October 29, 2006

Gold? US Dollars? Euros?


To me there seems to be so many conflicting storylines when it comes to gold and the US$


* The dollar should plummet as the US economy goes into a tailspin, the Fed is forced to lower rates, the US sees deflation, the trade deficit becomes unmanageable, and foreign bankers and investors switch out of dollars and into Euros, gold, etc. Gold priced in US$ skyrockets.

* The dollar should rise as the world economy goes into a tailspin, and foreign banks and private investors do a classic flight to safety and into the arms of the US dollar, while the Fed tightens again due to inflation. Gold priced in US$ is pressured, gold demand for commercial use weakens

Here's an interesting presentation from the gold bull who runs Bullion Vault, a company here in London where you can buy physical gold bars and keep them in their vault for safe storage.

Yes, I'm thinking of gold again. And I moved a big chunk of change last week into Euros, after these comments by Peter Costello, Australia's treasurer, who pleaded with Asian bankers to "telegraph" their move out of dollars so as not to crash the market.

Treasurer Peter Costello has called on East Asia's central bankers to "telegraph" their intentions to diversify out of American investments and ensure an orderly adjustment.

Central banks in China, Japan, Taiwan, South Korea and Hong Kong have channeled immense foreign reserves into American government bonds, helping to prop up the US dollar and hold down American interest rates.

Mr Costello said "the strategy had changed" and Chinese central bankers were now looking for alternative investments.

"Of course you can have an orderly adjustment," he told reporters. "And what I would recommend is that these matters be telegraphed well in advance. I think we should begin preparing ourselves for it."

74 comments:

gold bug said...

Keith.....I hope you have better luck with Gold this time than you have had last time.......

uknowwhoiyam said...

How ironic; you're a commodity flipper.

Well, good luck with that. LOL.

panicearly said...

dollar went down 2 yen on friday alone.
come to daddy

GrandInquisitor said...

In 1987 gold tanked when the market crashed. The dollar meanwhile declined in value by about 50% between 1985 and 1987. There are a lot of parallels between today and 1987.

In 1986 the United States shifted from a rapidly growing recovery to a slower growing expansion, there was a "soft landing" as the economy slowed and inflation dropped. As 1987 wore on, and it seemed that recessionary fears were behind the US economy, and there was a boom ahead, the US stock market advanced significantly, peaking in August of 1987.

Sound familiar? Gold may not be a safe haven.

Real estate 101 said...

It's not 1987! Oil is more like 1979. Housing is more like 1979. The USD is more like 1979. Iran is more like 1979. Gold is money.
10-15% of your assets in gold is recommended.

sk said...

I'm doing all of the below, and ready to get out ( the unprincipled uncommitted whore that I am ) by using trailing stop losses:
0. Almost 30% STILL IN US$ denominated short term CDs.
1. Book by Jim Rogers - Hot Commodities.
2. Euros Yen and Swiss Francs using EverBank.
3. UK Pounds and UK utilities selloff ( from the Maggie Thatcher privatization era ) in onshore and offshore bank accounts from past residence there.
3. Gold using GLD and Kruggerands stuffed away ages ago in ( not saying where!).
4. Natural Gas AFTER Amaranth caused it to dump to 4.3x using natural resource trusts like DOM and WTU and sadly, ENT.
5. Hard currency mutual funds like MERKX that track the inverse of the DX dollar index.
6. Foreign, non dollar hedged bond fund like BEGBX.
6.USO ETF for OIL recently.
7. a daily trading game of naked puts on the DOW recently and shorting of US housing related stuff: construction materials, furniture TIMBER(yayy), builders and mortgage banks and FRE( OUCH!)
( an immense amount of work for a very paltry gain and large doses of bile and angst).

Its all fun.. Enjoy and remember the personal gun, the 4 week food supply, friendly neighbors and relatives to whom you NEVAH boast and finally that its all only a way of keeping score.

-K

GrandInquisitor said...

OK, but if this "soft landing" turns into a hard landing, as I gather most HP'ers believe it will, then Gold is going take a beating. Also, from a technical perspective the XAU Gold and Silver index is in a classic head and shoulders pattern. Why not wait 6 months and then reassess the situation? If Gold breaks out then jump on board. There's too much uncertainty right now, IMO.

borkafatty said...

With the way markets are being manipulated, is gold really a safe heaven?,,,but then again what is.

sk said...

After buying Gold in the mid-90s at 350 and watch it drop to 255 by 2001, I gave up on Gold, keeping just a stash for the apocalypse ( to buy my way into HELL I imagine) and missed buying extra during the run-up to 720. Since then.. started watching it at 610 - watched for almost 3 months then bought twice at 565 and 578, ready to dump at 530 ( now a trailing stop at 550) - ready to buy more at 607 or thereabouts, or buy more at 500.

-K

tom said...

“I'm cracking up here! "Orderly adjustment!" Hahaha! I am laughing so hard that I am coughing up actual pieces of lung! Hahahaha, cough, hack, hahahaha! "Be orderly!" he says. He might as well have said, "The dollar is turning into crap. So tell us when you are going to dump them, and then we can calmly and patiently line up to take our turn in getting out of dollars, so that the first people in line can escape unscathed, and maybe make a little money, and the last people in line can get screwed royally and end up in the gutter with that Mogambo idiot!" Hahaha! "Orderly adjustment!" That'll be the day!”

