Last week was options expiration week as well as the end of the Third Quarter. So hedge funds were highly incentivized to gun stocks and precious metals higher (hedge funds are currently mostly long stocks and precious metals) to game their 3Q12 performance.

However, what’s notable is that despite this, stocks actually finished the week down. Indeed, as the below chart shows, hedgies continually pushed the market up only to find that there were few real buyers in the market, as a result, stocks tended to drift downward towards the end of each session.

Gold on the other hand, finished the week up.

This is a critical development. A recent survey performed by Goldman Sachs indicates that the firm’s clients do not believe that QE 3 (or QE Infinite as it’s commonly called due to the program being continuous in nature) will do much to boost stocks, but that it will unleash higher inflation.

Last week’s action provides plenty of evidence that this is the growing consensus among institutional investors and hedge funds. This is particularly worrisome as it indicates that the Fed may have just spent its last bullet: if the only positive consequence of QE (stocks moving higher) is no longer in place while the negative consequences (higher inflation/ cost of living) are being exacerbated, then things will be getting very ugly indeed.
The key chart to watch for this will be the performance of Gold relative to the S&P 500. If and when the S&P 500 turns downward while Gold continues to rally, then the Fed will have lost all control and we’re heading into a truly disastrously inflationary collapse.

By the look of things, this is not far off. The below chart shows the performance of Gold vs. that of the S&P 500 since the Fed announced QE 3. If stock continue to crater while Gold rallies, then it’s GAME OVER for Fed intervention as the Fed literally cannot do anything more.

The significance of this cannot be overstated. The only reason the Fed has been able to get away with the various interventions it implements is because the stock market continues to rally each time the Fed supplies more juice.

So if the Fed announces an ongoing program with no end in site and stocks fall, then buckle up.

On that note, I’m currently preparing subscribers of my Private Wealth Advisory newsletter for the coming inflationary storm with a Special Inflation Portfolio consisting of unique, unknown inflation hedges that will outperform even Gold and Silver as inflation rips through the financial system.

I’m talking about extraordinary asset plays trading at massive discounts to their real value.

One of them is a junior Gold company with reserves valued at over $9 billion. Today it’s entire market cap is less than $300 million.

Another one is a Silver play currently valued by the market at less than 10% of its known reserves. And it’s already producing (so this is not some “pie in the sky” play on future discoveries)

I’ve got three other plays up my sleeve. I expect all of them will be up in the double digits in the weeks to come.

To find out what they are, all you need to do is take out a trial subscription to my Private Wealth Advisory newsletter. You’ll immediately be given access to my Special Inflation Portfolio as well as my three Special Reports titled Protect Your Family, Protect Your Savings, and Protect Your Portfolio.

Collectively, these reports outline critical information for the coming crisis including:

1)   What banks are most exposed to systemic risk.

2)   How, why, and where to buy Gold and Silver bullion.

3)   How much food you need to stockpile, where to buy it and how to store it.

And more!

To take out trial subscription to Private Wealth Advisory…

Click Here Now!!!

Best Regards,

Graham Summers

Regarding the recent Central Bank coordinated intervention, the key take-away point is that the ECB and US Federal Reserve attempted “shock and awe” tactics with their latest announcements by throwing out words such as “unlimited” and “open-ended.”

The implication here was that the Central Banks would do everything they could to prop up the financial markets. However, as has been the case with every Central Bank intervention, there are unintended consequences.

The first unintended consequence concerns the fact that both programs are essentially a form of “intervention to infinite.” The problem with this is that the primary driver of stock prices over the last three years has been the anticipation of more monetary stimulus from Central Banks.

Indeed, the New York Fed itself has openly admitted that were it to remove the market moves that occurred around Fed FOMC meetings (the times when the Fed announced new programs or hinted at doing so), the S&P 500 would be at 600 today.

So, by announcing programs that will be on going in nature, both the ECB and the Fed have removed the anticipation of future Central Bank intervention from investors’ psychologies. This could become highly problematic, especially if these latest announcements turn out to be duds.

Speaking of which…

Spain’s ten-year bond yield has broken back above 6%. To see Spain’s sovereign bond yields rising like this after the ECB announced it would essentially provide “unlimited” buying as support is simply stunning. And it indicates in plain terms that the ECB’s program was in fact a dud.

In other news, we find that even barely literate high school students have a better understanding of job creation than Washington.

In case you missed it, recently the US public school system has implemented a series of reforms to mandate what students should eat based on a healthier diet.

The program was spearheaded by First Lady Michelle Obama, who, despite not being a nutritionist or having any sort of medical degree, has decided she knows what’s best for children in terms of their diets.

As a result of the reforms, the cost of school lunches has risen by $0.20-$0.25 per plate. And students don’t like it. In fact, many of them have begun protesting the reforms saying that they’re hungry and the food portions are not enough.

