Thursday, January 31, 2013

Truth In Reporting

By now everyone has seen the reports of the unexpected decline in Q4 GDP reported yesterday.  Of course, the decline was blamed by the White House and the media on a decline in Government spending.  But I wanted to bring to everyone's attention the truth about this.  If you pull up this link:  Fact Check, you'll see that the Govt actually spent about $98 billion more in Q4 than in Q3.  In addition, the Government rang up a $292.2 billion spending deficit.  So I wonder what the real culprit was for the Q4 GDP contraction.  Pretty much has to be autos and housing.  I would recommend reading that link, but you can do the Government spending numbers yourself here:  LINK

Tomorrow we have the Government's non-farm payroll report for January.  Quite honestly I haven't paid much attention to this number for the past few years other than to dissect out where the inconsistencies are with the report and the real world.  One of the primary numbers I look at is the labor force participation rate, which is the percentage of the population that is "eligible" to participate in the Government defined labor pool as a percent of the total working age population.  This metric is currently about as low as it was back in the early 1980's, meaning that the number of people working and paying taxes is significantly lower as a percent of the total population now than back then.  The significance of that metric and the ramifications for further Government deficit spending and Treasury debt issuance to fund that spending are pretty obvious.

That aside, I saw an article about which of the big box retailers would be closing the most stores this year.  Barnes and Noble, Office Depot, JC Penny, Sears and Best Buy are closing anywhere from 10-20% of their store base.  That's quite a bit of lost jobs to start the year:  LINK

Again, regardless of what the Government shows for jobs added tomorrow, keep in mind that as big retailers close stores, they cut their workforce.  And this list is just the top-5 expected closings. I expect we'll see a lot more over the course of the next few months.  When retail sales are slow, it means the consumers are tapped out - or maxed out on debt - and the economy is weak or in a state of general decline.

And of course, when big box retailers close down a lot of stores, it adds to the growing glut of commercial real estate.

Just a little truth tidbit if you're worried about the latest sell-off in the price of gold/silver.  There's a lot of misinformation, disinformation and absurd ideas about what's going in the market.  The truth is that the eastern hemisphere countries are vacuuming up physical gold and silver that they are having delivered domestically as quickly as the London/New York dealers are printing paper gold and silver contracts.  You can see this in any given 24 hour trading period, where the price of the metals rises overnight until Hong Kong closes and London opens.  Then the price sells off as the London/NYC bullion banks print up more paper contracts and dump them on the market.

In fact, per today's Comex open interest report, currently there are about 13,900 contracts February open and potentially standing for delivery.  This represents 63% of the gold listed as available for delivery on the Comex.  This is an extraordinarily high amount in relation to the historical context at this point in any given delivery month cycle (first notice day).  We'll see how this unfolds, but I doubt Marketwatch, Bloomberg News and CNBC are reporting this information.

One more point of thought regarding yesterday's GDP report.  The Government used a .6% inflation assumption (that's point six percent, annualized) in calculating Q4 GDP.  Anyone out experience only a .6% increase in their necessities last year?  Imagine how negative the GDP report would have been if the Government used a realistic inflation index...


  1. When it is proved the central bankers suppressed the gold price and let it go cheaply to China, I'd like to think there would be hangings. But Gordon Brown is still around so probably not.

  2. You are the snuffleupagus of financial bloggers, Dave. Not much gets by your nose, does it? Thanks for the info/insights, keep 'em coming.

    1. LOL. Is that really how you spell it? Thanks for the feedback

  3. It seems that pricing on the L.M.E. or the Comex is becoming almost irrelevent. The true value of gold and silver will be what you can obtain for it's true value. The value will be determined by the country(s) that control the most gold and silver. Thank You again Dave for your steady logic.

  4. The spin on the numbers and intervention in these markets is absolutely breath-taking. Bonds massively overvalued and gold and silver undervalued.

  5. Harvey Organ reiterates your commentary, Dave, today:

    "Today we had first day notice and what a surprise. We had a massive 1,391,000 million oz of gold stand or 43.26 tonnes of gold. I have been following the gold and silver comex data from the mid 1970's and I have never seen anything like this before. You will recall that this past December we had only 10 tonnes of gold delivered upon. Generally December is the biggest delivery month of the year. The comex is not a physical market. If one needs physical they generally head over to London at the LBMA and purchase the metal over there. The high amounts standing may mean that our gentlemen from Eastern persuasion are having difficulty finding metal and thus they are heading over to our neck of the woods to obtain this very valuable commodity."

    Question is, Dave, can we expect real price discovery in this environment? And when?

    1. LOL. I stopped putting out price targets based on timeframes a long time ago. Too much unpredictability with all the intervention. Unfortunately, the catalyst that enables real price discovery will probably be part of the same event that makes this country completely unlivable except for the PTB

  6. Money Tsunami

    Add modern derivatives, which entered the scene in a significant way only some 30 years ago, and the picture becomes even murkier. To demonstrate this, in slow motion, consider the creation of a credit default swap (CDS), and then a mortgage collateralized debt obligation (CDO). Assume an investor wants to be long the credit of IBM. The investor offers to sell to a dealer a CDS on IBM. The dealer purchases the CDS and either keeps it or lays off the risk by booking an offsetting transaction with someone else. Actual securities issued by IBM are not part of these transactions – the CDS is just a contract between the investor and the dealer. As IBM’s credit quality is perceived to change, the price of the CDS will fluctuate and money will change hands between the investor and the dealer (based on the “mark to market”). This position is basically a borrowing by the investor who now “owns” a security referencing the credit of IBM, and who has put up only a small deposit – a tiny fraction of the notional credit exposure that the investor is long. It also represents a highly-leveraged loan by the dealer. Although the investor/borrower does not receive the full proceeds of this “loan,” he or she bears the full risk of loss on the underlying asset. It is as if the investor borrowed money from the dealer, added a small amount of his or her own money, and purchased an IBM security with the total amount of money. Interestingly, such borrowings also have the effect of impacting the price of the actual underlying assets (in this case, IBM credit) due to arbitrage pressures. In effect, these transactions by investors and non-bank dealers represent many of the characteristics of the creation and dissipation of money, but they are outside the traditional and commonly-understood mechanics of fractional reserve banking. Most economists would not consider these transactions in the context of money supply, but we think that they are being mechanistic and not seeing the actual effects of the basically unlimited ability of private derivatives transactions to have many of the same effects as are caused by the creation and destruction of “money.”

  7. No-money-down mortgages are back

    Some affluent buyers are getting the keys to their new home without putting a penny down.

    It’s 100% financing—the same strategy that pushed many homeowners into foreclosure during the housing bust. Banks say these loans are safer: They’re almost exclusively being offered to clients with sizable assets, and they often require two forms of collateral—the house and a portion of the client’s investment portfolio in lieu of a traditional cash down payment.

    In most cases, borrowers end up with one loan and one monthly payment. Depending on the lender and the borrower, roughly 60% to 80% of the loan can be pegged to the home’s value while the remaining 20% to 40% can be secured by investments. On a $2 million primary residence, for instance, the borrower could get a $2 million loan, which would require a pledge of assets in an investment portfolio to cover what could have been, say, a $500,000 down payment. The pledged assets can remain fully invested, earning returns as normal, without disrupting the client’s investment goals.
    Some banks are using this product to lure in clients, such as BOK Financial’s offer, which is available to new physicians. To provide the loan, the bank must first receive proof that the borrower has cash or investments, like stocks or mutual funds, that equal 10% of the borrowed amount. (The company says it doesn’t seek a pledge of those assets but just wants to know that borrowers can meet their obligations over time.)

    whole economy runs on pledged assets...?whose balance sheet are those assets on? margined accounts?