4 July 2009 - Global Markets Review

Dear Ladies & Gentlemen,

The fundamentals of most economies globally currently - in my humble opinion - are still not sound and so it was no surprise this week that we saw further volatility as unemployment continued to surprise.

Continued to surprise who though? I've been saying it for months that 'Unemployment' remains the key to whether the world is coming out of a recession - or the recession is much deeper than people would have you believe.

Just a month ago, the Dow Jones Industrial Average was completing a bizarre run from 6,800 to 8,800, following the monster decline from 14,000 less than a year ago. Aside from the obvious "dead cat bounce" phenomenon, the market (helped, of course, by the omnipresent PPT) was aglow with dreams of "green shoots of economic recovery", a propagandist platform created by a combination of Washington, Wall Street, and scheming media outlets such as CNBC.

There was no real evidence of such a recovery (even in "massaged" government figures), other than that the freefall of economic activity that commenced last autumn had started to slow to a more normalized decline, hardly what I would call reason for excitement. And given the major bankruptcies of General Motors and Chrysler that have occurred since then, as well as continued declines in real estate prices and rising unemployment, I find it laughable that anyone would entertain such a ridiculous idea that the economy is "bottoming."

At that point, on roughly June 5th, the stock market peaked following the "bombshell" (facetious) news that May US non-farm payrolls had "only declined by 345,000" compared to the 530,000 estimate. Never mind that the government's favorite new fudging tool, the employment "Birth/Death model", added a miraculous 220,000 phantom jobs, its highest level ever by a large margin (except for April, when it added 226,000), preventing the real number from being reported as 565,000. Nor that the ADP employment report, released days earlier, claimed that 473,000 jobs had been lost. All that mattered to the public is that the US government said it was just 345,000, and as we all know, the US government is always truthful.

By the way, Thursday's reported 467,000 June job loss included a 185,000 phantom job gain from the aforementioned Birth/Death Model, meaning the real number was closer to 652,000. In fact, I'd argue that, if anything, the amount of unreported jobs is going DOWN, not up. Does anyone know someone that just lost their job, and as a result is starting their own business in this environment?

Of course not!

Now I'd like to answer a question posed this week; why is Gold not over $1,000 yet?

In the backdrop of the above stock market scenario, gold had quietly crept up to $980-$990, where over a two-week period in late May/early June it mysteriously was blocked at least a half dozen times in its attempt to yet again reach the important psychological $1,000 level, all at a time when "inflation expectations" were soaring yielding surging interest rates and commodity prices.

Gold's rise was finally put to rest the day of the June 5th "better than expected" employment report, with the newspaper headlines gleefully shrilling "gold falls due to strong Dollar, end of safe haven trade" because the Dollar happened to rise that day. Of course, I challenge anyone to find even one piece of evidence to support the assumption that gold demand was falling (in fact, to the contrary), not to mention that the Dollar, even after that day's rally, was still sitting near its lows after a painful 10% correction

But that's how the Gold Cartel game works. Short gold heavily (with unbacked paper contracts) on the way up, so as to mute its rise, and then attack when some market or other (such as the Dollar, the Dow, oil, etc.) makes a big move that gold's fall can be attributed to. Meanwhile, the clueless, and in some cases corrupted press will happily print whatever makes the most sense that day, such as "gold falls on strong Dollar", "gold falls on rising Dow" etc. etc.

Dozens of years of history will show that gold actually has little or no (positive or negative) correlation to most of these markets, not to mention that many of gold's strongest rises have occurred during such seemingly "gold bearish" conditions (such as a strong Dollar, a strong Dow, or weak oil).

My point, of course, is that few people care to even observe the obvious, let alone try to analyze published data and/or dispute what the "powers that be" say, including the White House, CNBC, or Wall Street analysts, all of whom, by the way, have massive conflicts of interest yielding a burning need for stocks and bonds to do well, and gold to do poorly.