However, the far more interesting development concerns students who have begun a black market of selling food to other students. Several enterprising individuals have begun bringing food to school and selling it to other students. One student simply brings in a chocolate syrup bottle and sells “shots” to classmates.

Bear in mind, SAT verbal scores just hit their lowest levels since 1972. And this is after the test was dumbed down several times.

What’s my point with all of this?

That high school students, even those who are borderline-failing their SATs, have a better understand of economics and job growth than Washington bureaucrats.

Welcome to the USA.

The reason the US rose to power was due to a Democratic Capitalism of innovation and entrepreneurialism, NOT the Government running things. In the recent case of school lunches, the Government has gotten involved, prices have gone up, and students are unhappy. As a result, other students have stepped in, creating a sub-economy for lunches in the schools.

Want to fix the economy? Get the Government out of the way. Heck, even SAT failing high school students know this.

But don’t expect the folks in Washington or at the Fed to get this. They believe that the medicine for the economy’s sickness is the very item that caused the sickness in the first place: more debt and loose monetary policies.

There’s a word for low economic growth and high inflation… it’s called stagflation… and it’s going to be getting worse in the coming months. Gold and Silver have already broken out of their wedge patterns, and the US Dollar is getting perilously close to breaking down in a BIG way.

On that note, we just published a Special Portfolio of unique inflation hedges: investments that will not only maintain their purchasing power but will outperform even Gold and Silver as the Fed and ECB debase their respective fiat currencies.

We’re talking about investments of extraordinary value that 99% of investors are unaware of: asset plays trading at massive discounts to their underlying values. The kind of investments that can show you double-digit returns in a very short period.

This portfolio will be made available only to subscribers of our Private Wealth Advisory newsletter. The last time we opened a similar portfolio, we saw gains of 28%, 41% and 42% in a matter of months. We expect similar returns this time around as well.

To find out more about Private Wealth Advisory and get on board for this Special Inflation Portfolio…

Click Here Now!

Phoenix Capital Research

Since the Great Crisis began in 2007 the Fed/ Feds have done the following:

• Cutting interest rates from 5.25-0.25% (Sept ’07-today).
• The Bear Stearns deal/ taking on $30 billion in junk mortgages (Mar ’08).
• Opening various lending windows to investment banks (Mar ’08).
• Hank Paulson spends $400 billion on Fannie/ Freddie (Sept ’08).
• The Fed takes over insurance company AIG for $85 billion (Sept ’08).
• The Fed doles out $25 billion for the automakers (Sept ’08)
• The Feds kick off the $700 billion TARP program (Oct ’08)
• The Fed buys commercial paper from non-financial firms (Oct ’08)
• The Fed offers $540 billion to backstop money market funds (Oct ’08)
• The Fed agrees to back up to $280 billion of Citigroup’s liabilities (Oct ’08).
• $40 billion more to AIG (Nov ’08)
• The Fed backstops $140 billion of Bank of America’s liabilities (Jan ’09)
• Obama’s $787 Billion Stimulus (Jan ’09)
• QE 1 buys $1.25 trillion in Treasuries and mortgage debt (March ’09)
• QE lite buys $200-300 billion of Treasuries and mortgage debt (Aug ’10)
• QE 2 buys $600 billion in Treasuries (Nov ’10)
• Operation Twist 2 (Nov ’11)
• QE 3 buys $40 billion in Mortgage Backed Securities every month from now on (Sept. ’12)

That’s one heck of a list. And the worst part is I know I’ve left something out somewhere.

However, despite this incredible intervention, the economy remains in the toilet. Indeed, adding to the more evidence that the alleged “recovery” is in fact a load of BS category… we have the latest survey of small business owners. Small businesses (50 employees or more) account for 75% of job creation in the US.

• 67 percent say there is too much uncertainty in the market today to expand, grow or hire new workers.
• 69 percent of small business owners and manufacturers say President Obama’s Executive Branch and regulatory policies have hurt American small businesses and manufacturers.
• 55 percent say they would not start a business today given what they know now and in the current environment.
• 54 percent say other countries like China and India are more supportive of their small businesses and manufacturers than the United States.

“Instead of smoothing the way, our government continues to erect more barriers to growth through burdensome regulations that increase costs for small businesses and all Americans,” NFIB president Dan Danner said.

http://washingtonexaminer.com/55-percent-of-small-business-owners-would-not-start-company-today-blame-obama/article/2509069#.UGMqSo6_u_t

This comes on top of the following:

1)   Median income today is lower than it was during at the end of 2009 (when the recession supposedly ended)

2)   The percentage of Americans on food stamps has increased from 11% to nearly 15%

3)   The average unemployment duration has increased from 30 weeks to nearly 40 weeks

4)   The civilian employment to population ratio hasn’t budged

5)   Industrial production has yet to exceed its former peak (a first in post WW-II “recoveries”)

And the Fed’s answer to this issue? Print more money!

Folks, this is the reality we’re dealing with. The Fed has gone “all in” in their efforts to stop the debt implosion… and it’s’ve failed. All it’s done is unleashed an even more serious inflationary storm than the one we were already facing.

The time to start preparing is now. The printers are running. The Great Currency Debasement has begun. Some folks will walk out of this mess winners. Most will walk out as losers.

At Phoenix Capital Research, we’re taking steps to insure our clients are among the winners. We are currently preparing a Special Portfolio of unique inflation hedges: investments that will not only maintain their purchasing power but will outperform even Gold and Silver as the Fed and ECB debase their respective fiat currencies.

We’re talking about investments of extraordinary value that 99% of investors are unaware of: asset plays trading at massive discounts to their underlying values. The kind of investments that can show you double-digit returns in a very short period.

This portfolio will be made available only to subscribers of our Private Wealth Advisory newsletter. The last time we opened a similar portfolio, we saw gains of 28%, 41% and 42% in a matter of months. We expect similar returns this time around as well.

To find out more about Private Wealth Advisory and get on board for this Special Inflation Portfolio the first segment of which was already released yesterday…

Click Here Now!

Phoenix Capital Research

The following is excerpt from a recent issue of Private Wealth Advisory. In it I outline why the world is entering a stagflationary disaster. To find out more about Private Wealth Advisory and how it can help you crush the market… Click Here!

In the last few days we’ve assessed how both China and Europe are no longer engines for global growth.

So what about the US?

By all counts, the latest ISM (a measure of manufacturing in the US) was a complete and total disaster. In August the ISM hit 49. Anything below 50 is considered a recessionary rating.

However, things are even worse below the surface. The ISM is made up of several components. Its Production component is back to May 2009 levels. The New Orders component is back to April 2009 levels.

And worse of all, Prices Paid is up to 54, up from a reading of just 39 in July.

In simple terms this tells us that inflation is hitting “lift off” in the US at the very same time that we are entering a recession that could be on par with that of 2008. And with corn and soybean prices at or near record highs, we could be on the verge of a stagflationary disaster combined with a food crisis at the very same time.

We get additional confirmation of a major economic contraction from corporate earnings. Recently we’ve seen earnings forecast cuts from Fed Ex, Bed Bath and Beyond, Proctor and Gamble, Adobe, Starbucks, McDonald’s and more.  Indeed, when you remove financials, S&P 500 earnings FELL year over year for 2Q12.

This is hardly indicative of a strong economy. The fact a record number of Americans are on food stamps doesn’t bode well either. And the Rasmussen Employment Index indicates worker confidence is at levels not seen since the FALL OF 2008!

All of this, combined with the following:

1)   Median income today is lower than it was during at the end of 2009 (when the recession supposedly ended)

2)   The percentage of Americans on food stamps has increased from 11% to nearly 15%

3)   The average unemployment duration has increased from 30 weeks to nearly 40 weeks

4)   The civilian employment to population ratio hasn’t budged

5)   Industrial production has yet to exceed its former peak (a first in post WW-II “recoveries”)

And this has happened despite the Fed’s massive intervention in the markets/economy.

To whit, the US Federal Reserve bought roughly three quarters of all Treasury issuance last year. Let that sink in for a moment. Roughly $0.74 out of every $1 in debt created by the US in 2011 was bought by the US Fed… not by the bond market, not by foreign countries, but by our own Central Bank.

Despite this massive intervention, the ECRI (which is a much better predictor of recessions than the National Bureau of Economic Research or NBER) believes that the US re-entered a recession in June.

And this is happening at a time when inflation is soaring due to the Fed’s money printing/ loose monetary policies. Agricultural commodities have risen some 20% since the last recession supposedly “ended.” Over the same time, Oil has risen by nearly $30 per barrel.

So… the Fed has engaged in record intervention in the market and economy. Despite this, the US “recovery” has in fact been a total dud: we’re officially back in a recession. And inflation is hitting lift off.

This means the US, like China and Europe, is no longer an engine for global growth. Combined these three regions account for 55% of global GDP.

Thus, we are in a very frightening situation… that of stagflation: the combination of low or no economic growth combined with higher inflation.

This is an extremely dangerous combination. And investors need to prepare for it in advance if they want to maintain their portfolios.

On that note, I’ve recently detailed four special inflation investments designed the profit from stagflation. These are unique investments that will outperform even Gold and Silver as inflation takes off…

Case in point, two of them are up 8% and 10% last week alone. And I expect all of them to be much higher in the coming months.

To find out what they are… and take action to prepare yourself and your portfolio to face the coming Inflationary Storm, I highly recommend taking out a subscription to my Private Wealth Advisory newsletter.

To learn more about Private Wealth Advisory and find out more about our Special Inflation Portfolio comprised of extraordinary inflation hedges that 99% of investors don’t even know about…

Click Here Now!

Phoenix Capital Research

Yesterday we assessed how China will not longer be an engine for economic growth going forward. Today we look at Europe.