The Mogambo Guru

kilobar said...

I'm seeing it as a two-part movement. First, US bonds will rally as a flight to quality when the housing bear goes into full steam and mortgage backed securities tumble. Second, the Asians will use this as an opportunity to rotate out of US bonds into Euros which will then send rates soaring.

Gold lower initially, then higher later.

FlyingMonkeyWarrior said...

Keith,

I know you are in marketing (so am I) and not investment banking, but HP is still AHEAD of the news flow of information. I was at a costume party last night and there was a Merrill Lynch VP (Air Line Pilot) and an Investment Banker (Caesar). Caesar asked the Pilot if he was 'Bullish" on 07' and Merrill Lynch Pilot Guy said, "Yes'".

I raised some of the issues facing the world economy, like info in this post, and said, enfaticly NO, it would be a bear. They both just looked at me with that 'deer in the headlights' look, while all the other chicks wandered away,(: when I told them about this:
--------

Mr Costello said "the strategy had changed" and Chinese central bankers were now looking for alternative investments.
----------
Which means China is getting ready to dump USD and these two experts had NO IDEA!

They were both pretty surprised. It was fun to be so smart over a beer, dressed in my Goth Chick Costume, but scary that these two are such Myopic Money Managers.

FlyingMonkeyWarrior said...

Dollar Declines as New Home Prices Fall the Most Since 1970

``This will keep the Fed worried about the economic growth going into the fourth quarter,'' said Kathy Lien, chief currency strategist at Forex Capital Markets LLC in New York. ``U.S. consumers living freely on paper wealth of their homes will have less to spend for the Christmas season. This is a bearish picture for the dollar.''


url;
http://www.bloomberg.com/apps/news?pid=
20601087&sid=a4JEYmwdsD4M&refer=home

Aaron Krowne said...

In my opinion the only medium-term bearish argument for gold is that we'll have deflation (gold isn't significantly effected by a reduction in industrial demand).

This is extremely unlikely as the Fed will not let that happen -- Bernanke was essentially hired with that directive.

An extremely short-term risk with gold is that the Fed will aggressively raise interest rates; but I seriously doubt they will raise them steeply enough.

The larger-scale, more fundamental case with gold is that we're now entering an era where systemic risk will actually become a problem -- likely the greatest it has been since the Great Depression (worse than the bank failure era of the 80s). The second major fundamental component is most of the world diversifying their wealth away from dollars, as the dollar ceases being the world's reserve currency.

As for trading risks... I think hedge funds are basically out of gold (and other commodities), so we're unlikely to see another sharp decline like May of this year.

Gold's resilience around $600 has been remarkable. I consider it a mere launching point for the forseeable future.

Aaron Krowne said...

By the way, Euros will be good too, and possibly JPY. The reason is that most of the systemic risk and problems will be concentrated on the US this time -- when the US sneezes, the US will catch the cold.

The data are actually starting to point in this direction, but few people have noticed this, still assuming that a recession in the US will be global.

Charlie said...

Kieth and HPers,

How exactly does a simple Californian transfer dollars into Euros???

Cheerio,

Charlie

wacahootaman said...

One bad thing about Gold is the income tax laws no longer allow capital gains in gold profits anymore except in gold stocks.

I think it should be part of your portfolio for doomsday but the tax liabilities are too high on it IMO to justify a large investment in it.

boiseboomer said...

My my, getting ready to try another gold flip eh? I really don't understand your fascination with gold. Obviously you don't consider it a long term investment, opting instead to go in and out to secure at best a small gain.

On the other hand you view the stock market as another bubble ready to bust. Just as housing is, and should be treated as, a long term investment (yes Virginia it IS an investment if you hold it long term) so too is the stock market a long term investment, not something to pop in and out of with every bit of "news" that some pundit spews.

Just as I've owned the same home for over 15 years (and done very well on it thank you very much) I've also held the same stock and mutual fund portfolio for some 20 years with a 10% average rate of return. Not coincidentally, the average stock market return for the last 70 years or so.

The stock market rise is not an anomaly - think about it - all of the smart money abandoned real estate over the last year or so. Smart money doesn't like languishing in a 5% money market account, so where does it go? Gold, or other commodities? Please, we're talking the *smart* money here. It goes to the one long term haven, the stock market.

Hopefully none of your readers sold their portfolios to buy gold on your advice 6 months ago...

bubble trouble said...

Keith thanks for posting this thread, I have been wanting some feedback on this issue.

Regarding the masses and investments bankers not being in "the know". A coworker was telling me about a friend who is a real estate investment banker who has been making $300,000+ a year for the last few years. The investment banker was trying to get my coworker (an engineer) to get into the business. Just out of curiosity my coworker asked him how much of that salary he had saved in the last few years and the investment banker replied..."none". I'm actually 40,000 in debt.

I have two points here... A) the serious lack of information being provided by the MSM. By all means, don't concern the public. It really seems that people don't believe reality until all the talking heads of the MSM are whailing away about it. Not even people in the industry.