So what really caused this latest gold/silver trashing? Over the past month, gold fell 6% from a high of $990 to $930 Friday, while silver fell an astounding 17%, from $16.20 to $13.40 Friday.

Gold made numerous attempts to break toward $1,000 a in early June, all of which were thwarted by Cartel shorting.

On June 5th gold suffered a waterfall decline following the "gold bearish" unemployment report.

Clearly the (un)Employment report is viewed as the most important piece of economic data by the powers that be (due to its high visibility to the public), increasing the incentive of anti-gold organizations to prevent Precious Metals from performing strongly in their wakes.

Without having done the data, I can confidently estimate that, despite a seven-year "gold bullish" trend in US employment, gold declined on 90%-95% of the days that such reports were issued (the first Friday of the month), with the media alternately reporting the contradictory headlines of "gold hammered on strong jobless report" and "gold hammered on weak jobless report."

Silver, a much more volatile commodity due to its small market size and more dominant "commercial" trading positions on the COMEX futures market, as usual falls much more than gold during such Precious Metals trashings, despite it having a significantly tighter supply/demand balance, dramatically lower global inventories, and the dual utilities of investment/currency and industrial applications.

Let's look next at the Dow Jones Industrial Average, a conglomeration of just 30 of the 10,000 or so public companies in America, chock full of upstanding firms such as AIG, Citibank, and General Motors (whoops, these companies were recently dropped from the DJIA, a major reason why it continues to be a meaningless measure of US economic activity).

Either way, the clueless media loves to get excited when the Dow is rising and gold is falling, as these two markets are clearly the "key barometers of economic activity" in the eyes of the public, and not coincidentally, the combination that best serves their own interests. In other words, a rising Dow and falling gold is "good", while a falling Dow and rising gold is "bad."

This is why it is so important for the US Government and the Gold Cartel to work their magic?

Anyway, lets' take a look to see if gold fell because a soaring Dow yielded an end to the need for a gold "safe haven", or if a plummeting Dow led to renewed "deflation fears", although, if you actually do the analysis, gold has historically had a negative correlation to the Dow.

Here's what you see; the Dow is at the same price (roughly 8,300) that is was a month ago, and if you take out Thursday's 223-point drubbing it was squarely at 8,500, right in the middle of that range.

This is why I find it strange that this whole gold trashing began with a "stronger than expected" jobless report, yet Thursday, when the June jobless report was decidedly "weaker than expected", gold was again hit.

And this goes back to my earlier commentary about how gold, despite being in a bull market for nine years, seems to get smashed 90%-95% of the days that a US employment report is issued, whether it is perceived to be "good" or "bad."

But this is why Gold has waivered the past month and whilst the US Government continue to manipulate employment figures, Gold will struggles to break through $1,000.

But you all know my views; when it finally does ..... there will be no stopping it.

This week optimism about the US economy, a critical market for Asian-made goods, buckled after the government said employers slashed 467,000 jobs in June. That was far worse than the 363,000 that economists predicted and marked the first increase in monthly jobs losses since January. At the same time, the unemployment rate hit 9.5%, the highest since 1983.

Investors have sent markets surging in recent months after the global economy flickered to life as companies began restocking their inventories and international trade picked up modestly.

But the dreary news about America's labour market just reinforces worries that a strong recovery in the US economy, even if the recession officially ends this year, was unlikely anytime soon.

I know I keep saying it, but I figure a 15-20% correction within the next 8 weeks.

And what of those American Banks and my comments that at least one more major US Bank will hit the wall within the next few months?

Six banks in Illinois and one in Texas were seized by regulators this week as the deepening financial crisis pushed the toll of failed US lenders this year to 52, the most since 1992.

Regulators this year have closed the most banks since the savings-and-loan crisis of the 1990s as lenders struggle with mounting losses on mortgages and commercial loans. The total for 2009 is more than double the 25 banks shuttered in 2008 and surpasses the 50 that were closed in 1993. The prior year there were 181 failures or government-assisted transactions.