The world continues to believe that Europe is somehow savable. The reality is Europe is in worse shape than most people can imagine. Case in point, Spaniards took €75 billion out of Spanish banks in July. Why is this a big deal? The entire Spanish banking system’s market cap is just €114 billion!!!!

         Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain

In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country’s overall economic output — as doubts grew about the durability of Spain’s financial system.

The withdrawals accelerated a trend that began in the middle of last year, and came despite a European commitment to pump up to 100 billion euros into the Spanish banking system. Analysts will be watching to see whether the August data, when available, shows an even faster rate of capital flight.

More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent.

According to official statistics, 30,000 Spaniards registered to work in Britain in the last year, and analysts say that this figure would be many multiples higher if workers without documents were counted. That is a 25 percent increase from a year earlier.

http://www.cnbc.com/id/48889555

As I’ve stated many times before, Spain is an absolute disaster. The Prime Minister denied needing a bailout for weeks, then demanded €100 billion in one week, procured the funds and went to see a soccer match (no joke).

Now he’s openly threatening the ECB. Not a good idea when your entire banking system is on life support to the tune of €300 billion+ from the ECB.

Spanish PM Rajoy challenges the European central bank and Germany

Spain will consider seeking extra aid from Europe on top of a 100 billion Euro rescue of its financial sector but does not see any need for new conditions, Prime Minister Mariano Rajoy said in an interview published in European newspapers.

http://en.mercopress.com/2012/09/03/spanish-pm-rajoy-challenges-the-european-central-bank-and-germany

That one paragraph says it all: give me more money with no conditions.

This is coming from a man who demands €100 billion in bailout funds, threatens to blow up the EU, and then goes to watch a soccer match once he’s got the money.

However, in some ways you can’t blame Rajoy for this attitude as it appears to be endemic for Spanish politicians:

         Catalonia asks for €5bn bailout from Spain

Spain’s north-eastern region of Catalonia, which represents around a fifth of the country’s economic output, will tap a state liquidity facility for just over €5bn, a spokeswoman for the region’s economy head has said.

We will not accept political conditions for the aid,” she added. Of Spain’s 17 regions, Valencia and Murcia have also said they would need recourse to the fund.

http://www.telegraph.co.uk/finance/financialcrisis/9503633/Catalonia-asks-for-5bn-bailout-from-Spain.html

Again, give me more money with no conditions. Simply incredible.

Meanwhile, pretty much all of Europe is in recession now, including Germany. True, the ESM bailout fund has been ratified… but the question remains who actually has funds to support it (Spain and Italy are meant to supply 30% of its funding… and they’re the ones who will be requesting a bailout!).

So don’t count on Europe providing an economic growth to speak of. Which means… all that’s left is the US. And we’ll be assessing that situation in tomorrow’s article.

In the meantime, I want to alert you to a very frightening development… that of stagflation: the combination of low or no economic growth combined with higher inflation.

This is an extremely dangerous combination. And investors need to prepare for it in advance if they want to maintain their portfolios.

On that note, I’ve recently detailed four special inflation investments designed the profit from stagflation. These are unique investments that will outperform even Gold and Silver as inflation takes off…

Case in point, two of them are up 8% and 10% last week alone. And I expect all of them to be much higher in the coming months.

To find out what they are… and take action to prepare yourself and your portfolio to face the coming Inflationary Storm, I highly recommend taking out a subscription to my Private Wealth Advisory newsletter.

To learn more about Private Wealth Advisory and find out more about our Special Inflation Portfolio comprised of extraordinary inflation hedges that 99% of investors don’t even know about…

Click Here Now!

Phoenix Capital Research

I’ve been skeptical about China for some time. While I do believe China has made some serious economic progress as a country, I remain thoroughly convinced that ultimately its economic “miracle” will be much like that of the Soviet Union powerhouse in the late 20s: apparently awesome in scope at the time, but a total fraud after the fact.

For one thing, China remains a control economy. There is no history that I know of in which a controlled economy works. The primary drivers of macro-economic growth are innovation, technological adaptation, and increased efficiency.

In order to have this, you need to have rule of law, strong education, openness to trade, and quality institutions to establish credibility and uphold the rule of law.

China is big on trade and education, but sorely lacking on quality institutions and rule of law. Just a few of the more glaring items include:

1)   China’s obviously fraudulent economic data.

2)   Rampant corruption of Chinese Government officials (no rule of law).

3)   A lack of individual rights for Chinese citizens (again no rule of law)

4)   A total lack of credible institutions to maintain accounting standards, quality control, protection of Intellectual Property, and the like.

One could easily argue that the US suffers from some of these issues (indeed, every country in the world does). However, the US remains, for the most part, a dynamic and open economy with semi-credible institutions and which generally upholds the rule of law (I remain convinced that those who committed fraud and broke the law leading up to the Financial Crisis and since then will eventually be brought to justice).