B) the fact that everyone is still in party mode, thinking the good times will go on forever. They don't even bother reading the news or looking at the fundamentals, because "all is well". Nor do they bother stashing away a little savings for a rainy day. What rainy day? ...they think.

bubble trouble said...

Boiseboomer,

It's not an issue of the stock market getting ready to bust. It's an issue of whether or not the last month or so of the bull run will stick. I think we can clearly see, given Friday's results due to the economic report and the decline in GDP that it very well may not. Why would one, knowing this flood a bunch of money into the stock market now? Whether the answer is yes or no, it's important to be strategic in regards to where you place your money in or out of the stock market...given the probable retraction period in the future.

On the other hand, the money does have to go somewhere...Will it go into bonds? Will it go into gold? Etc.

keith said...

I moved a chunk of my 401k to euros via FXE

The problem with the currency etf's is that they don't pay interest. So if you can earn 5% in a money market in US$, the only way you gain is if the dollar falls more than 5% vs. the currency in the etf

I'll stay on the sidelines for gold. Remember, living in Europe my situation is a bit different - it's asset preservation in global terms I seek, or safety from a US$ plunge

Dangerous times ahead, with no silver bullet I'd say

john_law_the_II said...

" There are a lot of parallels between today and 1987."

one being that gold wasn't in a long-term bull market back then.

Anonymous said...

When the panic sets in gold will explode and then plateau until the mess gets sorted out. You see, when the music stops and the people that weren't paying attention realize it, there will be no time to ponder whether gold is still (after a mere 5000 years) a safe haven. There are still enough people that believe it is whether you do or not, especially when the shiat is full-on atomizing on the fan. Get in now, then get out down the road before the sheeple decide the world didn't end and get out too... This is the next bubble.

sk said...

Charlie,

I use Everbank www.everbank.com for Euro denominated CDs ( 2% APY for 3 month CD), BEGBX for a non-dollar hedged international high quality ( which essentially means European ) bond mutual fund and MERKX hard currency fund which aims to track the inverse of the DX ( US Dollar index).

-k

john_law_the_II said...

" Smart money doesn't like languishing in a 5% money market account, so where does it go? Gold, or other commodities? Please, we're talking the *smart* money here. It goes to the one long term haven, the stock market."

I"m glad that that money isn't going into gold and commodities, it means that the commodities bull market still have a ways to go.

is this the same "smart" money that has been flat to down since 2000?

uknowwhoiyam said...

My my, getting ready to try another gold flip eh? I really don't understand your fascination with gold. Obviously you don't consider it a long term investment, opting instead to go in and out to secure at best a small gain.

It's the day trader, get-rich-quick mentality, the very same thing he derides in real estate flippers.

Hypocrisy with a capital H.

uknowwhoiyam said...

is this the same "smart" money that has been flat to down since 2000?

Dunno where you're putting your $ but mine's averaging more than 10% annually.

So far, this year:
Personal Rate of Return from 01/01/2006 to 10/27/2006 is 17.2%.

LauraVella said...

realestate101 said: "It's not 1987! Oil is more like 1979. Housing is more like 1979. The USD is more like 1979. Iran is more like 1979. Gold is money.
10-15% of your assets in gold is recommended".

I totally agree with you 101. We are closer to mimicking the 1970's than the 1980's.

Golds high was seven years earlier, where is the comparison?

Anonymous said...

Saw one mortgage lender reported their mortgage default rate had doubled within a quarter. As long as the default rate increases, the number of home foreclosure sales will increase, potentially driving the cost of housing down. Most home builders were yet seeing profits although their margins were decreasing. The desire to build more homes at low margins might increase profits for some. New home starts went up in September as homebuilders switched to building the cheaper housing that the market craves. Thus the price of new housing went down as builders tried to serve the demand for lower cost housing. The high end of the market was getting the greater loss of value. Many would rather buy cheaper housing and have more family cash flow than buy expensive housing for tax write offs and lower famiily operating cash flow. Paying interest, insurance, and taxes on empty interior space is a penalty to one's free operating cash flow. Might need to meet in a restaurant rather than order a huge dining room that might rarely be used. Might order a sofa bed or rollaway beds rather than a spare bedroom for the guests that visited rarely.

john_law_the_II said...

"Dunno where you're putting your $ but mine's averaging more than 10% annually."

started buying gold and silver in 2003.

keith said...

uknow my fascination isn't with gold - it's with PRESERVING MY WEALTH that finds itself in US$ denominated assets

I moved into gold many months ago and then got out after it went parabolic if you remember. then back in but then back out as it wasn't doing what I needed - which was preserving capital. I'm glad I got out both times.

Now, I'm sitting with US$ assets and income living in Europe. If you were in my shoes you'd be trying to do exactly what I need to do - preserve wealth.

But from my view, there is no asset class that is a safe haven coming up, thus the consideration once again of gold.

If this conversation is too deep for you, I'd suggest Ben's blog

Anonymous said...

Keith,

Once you understand that the volitility
in gold and silver is largely due to
market manipulation, it puts things is
a very different perspective, and makes
it easier to weather the large fluctuations. Selling of gold by FCBs is largely supportive of the dollar and
bearish for gold. But that will eventually come to an end.