The FDIC estimates Thursday's seizures will cost its insurance fund $314.3 million. The regulator imposed an emergency fee in May to raise $5.6 billion to rebuild the fund, which has deteriorated in the past 18 months. More assessments are possible, the FDIC said.

In addition to CDOs, the failed banks were plagued by losses on commercial real estate loans. Founders Bank of Worth, the biggest of the Illinois banks seized Thursday, had $374 million in construction and commercial real estate loans as of March, accounting for 63% of the bank's net loans and leases, according to a regulatory report.

Millennium State Bank of Texas, the Dallas-based bank taken over Thursday, had $67.5 million in such loans, or 81% of its total loans.

But you think I'm always harping on about the US right?

How about this for a change of tack this week - looking a little closer at those people who think that Australia is a 'little better off than the rest of the world' - or 'a little less exposed' at the very least.

Australia's economy, which has so far skirted the global recession, may stall after reports showed exports dropped to a 14-month low, bank lending fell and home- building approvals declined by the most since 2002.

Australia was one of few major economies including China and India to grow in the first quarter as government cash handouts and record interest-rate cuts stoked consumer spending. Gross domestic product expanded 0.4% from the previous three months, in contrast to a 3.8% decline in Japan and a 1.4% contraction in the US

This week's reports suggest the global recession is biting as stimulus efforts fade, which may prompt the central bank to cut interest rates. Reserve Bank Governor Glenn Stevens said last month that slower growth and inflation give him scope to reduce borrowing costs if it helps secure "a durable upswing."

The full brunt of the deepest and most synchronized post- war global recession has yet to fully bear down on Australia. Export income, the terms of trade and business investment are all set to move substantially lower over the second half of the year.

The local currency fell 1.8% Thursday after a government report showed exports slumped 5% in May from April, widening the trade deficit to A$556 million ($448 million). Economists expected a mere A$125 million shortfall.

Imports of capital goods, which include trucks and machinery, tumbled 14%, a sign businesses are cutting capital spending, Thursday's report showed.

As Australia's GDP flatlines and unemployment climbs, the central bank may have to cut interest rates further.

Lower prices for coal and iron ore have damped a mining boom that has driven Australia's 17 years of economic expansion. BHP Billiton Ltd., the world's biggest mining company, and Rio Tinto Group have cut output, fired workers and reduced capital expenditure in response to the slowdown in world demand.

The numbers this week provide a reality check for markets that continue to price in interest-rate hikes in early 2010.

Traders expect Australia's overnight cash rate target will be 42 basis points higher in 12 months, a Credit Suisse Group AG index based on interest-rate swaps showed at 10:15 p.m. in Sydney. Earlier this week, the index was pricing in 63 basis points in rate increases in a year.

Further signs of weakness in the economy include a July 1 report that showed approvals to build or renovate houses and apartments fell 12.5% in May from April, the biggest drop since November 2002. The decline was led by apartments, which tumbled 43.6%.

Lending by Australian financial institutions slipped 0.1% in May, led by a 0.7% decline in borrowing by companies, the central bank said this week. Sales of newly built homes slumped 5.7% from April, the first drop this year, the Housing Industry Association reported on June 30.

Still, there was evidence this week of strength in a key area of the Australian economy. Retail sales increased 1% in May, twice as much as economists estimated, buoyed by spending at department stores and restaurants. The services industry expanded for the first time in 15 months in June, according to an index Friday from Commonwealth Bank of Australia and the Australian Industry Group.

Consumer spending rose 0.6% in the first quarter, accounting for three-quarters of the Australian economy's growth in the period.

But isn't that precisely what happened in the US a few weeks ago?

Rather than alienate myself with the Australian readership on top of those US readers I always seem to offend, off of my 'soap-box' and on to the numbers for the week: