, New York Times journalist Paul Krugman seems absolutely ecstatic that gold has crashed.  He seems to think that this "crash" is vindication for everything that he has been saying the past couple of years.
In an article entitled "EVERYONE Should Be Thrilled By The Gold Crash", Business Insider declared that all of us should be really glad that gold has crashed because according to them it is a sign that the economy is getting better and that faith in the financial system has been restored.
Dan Fitzpatrick, the president of StockMarketMentor.com, recently told CNBC that people are "flying out of gold" and "getting into equities"...
"There have been so many reasons, and there remain so many reasons to be in gold," Fitzpatrick said, noting currency debasement and the fear of inflation. "But the chart is telling you that none of that is happening. Because of that, you're going to see people just flying out of gold. There's just no reason to be in it.Traders are scaling out of gold and getting into equities."
Personally, I feel so sorry for those that are putting their money in the stock market right now.  They are getting in just in time for the crash.
As CNBC recently noted, a very ominous "head and shoulders pattern" for the S&P 500 is emerging right now...
A scary head-and-shoulders pattern could be building in the S&P 500, and this negative chart formation would be created if the market stalls just above current levels.
"It's developing and it's developing fast," said Scott Redler of T3Live.com on Wednesday morning.
Even worse, volatility has returned to Wall Street in a huge way.  This isusually a sign that a significant downturn is on the way...
Call options buying recently hit a three-year high for the CBOE's Volatility Index, a popular measure of market fear that usually moves in the opposite direction of the Standard & Poor's 500 stock index.
A call buy, which gives the owner the option to purchase the security at a certain price, implies a belief that the VIX is likely to go higher, which usually is an ominous sign for stocks.
"We saw a huge spike in call buying on the VIX, the most in a while," said Ryan Detrick, senior analyst at Schaeffer's Investment Research. "That's not what you want to hear (because it usually happens) right before a big pullback."
The last time call options activity hit this level, on Jan. 13, 2010, it preceded a 9 percent stock market drop that happened over just four weeks, triggered in large part by worries over the ongoing European debt crisis.
And according to Richard Russell, the "smart money" has already been very busy dumping consumer stocks...
What do billionaires Warren Buffet, John Paulson, and George Soros know that you and I don't know? I don't have the answer, but I do know what these billionaires are doing. They, all three, are selling consumer-oriented stocks. Buffett has been a cheerleader for US stocks all along.
But in the latest filing, Buffett has been drastically cutting back on his exposure to consumer stocks. Berkshire sold roughly 19 million shares of Johnson and Johnson. Berkshire has reduced his overall stake in consumer product stocks by 21%, including Kraft and Procter and Gamble. He has also cleared out his entire position in Intel. He has sold 10,000 shares of GM and 597,000 shares of IBM.
Fellow billionaire John Paulson dumped 14 million shares of JP Morgan and dumped his entire position in Family Dollar and consumer goods maker Sara Lee. To wrap up the trio of billionaires, George Soros sold nearly all his bank stocks including JP Morgan, Citigroup and Goldman Sachs. So I don't know exactly what the billionaires are thinking, but I do see what they're doing -- they are avoiding consumer stocks and building up cash.
... the billionaires are thinking that consumption is heading down and that America's consumers are close to going on strike.
So what are all of those billionaires preparing for?
What do they know that we don't know?
I don't know about you, but when I start putting all of the pieces that I have just discussed together, it paints a rather ominous picture for the months ahead.
At some point, there will be another major stock market crash.  When it happens, we will likely see even worse chaos than we saw back in 2008.  Major financial institutions will fail, the credit markets will freeze up, economic activity will grind to a standstill and millions of Americans will lose their jobs.
I sincerely hope that we still have at least a few more months before that happens.  But right now things are moving very rapidly and it is becoming increasingly clear that time is running out.

Child Poverty In US Among The Highest In Developed World

A recent report by the United Nation’s Children’s Fund (UNICEF) details the growing levels of poverty facing children in the major capitalist countries.