Also, silver has many features that gold
may not, and may offer a much better
investment return for less. But again,
it is very volatile, and you just have to
learn to live with it. Read Ted Buttler
for a better understanding of that.

The trick is I think, not to shift
everything into metals all at once,
but to wait for dips (which you have
been missing!!), and to average into
these dips bit by bit. Your
disatisfaction with the metals seems
to have a lot to do with all in or all
out mentality.

FlyingMonkeyWarrior said...

Might order a sofa bed or rollaway beds rather than a spare bedroom for the guests that visited rarely.
-------
Newest Trend according to CNN:

Murphy Beds

http://www.murphybedsorlando.com/specials.htm

Anonymous said...

Flying monkey warrior,

I've got to know. Are you a hot
goth chick? A simple yes of no
will do...

FlyingMonkeyWarrior said...

Last Night: YEA!

LauraVella said...

Wacahoot said: "One bad thing about Gold is the income tax laws no longer allow capital gains in gold profits anymore except in gold stocks.

I think it should be part of your portfolio for doomsday but the tax liabilities are too high on it IMO to justify a large investment in it".

This is true, there's alot of good quality gold stocks that pay dividends out there.. more bang for my buck when the POG rises.

Anonymous said...

Might order a sofa bed or rollaway beds rather than a spare bedroom for the guests that visited rarely.
Newest Trend according to CNN:
Murphy Beds
++++++++++++
Sounds like insolvent children, having gone bankrupt during foreclosure, are already starting to move in with their parents. It's a repeat of the Depression....

bugsy said...

"Sounds like insolvent children, having gone bankrupt during foreclosure, are already starting to move in with their parents. It's a repeat of the Depression...."

I hope your right. I really hate them so much.

Anonymous said...

I hope your right. I really hate them so much.
-------
Bugsy,

You hate insolvent children or murphy beds?

real estate 101 said...

Gold is money. The high for gold in 1980's dollars is over $2000 in 2006 dollars. Gold has a long way to go. I'm no gold bug, but gold is going to rise faster and farther than anyone expects. The gold market is tiny and the world is flush with paper money. It has to go somewhere. The sea of liquidity is becoming a tidal wave. Gold is where smart money moves with an (undeniable) drop in the world's currency (USD).

Cash is king or is it? Cash is paper, fiat paper to be exact. No fiat currency has ever endured. We've only been on a fiat currency since 1971 when the French were demanding gold instead of Vietnam war inflated USDs. Nixon told them no more gold and closed the gold window in 1971.

Got gold? Got Forex? Got commodities?

A collapse in housing could be the catalyst for a collapse that we can't imagine. Be careful in what you wish for.

I do think a housing collapse is possible. But, if it does occur very few will have any money to buy houses at the lower prices. More over, many people won't have a job to have the ability to buy anything. Banks won't loan money either. It'll be back to 20% down. That alone will wipe out most peoples ability to buy a house. This economic event could effect a generation.

Anonymous said...

Gold is towards the beginning of phase 2 out of 3 phases. During this phase gold will swing wildly back and forth as it attempts to de-couple from the US$. Once it completes this phase the US$ will no longer be a factor. In phase 3 gold goes parabolic. this is a typical gold run.

Anonymous said...

EVERYONE ON THIS BLOG UNDERSTANDS
GOLD EXCEPT KEITH. KEITH: TIME
TO SELL YOURE GOLD AGAIN! ITS GOING
TO CRASH! SELL! BUY! SELL!

-MAHA

PS. SORRY KEITH, ITS UNFAIR BUT
I CAN'T HELP MYSELF. ITS JUST TOO EASY...

keith said...

I seem to have nailed gold pretty good - buy when it was rising and sell when it was dropping, now out of the market as it goes sideways

Anonymous said...

why should i trust any form of non-physical delivery, such as bullion vaults?

GrandInquisitor said...

A collapse in housing could be the catalyst for a collapse that we can't imagine.

If housing collapses then the consumer probably stops spending. If the consumer stops spending then China's bull market and demand for commodities would come to an end. Then we are faced with a period of global deflation. Obviously the chance of this scenario playing out is maybe 10% or less???? If it does happen gold will sell off in a big way.

If you think the market today is more like 1979 than 1987 then gold has a ways to go yet. I still think it would make sense to wait and see what happens with housing and consumer spending over the next 6 months.

GrandInquisitor said...

Keith, I think you are making the right choice waiting out the sideways move. What's the opportunity cost of waiting? There's just too much risk / uncertainty right now. Also, IMO the Euro is a great currency to be long right now.

tabasco jenkins said...

To the poster who said that right now is like 1987 and that Gold tanked following the 1987 crash.

Well, you are just a teeny bit right with that statement. First off, follwing the market crash of 1987, Gold did not tank, it rallied from 450 to 500 (after having rallied from 400 at the start of 1987), then in 1988, it resumed it's secular bear market trend that had been ongoing since 1981, and started to drop again.

Also, in 1987, stocks and bonds were in the midst of a secular bull market and real estate and commodities were in the midst of secular bear market. So, right now isn't just like 1987 in those respects at all, in fact it is the exact opposite.

The part where you are a teenny bit right is that right now is 6-7 years into a long term hard or paper asset cycle like, just like it was in 1987. And typically what has happened 6-7 years into one of those cycles is that the dominant asset class crashes while the recessive asset class makes a slight recovery, before reverting back to the long term cycle.

In 1987, the dominant asset class was paper assets like stocks and bonds. They crashed and hard assets like gold made a recovery. But the crash of paper assets and the recovery of hard assets was short lived and 10 years later you would have been much better off if you had been buying stocks and bonds in 1987 then you would have been buying gold.

Right now is the mirror image of 1987. The dominant asset class since 2000, hard assets like commodities, have been crashing, while the recessive asset class, paper assets like stocks, have been recovering. But it won't last long, and 10 years from now you will be alot better off if you've been buying gold than if you've been buying stocks.

paul said...

I don't see Euros or Yen as a hedge against the dollar. In a previous post Keith put a chart of how over priced eurozone housing markets are. They are inflating as much as we are and they have persistent labor problems so their currency is worthless too.
Japan has been trying for years to get out of a depression and all they have to show for it is 1.5 times GDP in debt.
With the world's fiat currencies, gold is not money anymore. The only reason for gold to move is for central banks to value it again and there is no chance of that.
Furthermore, America's economy can't afford to loose the advantages of being the world's reserrve currency. Bernanke will pull a Volker to get us out of this. Stagflation here we come.

GrandInquisitor said...

tabasco, I take it you don't see all asset classes falling in unison? That's what I think could happen if housing turns into a crash and consumer spending dries up. If China is the reason for the bull market in gold and other hard commodities then we could experience a significant deflationary period. I realize the FED will print money like there is no tommorrow but I believe it will be too little to late. Again, I don't think this is a high probablility event.

Disgorge! said...

Kweefster: I'm thinking of gold again. And I moved a big chunk of change last week into Euros, after these comments by Peter Costello, Australia's treasurer, who pleaded with Asian bankers to "telegraph" their move out of dollars so as not to crash the market.

Oh please, isn't it obvious. Devious Costello is hinting to the Asians that they need to buy his Australian dollar and prop up his shaky economy. Economics 101!

Anonymous said...

Was Q3 GDP growth manipulated upwards because of the coming elections or is the US government clueless about measuring output?
Nouriel Roubini | Oct 29, 2006
The first estimate of US Q3 GDP growth came out at a dismal 1.6% but, as reported by Bloomberg, the actual correct figure would have been 0.9% if the production of motor vehicles in Q3 had been measured correctly:

U.S. Statistical Fluke Exaggerated Growth, Will Be Reversed
By Carlos Torres

Oct. 27 (Bloomberg) -- An unexpected increase in auto production last quarter was a statistical fluke that will be reversed, making current U.S. economic growth even weaker, according to a former Commerce Department economist.

Last quarter's annualized 26 percent increase in auto production shocked Joe Carson, now director of economic research at AllianceBernstein LP in New York. Without the gain, the economy would have grown at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported today.

The increase in output came despite cutbacks announced by General Motors Corp., Ford Motor Co. and others. A drop in the wholesale price of SUVs and light trucks as the automakers cleared leftover 2006 models made production look stronger than it actually was, said Carson. The economic fallout from the auto-industry cutbacks will instead come this quarter, he said.

``Last quarter was weak even with the benefit of this mismatch and the fourth quarter will now also be weak because it's going the other way,'' Carson said. ``Whatever output you have this quarter, which will probably be down, will be discounted by a likely rebound in prices.''

The mismatch can be explained by looking at how the government adjusts the figures for price changes.

Commerce Department economists use wholesale light truck prices, from the Labor Department's producer price report, to eliminate the influence of inflation on investment and inventories for that category. A 5.5 percent drop in price of SUVs and other light trucks last quarter made output look stronger when adjusted for inflation.

Growth Pessimism

``Whatever output you have this quarter, which will probably be down, will be discounted by a likely rebound in prices,'' Carson said. He currently forecasts the U.S. economy will grow at an annual rate of 1.4 percent this quarter and said he wouldn't be surprised if growth came in at half that pace. AllianceBernstein is an asset management firm.

The median forecast of economists surveyed by Bloomberg News earlier this month was for fourth-quarter growth of 2.5 percent.

``We are looking into it to see if we can better understand the reasons for the large decline'' in prices, said Brent Moulton, associate director for national economic accounts at the Bureau of Economic Analysis, part of the Commerce Department, which produces the report on gross domestic product.

Carson wasn't the only economist shocked by the auto- production figures.

`Unbelievable Detail'

Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, called the output numbers ``the most unbelievable detail'' in the GDP report.

The composition of growth last quarter, which included an unexpectedly large accumulation of inventories, also prompted other economists to reduce estimates for fourth-quarter growth. An increase in inventories overall suggests manufacturers may need to trim production this quarter.

The economy will probably grow at an annual pace of 1 percent from October through December, down almost a full percentage point from his earlier estimate, according to Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities Inc. in New York.

``A relatively large inventory build last quarter will need to be worked off and that will produce a negative hit to production, employment and income,'' LaVorgna added.