China on the other hand experiences corruption on a scale that is truly staggering to understand. More importantly, the corruption is deeply intertwined with the economic growth story itself.

Consider the following story I recently came across.

The Chinese Government wanted to build a bridge in one of its many rural provinces. However, the retired government officials (who happened to reside in the best real estate over looking the area in question) complained that doing this would block their view. So the Government… built a far more expensive tunnel instead. It boosted GDP, kept the officials happy, but made absolutely no sense what-so-ever.

A few other items of note:

1)   In 2010 alone, 146,000 cases of corruption were launched in China (that’s 400 PER DAY).

2)   How much these officials stole is unknown. But… of the 14 cases that were actually reported in the Chinese media, the average amount stolen was 18 MILLION RMB (for perspective, the average college graduate in China earns 2,500 RMB per year).

Now, no one knows how much money the 146,000 officials stole in 2010, but one report that was verified stated that just 29 officials were caught stealing 647.18 million RMB that year. Between that figure and the average theft of 18 million RMB the media reports, it’s safe to assume that the 146,000 officials engaged in corruption probably stole a staggering amount of loot.

How staggering? Well let’s look to history:

Between 1991-2011, it’s estimated that between 16,000-18,000 Chinese officials fled China taking 800 BILLION RMB (roughly $125 BILLION) with them. Bear in mind China’s entire GDP was just 2.1 trillion RMB in 1991.

With this kind of insane corruption combined with a desire to maintain ridiculous GDP numbers at all costs, quality goes right out the window.  Case in point, it’s estimated that on average bribes comprise 5-10% of a given project’s costs in China today.

Let me say that again… if you are proposing a construction project in China, on average you’ll need to allocate 5-10% of your costs towards bribing officials.

Small wonder then that many of the “projects” behind China’s growth “miracle” are falling to pieces… literally.

Collapse of New Bridge Underscores Worries About China Infrastructure

One of the longest bridges in northern China collapsed on Friday, just nine months after it opened, setting off a storm of criticism from Chinese Internet users and underscoring questions about the quality of construction in the country’s rapid expansion of its infrastructure.

A nearly 330-foot-long section of a ramp of the eight-lane Yangmingtan Bridge in the city of Harbin dropped 100 feet to the ground. Four trucks plummeted with it, resulting in three deaths and five injuries.

The 9.6-mile bridge is one of three built over the Songhua River in that area in the past four years. China’s economic stimulus program in 2009 and 2010 helped the country avoid most of the effects of the global economic downturn, but involved incurring heavy debt to pay for the rapid construction of new bridges, highways and high-speed rail lines all over the country.

Questions about the materials used during the construction and whether the projects were properly engineered have been the subject of national debate ever since a high-speed train plowed into the back of a stopped train on the same track on July 23 last year in the eastern city of Wenzhou. The crash killed 40 people and injured 191; a subsequent investigation blamed in particular flaws in the design of the signaling equipment.

http://www.nytimes.com/2012/08/25/world/asia/collapse-of-new-bridge-underscores-chinas-infrastructure-concerns.html

True, the US suffered a bridge collapse a few years back, but in China these kinds of disasters are far more commonplace than you would imagine.

Spate of bridge collapses trouble Chinese netizens

After three large bridges collapse in a single month, Chinese internet users say “I told you so”.

A complete section of the Wuyi mountain bridge in Fujian Province collapsed on July 15, killing a bus driver and injuring 22 bus passengers. The following day, gaps appeared in the middle section of the third Qianjiang River Bridge in Hangzhou, injuring a truck driver…

All three bridges were built in the mid-to-late 1990s. The Qianjiang bridge in Hangzhou was refurbished in 2005, but minutes from a meeting of the local transportation bureau showed that an incorrect ratio of sand to concrete was used in the maintenance, according to the China Daily newspaper.

Internet users predicted the collapse of the Qianjiang bridge several years ago. As early as 2007, posts on popular internet forum Tianya pointed out that the ratio of sand to concrete used to build the bridge was incorrect, according to the Beijing News. Other posts to the forum pointed out that the bridge was built by the same company responsible for a collapsed bridge in Hunan province, and advised drivers to avoid crossing the bridge.

Low quality infrastructure may be caused by corruption amongst officials responsible for overseeing construction projects. The China Daily reports that Zhao Zhanqi, an official responsible for the Qianjiang bridge project, was sentence to life in jail in 2007 for taking over 6 million yuan in bribes during the bidding for the bridge project and during its construction.

The world’s longest ocean bridge, spanning 23 miles, opened in Qingdao, Shandong province last month. Chinese internet users soon complained about the rushed construction of the bridge, after pictures of easily loosened bolts and incomplete safety rails along the bridge were posted online. Last year a bridge in Henan province collapsed, killing 37 people.

The frequency of bridge collapses in China leads to an attitude of cynicism among some sections of the public. “If the bridges didn’t collapse, how else could we rebuild them and boost our GDP?”, wrote one commentator on Chinese news website Caixin.

http://asiancorrespondent.com/60253/shoddy-bridges-trouble-chinese-netizens/

For those of you who glossed over that article, the key point is this: three major bridges collapsed in a single month in China. The reason? Shoddy construction courtesy of bribed officials.

My point with all of this is that the China growth story has been dramatically overhyped in the Western media. So with that in mind, we have to consider what impact this realization would have on the capital markets.

Put another way, imagine if the world found out that China’s growth and recovery post 2008 were largely based on fraudulent data and garbage development projects fueled by easy money and rampant corruption on the part of Chinese officials?

Imagine a world in which the China “miracle” turns out to be the China “lie”? The bulls and those desperate to claim that the world is in great shape would lose one of, if not the key pillars of their a growth rgument.

Indeed, by some measures China is considered the engine for the post-2008 recovery. So if this engine turns out to be not only sputtering, but broken…

         China’s steel mills braced for slowdown

Chinese steel traders are short on good news these days. Prices for steel are falling, demand is poor, loans are hard to come by, and no relief is in sight.

“There is just no demand,” says one trader in the town of Tangshan. “It’s much worse than [the last downturn] in 2008. In 2008 at least you had buyers talking to you. Not any more.”

The collapse of China’s steel market has reverberated around the world: benchmark prices for iron ore, a key steelmaking ingredient, have dropped to three-year lows of $89 a tonne, down 24 per cent in the past month alone. China accounts for about 60 per cent of global imports of iron ore, a market worth more than $100bn annually worldwide and one that is essential for the profits of global mining houses such as BHP Billiton, Rio Tinto and Vale of Brazil.

http://www.ft.com/cms/s/0/0db84534-f691-11e1-9dff-00144feabdc0.html#ixzz25cn4xBrh

So… unlike in 2008, steel traders in China find people are not even talking to them.

We see similar signs of a collapse in China in the form of iron ore prices, retail sales, oil demand, and on and on.

My point with all of this is that China is no longer going to be an engine for economic growth. The reason stocks are not showing this (at least in the US, in China the market is on the verge of breaking a MAJOR trendline), is because of the Fed’s money printing.

Indeed, this is something we all need to be extremely worried about… because stagflation becomes worse not better with money printing… and both the Fed and the ECB have gone “all in” to prop the markets up.

This is just one example of the slew of Unintended Consequences we’re going to be facing as a result of the Fed’s actions. I’ve detailed several more (all of them far worse than this) in my latest issue of Private Wealth Advisory, published just last week.

I’ve also detailed four special inflation investments designed the profit from the Fed’s inflationary monetary policies. These are unique investments that will outperform even Gold and Silver as inflation takes off…

Case in point, two of them are up 8% and 10% this week alone. And I expect all of them to be much higher in the coming months.

To find out what they are… and take action to prepare yourself and your portfolio to face the coming Inflationary Storm, I highly recommend taking out a subscription to my Private Wealth Advisory newsletter.

To learn more about Private Wealth Advisory and find out more about our Special Inflation Portfolio comprised of extraordinary inflation hedges that 99% of investors don’t even know about…

Click Here Now!

Phoenix Capital Research

Let’s just be blunt here.

Inflation is back in a big way. It’s not going to show up in the official numbers, but if you’ve paid for gas or food or healthcare recently, you’ve no doubt noticed that:

A)   Things are a lot more expensive

B)   You get way less bang for your buck (food packages are shrinking while prices remain the same)

This has been the case for some time now. However, the Fed’s QE 3 program, combined with the ECB’s OMT program, (both of which are “open ended” or “unlimited” in scope), have taken things to a whole new level.

Which is why we need to be concerned not with QE, but with UC: Unintended Consequences.

The Fed is largely composed of academics with little if any professional/ banking experience. These are people who use flawed data (case in point, the inflation measures in the US are a joke) to build models that they believe explain how reality works.

Setting aside the math and intelligence used to build these models, pure common sense begs the question, “how can someone who’s never worked in the real world, build a model to explain reality?”

The simple fact is that they can’t… which is why the Fed’s policies have and will continue to unleash a slew of Unintended Consequences.

For instance, QE 2, which saw the Fed spending $600 billion, pushed food prices to record highs, kicking off a wave of riots and civil unrest throughout the Middle East.

So what will QE 3 bring?

The short answer is: nothing pretty. Gas and food prices were already high before the Fed announced QE 3. They will be going much higher in the future (Oil is currently falling based on Saudi Arabia working with the US Government to suppress prices).

Higher inflation means higher operating costs for corporations. Corporate managers (folks with real world experience) will adjust accordingly, most likely by firing people.

Which pushes unemployment even higher.

This is just one example of the slew of Unintended Consequences we’re going to be facing as a result of the Fed’s actions. I’ve detailed several more (all of them far worse than this) in my latest issue of Private Wealth Advisory, published just last night.

I’ve also detailed four special inflation investments designed the profit from the Fed’s inflationary monetary policies. These are unique investments that will outperform even Gold and Silver as inflation takes off…

Case in point, two of them are up 8% and 10% this week alone. And I expect all of them to be much higher in the coming months.

To find out what they are… and take action to prepare yourself and your portfolio to face the coming Inflationary Storm, I highly recommend taking out a subscription to my Private Wealth Advisory newsletter.

To learn more about Private Wealth Advisory and find out more about our Special Inflation Portfolio comprised of extraordinary inflation hedges that 99% of investors don’t even know about…

Click Here Now!

Phoenix Capital Research

Now that the Fed has engaged in QE 3 (which is essentially QE infinite since it’s meant to run until things get where the Fed wants them), I decided to go back and count the recap the Fed/Feds’ interventions since the Great Crisis began in 2007.

Here’s a recap of some of the larger moves made during the Crisis:

• Cutting interest rates from 5.25-0.25% (Sept ’07-today).
• The Bear Stearns deal/ taking on $30 billion in junk mortgages (Mar ’08).
• Opening various lending windows to investment banks (Mar ’08).
• Hank Paulson spends $400 billion on Fannie/ Freddie (Sept ’08).
• The Fed takes over insurance company AIG for $85 billion (Sept ’08).
• The Fed doles out $25 billion for the automakers (Sept ’08)
• The Feds kick off the $700 billion TARP program (Oct ’08)
• The Fed buys commercial paper from non-financial firms (Oct ’08)
• The Fed offers $540 billion to backstop money market funds (Oct ’08)
• The Fed agrees to back up to $280 billion of Citigroup’s liabilities (Oct ’08).
• $40 billion more to AIG (Nov ’08)
• The Fed backstops $140 billion of Bank of America’s liabilities (Jan ’09)
• Obama’s $787 Billion Stimulus (Jan ’09)
• QE 1 buys $1.25 trillion in Treasuries and mortgage debt (March ’09)
• QE lite buys $200-300 billion of Treasuries and mortgage debt (Aug ’10)
• QE 2 buys $600 billion in Treasuries (Nov ’10)
• Operation Twist 2 (Nov ’11)
• QE 3 buys $40 billion in Mortgage Backed Securities every month from now on (Sept. ’12)

That’s one heck of a list. And the worst part is I know I’ve left something out somewhere.

And yet, despite all of this…

1)   Median income today is lower than it was during at the end of 2009 (when the recession supposedly ended)

2)   The percentage of Americans on food stamps has increased from 11% to nearly 15%

3)   The average unemployment duration has increased from 30 weeks to nearly 40 weeks

4)   The civilian employment to population ratio hasn’t budged

My question to everyone, especially the political class: at what point do we start calling BS on the Fed’s claims that it has a clue how to improve the economy?

Seriously, how many trillions of Dollars are we going to let the Fed spend? The Fed balance sheet is already at $2.8 trillion… making it larger than the GDP of France, the UK, or Brazil. Indeed, if the Fed’s balance sheet were a country, it’d be the FIFTH LARGEST COUNTRY IN THE WORLD.

While the Fed has failed miserably to improve the economy in the US, it’s done a bang up job of letting the inflation genie out of the bottle. Here’s a chart showing the price movements of Oil and Agricultural commodities since the recession supposedly “ended” in June 2009.

I don’t know how Ben Bernanke would look at this chart… but it sure looks to me like the cost of living has gone UP in the US. Oil’s gone from $70 to nearly $100 per barrel. And agricultural commodities have risen more than 20%.

So, the Fed has failed to improve the economy… but it has unleashed inflation. This is called STAGFLATION folks. And the fact the Fed thinks the answer to it is printing more money tells us point blank: things are going to be getting a lot worse in the coming months.

Indeed, it is now clear, via QE 3, that the Fed has gone “all in” in its commitment to money printing. QE 2 put food prices to record highs… what to you think QE 3 (which is unlimited) will do to the cost of living?

The time to start preparing is now. The printers are running. The Great Currency Debasement has begun. Some folks will walk out of this mess winners. Most will walk out as losers.

At Phoenix Capital Research, we’re taking steps to insure our clients are among the winners. We are currently preparing a Special Portfolio of unique inflation hedges: investments that will not only maintain their purchasing power but will outperform even Gold and Silver as the Fed and ECB debase their respective fiat currencies.

We’re talking about investments of extraordinary value that 99% of investors are unaware of: asset plays trading at massive discounts to their underlying values. The kind of investments that can show you double-digit returns in a very short period.

This portfolio will be made available only to subscribers of our Private Wealth Advisory newsletter. The last time we opened a similar portfolio, we saw gains of 28%, 41% and 42% in a matter of months. We expect similar returns this time around as well.

To find out more about Private Wealth Advisory and get on board for this Special Inflation Portfolio which is going out today after the market closes…

Click Here Now!