Compiled with information taken in the final two years of last decade (2009-2010), the report reveals a staggering level of child poverty in the “developed” world, with the standards of living in the United States, which has the highest gross domestic product, ranking near the bottom on all metrics.
Entitled “Child Well-Being in Rich Countries,” the study measures living conditions faced by children in major capitalist countries of North America, Europe, Oceania, and parts of Asia. The countries are ranked by several criteria: material well-being, education, health and safety, behaviors and risks, and housing and environment.
Roughly one in seven children within the United States currently lives in poverty. According to the overall metric, the US ranks 26 out of 29, behind Greece and just above Lithuania, Latvia and Romania. On the education metric, it comes in 27, while on the material well-being metric it comes in at 26.
The report notes that the United States, which has the world’s highest gross domestic product, has remained at the bottom of the list throughout the past decade.
In the areas of material well-being, the report focuses on individual countries’ poverty rates and the relative gap between the median income and children classified as poor. In the United States, the average child in poverty was an estimated 36 percent below the official poverty line, ranking with nations such as Italy and Greece.
The official poverty line is taken to be 50 percent of the median income level of any particular country. This is itself absurdly low, with many families above the poverty line still living in extremely difficult circumstances.
The report briefly outlines the importance of child well-being, stating that “failure to protect and promote the well-being of children is associated with increased risk across a wide range of later-life outcomes… From impaired cognitive development to lower levels of school achievement, from reduced skills and expectations to lower productivity and earnings.”
Of particular note is the infant mortality rate, included in the “health and safety” section of the report. The findings single out the United States, Great Britain and Canada, three of the world’s wealthiest nations, all of which fall into the lowest rankings for preventing infant deaths. Results were similar in remaining categories, with the United States possessing homicide rates of nearly eight deaths per 100,000 individuals, higher than Libya in 2008 (the last year in which statistics are available).
The nations with the highest levels of childhood well-being were concentrated within Nordic countries and Western Europe, which still retain relatively more developed social reforms, though these are under relentless attack. Finland had less than 5 percent child poverty.
The majority of the findings are constructed from data collected in 2009-2010, the most recent period available for all relevant criteria. Noting the apparent inadequacy of this due to the economic crisis’ continuing impact, the report mentions that such information would prove difficult to come by “in the best of times,” adding that the past few years have been “far from the best of times.”
Poverty has soared in Europe since the data in this report was recorded. The past three years have seen a series of ever more brutal austerity measure as a condition for bank bailouts organized by the European Union, the International Monetary Fund and the European Central Bank.
According to the assessment of education in the most developed countries, including the percentage of youth enrolled in preschool, the US is again one of only several countries whose child population falls below 80 percent in this category.
In his 2013 State of the Union address, President Barack Obama touted an initiative toward the expansion of the Federal Head Start program, stating his intention to make “high-quality preschool available to every child in America.” This is empty demagogy. In fact, the Obama administration is presiding over an historic attack on public education, with hundreds of schools shut down and hundreds of thousands of teachers laid off over the past four years.
The conditions of young people in the United States is a devastating indictment of American capitalism and the two big business parties. Over the past four decades, social inequality has soared to levels not seen since before the Great Depression of the 1930s. The rise of a financial aristocracy has been accompanied by a relentless attack on jobs, wages and social programs. The United States in turn has become a model for ruling classes all over the world.
Since the onset of the world economic crisis in 2008, the attack on the working class has only intensified. Trillions of dollars have been handed to the banks, while the Obama administration is now spearheading a drive to slash hundreds of billions from core social programs, including Social Security and Medicare. The consequences for child poverty and many other metrics of social inequality and distress are not hard to predict.

IMF Slashes World Growth Outlook

The International Monetary Fund downgraded its 2013 outlook for the world economy Tuesday amid mounting signs that the global slump is intensifying. In its latest World Economic Outlook report, the IMF said it expects global growth to reach 3.3 percent this year, compared to its January estimate of 3.5 percent. It left unchanged its projected growth rate of 4 percent for 2014.
The IMF downgraded its outlook for almost every part of the world, including both advanced and developing economies.
Most of the downgrade was attributable to worse-than-expected economic figures for the last quarter of 2012, which were released after its previous update in January. The euro zone economy contracted at a 2.3 percent annual rate in the final quarter of 2012, and the US economy stagnated.
The IMF’s assessment for the second half of this year remained cautiously optimistic, prompting criticism from commentators who noted that the global economy has fared much worse than the IMF’s estimates for two years running. The Financial Times wryly commented, “The IMF does not acknowledge this is becoming something of a pattern.”
Even if unduly optimistic, the IMF report reflects a significant deterioration in the global economy. The report cuts the organization’s forecast for the euro zone by 0.2 percent to -0.3 percent. France, in particular, had its outlook downgraded by 0.4 percent, “reflecting a combination of fiscal consolidation, poor export performance, and low confidence,” according to the report. The IMF noted that the weakening of the “core” European economies such as France “may call into question the ability of the core to help the periphery, if and when needed.”
Referring to the continued economic morass in Europe, Olivier Blanchard, the IMF’s economic counselor, concluded that “there appears to be a growing bifurcation between the United States on one hand and the euro area on the other.” Blanchard noted that “most euro area periphery countries, notably Italy and Spain, are expected to have substantial contractions in 2013.” He added, “Adverse feedback loops between weak banks, weak sovereigns, and low activity are still reinforcing each other.”
In the United States, whose growth outlook was cut by 0.2 percent, the projected rate of 1.9 percent will be “insufficient to make a large dent in the still-high unemployment rate.” But even this meager growth rate looks optimistic in light of recent developments. The US economy slowed to a crawl in the last quarter of 2012, and the jobs figures for March were among the worst in recent years.
The IMF report noted that stock prices “in advanced and emerging markets have risen by some 15 percent,” and that “markets may have moved ahead of the real economy.” This growth of asset prices, however, has not translated into increased availability of credit to consumers and businesses, which “remains sluggish in many advanced economies, despite the rebound in the financial markets.”
Asia and the emerging economies, which the report paints in a relatively favorable light compared to the disaster in Europe, are likewise mired in their own economic problems. China’s economy grew 7.7 percent in the first quarter of 2013 compared to a year earlier, significantly slower than expected, officials said Monday. The country’s economy has slowed for two years in a row, down from ten percent in 2010.
The IMF report significantly upgraded the outlook for Japan, by 0.4 percent, to 1.4 percent, as a result of the country’s newly announced plans to devalue its currency by doubling its money supply. The IMF generally praised the move, but called for it to be accompanied by attacks on pensions and social spending.
Blanchard wrote, “This policy will boost growth in the short term, and this is reflected in our forecast of 1.6 percent growth for 2013. Given the high level of public debt, however, embarking on a fiscal stimulus in the absence of a medium-term fiscal consolidation plan is risky; it increases the probability that investors will require a risk premium, and that this will lead in turn to debt unsustainability.”
The report comes ahead of the semiannual meeting of the IMF and World Bank scheduled for this weekend, which will be accompanied by a meeting of G20 finance ministers. The meetings will likely focus on the effects of Japan’s extraordinary monetary stimulus on global exchange rates.
China has denounced Japan’s actions, with Gao Xiqing, the head of China’s sovereign wealth fund, stating earlier this month, “Treating the neighbors as your garbage bin and starting a currency war would not only be dangerous for others but eventually be bad for yourself.” China is the largest source of Japanese imports.
Despite the obvious tensions, the report sought to downplay the danger of a currency war, saying that “complaints about competitive exchange rate depreciations appear overblown,” and adding, “The evidence on valuation of the yen is mixed,” even though the yen has fallen fifteen percent over the past year.
The IMF’s outlook downgrade came amid other weak economic data. German car sales fell 17.1 percent in the first quarter from a year earlier, according to data from the ACEA industry association, pointing to further weakness in the core European economies. Car sales were down ten percent for the EU as a whole, while sales in Cyprus were down by nearly 60 percent compared to a year earlier.
These figures followed the Markit purchasing managers’ index figures for March, which indicated the 19th consecutive month of contraction in the region. This likely means that the euro zone economy contracted in the first quarter of the year, which would mark the fourth consecutive quarter of economic contraction in the region.

Sequestration Cuts Hit Michigan

The state of Michigan will lose $150 million in federal aid due to the sequester cuts signed by President Obama. Republican governor Rick Snyder has rejected any increased state funding to make up for the shortfall and instead has outlined a series of devastating cuts to special education, low-income heating assistance, community health care programs and other services.
In addition, Detroit Medical Center, a massive hospital complex that is one of the city’s largest employers, announced plans to lay off 300 workers as a result of the two percent sequester cuts to Medicare.
Some 70 percent of DMC patients are Medicare or Medicaid recipients, reflecting the high level of poverty in Detroit, where over 60 percent of children live below the official poverty line.
While Michigan has a surplus of over $500 million—due primarily to billions in previous cuts to education, revenue sharing with cities and programs for the poor and elderly—the Snyder administration plans to cut $59.2 million from programs this year and $91.3 million in 2014 due to the federal cuts.
“We’ve said from the start that Michigan would not be replacing lost federal dollars with state dollars due to sequestration and that still holds true,” said Snyder. “We support getting the nation’s fiscal house in order, though across-the-board cuts like this are not the way to go about it,” he said hypocritically.
The cuts will have a shattering impact on workers in Detroit where Snyder has already imposed an emergency manager to slash city workers’ jobs, wages and pensions, and cut whatever remains of the city’s social infrastructure on behalf of the banks and big bondholders.
Fifty-four million dollars will be cut from Michigan’s public schools, primarily in the 2014 budget. The cuts include $20 million to special education programs for children with physical disabilities or other learning challenges, $21 million for Improving Basic Programs that help fund after-school programs, $4.7 million for teacher quality grants and $3.2 million in vocational education.
Another $23 million will be cut from Community Health, again for the poorest sections of the population. Those cuts include nearly $10 million for the supplemental nutrition program Women, Infants and Children (WIC).
The Department of Human Services is cutting $17 million. This includes nearly $10 million from the already deeply underfunded Low Income Heating Energy Assistance program or LIHEAP. This is in a state where hundreds of thousands have their utilities shut off because of unpaid bills and each winter lives are lost due to freezing temperatures or makeshift methods of warming homes.
In addition, $3 million will be cut from the block grant clothing allowance program, eliminating the $137 allowance for 21,000 low-income children who are staying with a family member, often a grandparent.
Judy Putnam, communications director for the Michigan League for Public Policy, told the WSWS, ”If you look at the cuts that were announced, they impact seniors, kids in special education and some of our most vulnerable children in our state, especially the kids receiving the clothing allowance. Why do you start with the most vulnerable people?”
Putnam explained the history of the clothing allowance program. The program began in 1999 to make sure children were able to have clothing at the start of the school year. “Every time there was an increase in welfare the landlords would increase the rent,” Putnam said, wiping out the ability of families to provide clothing for the children.
The program originally provided assistance for all children in the home. “Initially, it started off with $50 and later increased to $84 per child. Some years it would be all kids, in other years it would be only school-age kids. The aim was to give kids a start in school so that they were happy about going to school and this would allow them to have a decent set of clothing.”
Putnam explained that beginning in 2011 the Snyder administration carried out a series of devastating cuts to the program. Instead of providing assistance for all children the program was limited to only children who were forced to stay with a relative. This meant the number of children assisted by the program dropped from 130,000 to the present 21,000.
“It had already been limited,” stated Putnam, “now it is being eliminated. These are poor kids who are not even living at home. How much more vulnerable do you get than that?”
Other cuts include:
• $4 million for clean water and drinking water programs;
• $2.6 million from Section 8 Housing Choice vouchers;
• $15 million from workplace investment for dislocated workers, youth activities and adult programs;
• $3 million from career and technical education and adult education programs.