This mismeasurement of motor vehicle production in Q3 is highly suspicious coming about ten days before the US mid-term elections. It is also highly suspicious as it is not clear how the Bureau of Economic Analysis (BEA) at the Department of Commerce could have made such a gross mistake when seeing an alleged 26% increase in auto production that was patently at odds with many facts. During Q3 all the major US automakers - Ford, GM, Chrysler - announced production cuts for both Q3 and Q4. So, how could the folks at BEA argue and estimate that production went up by a whopping 26%? These data also do not make any sense as the Federal Reserve Board data on automotive production in Q3 show a sharp fall in production of "Motor Vehicles and Auto Parts" of 12.% (see http://www.federalreserve.gov/releases/g17/Current/g17.pdf, Table 1).

So how come the FRB data show a -12.0% sharp drop in production while the BEA estimates show an incredible 26% increase in production in Q3? This is altogether fishy. If one wants to give the benefit of the doubt to the usually non-partisan statisticians at BEA one would have to conclude that they were clueless about estimating motor vehicle production and they used a wrong price index to deflate the value of auto sales. How could they make such a gross mistake and believe in their estimate 26% growth figure - when all news headlines for months have been presenting the bad news about the plight of US automakers - is anyone's guess? The alternative hypothesis is that the Q3 GDP growth number was "massaged" upwards less than two weeks before the US mid-term elections. While a 1.6% is bad and dismal enough, a 0.9% would have been an altogether awful headline.

When I brought up the issue of the wrong estimate of the Q3 GDP number during my interview at Kudlow & Co. on Friday, even the conservative host Larry Kudlow was forced to ask one of the other guests - David Malpass of Bear Stearns - whether the GDP growth figure had been manipulated upward because of the election. And Malpass agreed with me that the motor vehicle figures looked fishy and that actual motor vehicle production in Q3 was lower than officially estimated.

Personally I prefer to give to BEA - a respected and independent government agency - the benefit of the doubt before claiming political and electoral manipulation of the most sensitive macro indicator before the election. But now BEA urgently owes the public a rapid and clear response on how it estimated motor vehicle production, why its +26% growth estimate is at odds with the -12% estimate of the Federal Reserve Board, and what it is planning to do to correct such incorrect estimate. Statistical measurement is always an art rather than a science but this is such a gross and obvious mismeasurement that BEA owes the public a clear and open answer. The fudged answer that Brent Moulton of BEA gave to Bloomberg for this first estimate will frankly not do.

I myself had predicted in July that Q3 GDP growth would be as low as 1.5% but, during the last few weeks, I had revised my growth estimate to "at most 1.5% and most likely closer to 1%". My even greater recent pessimism was based - in part - on the awful news and data that were coming out of the US auto sector. Indeed several other private sector forecasters had recently downgraded their Q3 growth forecasts below 1.% (for example Goldman Sachs down to 1%). That is why many observers, including Carson and Stanley, found the actual first estimate of Q3 GDP growth at 1.6% as highly suspicious.

We thus expect BEA to provide a rapid clear and open explanation of this gross mismeasurement. The issue is serious enough to require an explanation: both for markets and investors as the reaction of major asset markets to a 0.9% estimate of growth would have been even poorer than the reaction on Friday to the 1.6% estimate; and for the public in general as this episode leaves the suspicion - until otherwise clarified - that the first estimate of growth was actually manipulated for other purposes.

Disgorge! said...

Boiseboomer: I really don't understand your fascination with gold.

I do. The Kweefster is only human, and the number of websites and "gurus" out there pumping gold is astronomical. It's the new bubble, without a doubt.

You know it's all crap when idiots like Michael "Savage" (real name Michael Weiner pronounced "whiner") starts goading people to buy gold.

Disgorge! said...

If housing collapses then the consumer probably stops spending. If the consumer stops spending then China's bull market and demand for commodities would come to an end. Then we are faced with a period of global deflation.

Finally, someone says it! Collapsing US = collapsing China = collapsing commodity market = Australia (inter alia) in the toilet. And nobody will be buying gold in a deflation.

keith said...

to the posters that said that all asset classes will fall in unison, I agree

there is no safe haven, and that includes commodities evidently - which are not just quasi money in some cases (gold) but also used in industrial production and consumer uses (gold, silver, copper, etc). So a worldwide slowdown hurts 'em all.

and that's the $64,000 question. What to do knowing what we know is coming?

the sidelines feel good right now, especially with the dollar relatively stable and 5.5% at eloan on savings

but soon enough, just to preserve wealth, a move off the sidelines will be called for

and the only asset class that might increase will be simply.... drumroll...

going short

Disgorge! said...

I'm not a doomer, but I do believe in keeping a hidden stockpile of basic food essentials, like rice, sugar, oil, salt. In a very nasty situation, this could get you through when supermarket shelves are empty.

john_law_the_II said...

good post tabasco.

not all assets fall in unison. something has to increase in value. it very well could be commodities during a collapse. it very well could be us dollars or euros or some other currency.

SK said...

RE: going short..

And even that isn't easy and racked with risk and uncertainty.. So I shorted the semiconductors this earning season and did really well ( SANDSK, et al ) till Mon. - then XLNX turned things round and suddenly it stopped working - bad news was good news all over again - people had already brought prices down ahead of the report - then they lied IMO in the earnings and nobody cared or they produced that old pro-forma trick in a new guise( options investigations preclude us from stating earning but somehow we can tell you about revenue !).. its very hard this stuff.. its 3 steps forward, 2.5 steps back even.

long term shorting has it own risk - LBOs are still out there as are M&A - a deal like that destroys the carefully built up short value in a twinkling.

The only thing I know is - follow the data - and acknowledge that while all asset classes WILL decline, different ones will at different times take their turn in the woodshed - some will even have their day in the sun temporarily - continously adjust, alter, be empirical.

Let the data be with you.

-k

uknowwhoiyam said...

uknow my fascination isn't with gold - it's with PRESERVING MY WEALTH that finds itself in US$ denominated assets

If preservation is your goal, get thy $ into some long-term vehicles and stop losing thou$and$ in speculative markets.

When you start asking the stooges here for investment advice, you've got a big "PLEASE TAKE MY MONEY" sign on your forehead.

Anonymous said...

Anon said:"why should i trust any form of non-physical delivery, such as bullion vaults?"

Exactly, how do we know they are holding our gold for us?

Thats why I like gold stocks.

FlyingMonkeyWarrior said...

China is now the biggest holder of foreign exchange reserves in the world, accumulating $941 billion as of June 30 and expected to exceed a trillion dollars by the end of 2006 - a first in world history. A decision by China to shift a major portion of its reserve to the euro or the yen or gold could trigger other central banks to follow suit. Nobody would want to be left behind holding a bagfull of dollars rapidly turning worthless. The herd psychology would be very difficult to control in this case because national economic survival would be at stake.

This global herd psychology motivated by the survival instinct will be strongly reinforced by the latent anger of many countries in the Middle East, Eurasia, Southeast Asia, Africa and Latin America that silently abhor the pugnacious arrogance displayed by the lone Superpower in the exercise of its unilateral and militaristic foreign policies. They will just be too happy to dump the dollar and watch the lone Superpower squirm and collapse.

url;
http://www.atimes.com/atimes/China/
HJ19Ad01.html

Anonymous said...

FMW: Goth and smart. The total package :)

wacahootaman said...

For what it is worth; Gold just topped $600 an ounce on the Sydney market:

http://www.kitco.com/charts/livegold.htm

Anonymous said...

The dollar will not collapse.

The United States and the rest of the west will not allow it to happen.

The West has an absolute advantage in a financial banking speculative economy. They will never give up this advantage.

The third world has the greatest to gain, and the west has the most to lose in gold/silver backed money.

There will be a global war before a gold standard would ever arise.

Anonymous said...

The thing that Keith fails to see is that ALL currencies/assets (except precious metals) will drop in value when deflation sets in. This time gold will maintain its value and appear to rise but what is actually happening is that fiat currency will be devalued across the globe. GOLD IS MONEY and will retain its value, meanwhile currency will move to its real value -> 0 As this happens gold will become harder to get and demand will increase, which causes gold to rise.

Anonymous said...


I would recommend is that these matters be telegraphed well in advance.

Americas sixty families may hear but somehow I don't think western union will be knocking on our doors.

Richard said...

The US gov won't let the dollar crash?? Is that right?

Might want to read this.

******************


Are Dick Cheney's Money Managers Betting on Bad News?

By Steven Goldberg
Kiplinger's Personal Finance


Vice President Cheney's financial advisers are apparently betting on a rise in inflation and interest rates and on a decline in the value of the dollar against foreign currencies. That's the conclusion we draw after scouring the financial disclosure form released by Cheney this week.

As of the end of last year, Cheney and his wife, Lynne, held between $10 million and $25 million in Vanguard Short-Term Tax-Exempt fund (it's impossible to be more precise because the disclosure form lists holdings within ranges). The fund's holdings of tax-free municipal bonds mature, on average, in a little more than a year -- meaning that the fund should hold up well if rates rise.

The Cheneys held another $1 million to $5 million in Vanguard Tax-Exempt Money Market fund, which is practically risk-free and could benefit from continued increases in short-term interest rates. And the couple had between $2 million and $10 million in Vanguard Inflation-Protected Securities fund. The principal and interest payments of inflation-protected bonds rise along with consumer prices, making them good inflation hedges.

The Cheneys also had between $10 million and $25 million in American Century International Bond. The fund buys mainly high-quality foreign bonds (predominantly in Europe) and rarely hedges against possible increases in the value of the dollar. Indeed, its prospectus limits dollar exposure to 25% of assets and the fund currently has only 6% of assets in dollars, according to an American Century spokesman.

The Cheneys' total assets could be as high as $94.6 million, according to the disclosure form. The vice-president's advisers say the vice president pays no attention to his investments. His lawyer, Terrence O'Donnell, says outside money managers supervise the investments. "He has nothing to do with it," O'Donnell says.

As for stocks, the couple held between $1 million and $5 million in Lazard International Equity and a like amount in Lazard Emerging Markets funds. The Cheneys' relatively few U.S. stock fund holdings include $1 million to $5 million in GMO Tax-Managed U.S. Equities III.

President Bush may be bold in his public policies, but his private investments appear decidedly on the meek side. Bush and his wife, Laura, reported on their disclosure form that they held combined assets of $7.2 million to $20.9 million.

As of the end of last year, the Bushes' two largest assets were their Texas ranch, valued at between $1 million and $5 million, and a blind trust, also valued at between $1 million and $5 million. Of course, it's impossible to tell how the trust is invested, so it could be heavily in stocks. The White House would not make the trust's managers available for comment.

Beyond the trust, the First Family's investable assets are largely in super-safe Treasury notes, money-market funds and bank certificates of deposit. The Bushes' holdings in these instruments totaled between $1.7 million and $4.4 million. The President also listed a Health Savings Account worth between $1,000 and $15,000.

The Bushes confine most of their stock investing to their relatively small IRAs and to the President's retirement account from when he was governor of Texas. As of last December, that account was worth $108,016 and was invested entirely in Vanguard Wellington, which owns stocks and bonds.

The President's IRA, worth $87,074, includes $30,142 in Capital Income Builder, a balanced fund that's part of the American funds family; $30,866 in Growth Fund of America, another American fund; and $24,219 in zero-coupon U.S. Treasury bonds. Nearly all of the First Lady's IRA, worth $8,556, was also in Capital Income Builder.

Disgorge! said...

GOLD IS MONEY

No, it isn't. You cannot buy anything with gold. It is a metal, that is all.

tabasco jenkins said...

grandinquisitor,

No, I don't see all assets collapsing. It could happen, but even if it were to happen, it would be for a very short time.

Even after the crash of 1929, though all assets deflated for a while spurred on by a deflation in M3, commodities (except gold which was conficated) and real estate started to make a comeback after a few years, and as they hadn't been as bubblicious as stocks (excepting of course for Florida real estate), they actually started making new highs relatively quickly. Stocks, on the other hand, took 16 years to finally get back to 1929 levels.

Very rarely are all asset classes going to fall at the same time. Betting on that is betting on a once a century event. It may happen, but the odds are against it. And if M3 keeps increasing faster than population growth and foreign demand, it won't happen.

Anonymous said...

As an Australian, I have very little respect for Mr Costello. For those in the US who do not know, this is the guy who recently won a high court ruling that allows him (and other ministers) to veto Freedom of Information requests. The FOI that was being challenged was for information about the first home owners grant (which according to many economists) played a big part in the boom in Australian property. At one stage it was $14000.

In 2003 some journalists got wind of the fact that many wealthy people (specifically lawyers) were abusing the grant, by purchasing new houses in the names of their newly born child. Of coarse that practice was stopped fairly quickly.

The FOI request in question was for statistics, (collected by the Treasury Department – Mr Costello's department), about the demographics of the grant – who was taking advantage.

Stuff like this can only make you suspicious.

Here is a link to an article taken from ABC radio.

See our politicians are just as slimy.

Pays your money, takes your chances said...

I am gathering physical gold and silver on the dips. Pay cash and will sell for cash or trade for stuff. Stuff like food and other things I will need. I like coins because they are hard to counterfeit.

Anonymous said...

What i've learned from this is:

Buy Now!
Sell Now!
Hold!
Stay away from..
Aquire!
Divest!
Wait!
Gold on paper only!
Bullion only!

Thanks!

Anonymous said...

Keith thanks for posting this thread, I have been wanting some feedback on this issue.

Regarding the masses and investments bankers not being in "the know". A coworker was telling me about a friend who is a real estate investment banker who has been making $300,000+ a year for the last few years. The investment banker was trying to get my coworker (an engineer) to get into the business. Just out of curiosity my coworker asked him how much of that salary he had saved in the last few years and the investment banker replied..."none". I'm actually 40,000 in debt.

I have two points here... A) the serious lack of information being provided by the MSM. By all means, don't concern the public. It really seems that people don't believe reality until all the talking heads of the MSM are whailing away about it. Not even people in the industry.

B) the fact that everyone is still in party mode, thinking the good times will go on forever. They don't even bother reading the news or looking at the fundamentals, because "all is well". Nor do they bother stashing away a little savings for a rainy day. What rainy day? ...they think.

---------------------------

WOW! A few years at $300K+ per year and I would be well on my way to a nice and very early retirement. And the investment "professional" blows it all?!?!

Anonymous said...

Gold is better than money! Gold is a bull move. Just look at the price increase over the last 5 years. I have been buying gold mutual funds over the last few years, by buying on the dips and selling at the heights. I have done far better with gold than stocks.
Gold is about to make another run towards the $700 mark, and probably higher into the $1,000 range. Why do I think this? The U.S. economy is going into a recession led by real estate, and the negative savings rate. This combined with the national debt and exchange rate, and you have an increase in gold prices.
Also look at supply and demand factors, the Indians love gold. Women there can't inherit the husbands property or money upon his death. It all goes to the son. Except jewelry! That is why there is such a demand for it. Also Chinese love gold, and they too are buying! This will out strip supply and product and the price will sky rocket.

Anonymous said...

Gold is going to $1,000+! The supply is limited and demand is surging in India, China and the middle-east.