Phoenix Capital Research

Ben Bernanke and Mario Draghi must be absolutely terrified.

These two men, in the last two weeks, have both initiated open-ended bond buying programs. The purpose of these programs, aside from keeping insolvent banks in business, was to scare the markets into believing that no matter what happens, the Central Banks will be able to step in and support the financial system.

From a philosophical standpoint, this was Draghi’s and Bernanke’s “all in” moment. I won’t say they they’ve gone “nuclear,” as they have yet to truly monetize everything, but they’re not far from that.

And they’ve both failed.

Spain, which I’ve been warning will bring about the break-up of the Euro, saw the yields on its ten-year bonds break back above 6% yesterday. This is absolutely extraordinary. It indicates that within two weeks of the ECB announcing it’s going to do an “unlimited” bond purchasing plan, Spanish bonds are once again imploding.

Indeed, if you analyze the Spanish ten-year yield chart from a technical analysis perspective, you’d say that it’s bounce off former resistance (indicating that it’s now support) and is ready for the next leg up (north of 7% again).

This is Game Over for the ECB.

The EBC cannot announce an even larger program now as that would completely destroy its credibility in the markets.

Congratulations Mario Draghi, the markets were intimidated by your promise of unlimited bond buying for a total of less than two weeks.

On the other side of the pond, Ben Bernanke is rapidly approaching his own Game Over moment.

The US Federal Reserve bought roughly three quarters of all Treasury issuance last year. Let that sink in for a moment. Roughly $0.74 out of every $1 in debt created by the US in 2011 was bought by the US Fed… not by the bond market, not by foreign countries, but by our own Central Bank.

Despite this massive intervention, the US economy (according to the ECRI) has officially re-entered a recession. This is why the Fed announced QE 3 now, because Bernanke is growing truly desperate, both in terms of losing control of the markets and the potential of losing his job if Mitt Romney is elected President.

So the Fed chose to monetize Mortgage Backed Securities this time around. And the result is that the US Treasury market is tanking. If it takes out its trendline, things will get very ugly very fast.

Here’s a thought… what happens if the Treasury market begins to implode despite the Fed buying roughly 75% of all Treasury issuance?

GAME OVER for Bernanke and the Fed.  

The only option left would be to monetize everything, which would mean hyperinflation (all hyperinflationary episodes have been created by monetization of deficits… you can pull this off until you lose credibility… at which point you suffer a currency crisis).

Congratulations Ben Bernanke, you’ve managed to screw up the capital markets so badly that the US is on the verge of its own European-style debt crisis… despite you taking over the entire interbank money-market and nearly all US Treasury issuance.

Folks, this is the reality we’re dealing with. The ECB and Fed have gone “all in” in their efforts to stop the debt implosion… and they’ve failed. All they’ve done is unleashed an even more serious inflationary storm than the one we were already facing.

The time to start preparing is now. The printers are running. The Great Currency Debasement has begun. Some folks will walk out of this mess winners. Most will walk out as losers.

At Phoenix Capital Research, we’re taking steps to insure our clients are among the winners. We are currently preparing a Special Portfolio of unique inflation hedges: investments that will not only maintain their purchasing power but will outperform even Gold and Silver as the Fed and ECB debase their respective fiat currencies.

We’re talking about investments of extraordinary value that 99% of investors are unaware of: asset plays trading at massive discounts to their underlying values. The kind of investments that can show you double-digit returns in a very short period.

This portfolio will be made available only to subscribers of our Private Wealth Advisory newsletter. The last time we opened a similar portfolio, we saw gains of 28%, 41% and 42% in a matter of months. We expect similar returns this time around as well.

To find out more about Private Wealth Advisory and get on board for this Special Inflation Portfolio the first segment of which was already released yesterday…

Click Here Now!

Phoenix Capital Research

On Thursday last week, the US Federal Reserve announced QE 3: a program through which it will purchase $40 billion in Mortgage Backed Securities (MBS) every month going forward.

Given the close proximity of this move to the European Central Bank’s (ECB) “unlimited” bond purchasing program announced the week before, the Fed’s move should be taken as a coordinated Central Bank intervention. Thus, we have both the ECB and the Fed going “all in” on their efforts to support the Global Financial System.

This decision will not be without its consequences. Inflationary pressures were already high in the US and around the world. They will be going higher as a direct consequence of the Fed’s move.

Indeed, Oil is back at $100 per barrel. Gold has broken out of its wedge pattern and will likely hit new highs before year-end. And Agricultural Commodities are approaching records due to both severe droughts in the US combined with the Fed and ECB’s announcements.

The Fed has never been good at anticipating the consequences of its actions (see the Arab Spring that resulted from QE 2’s impact on food prices). So we have to ask ourselves, “has the Fed gone too far this time in its efforts to boost stock prices?” 

Our initial view is “yes.” Stocks were already at four-year highs before QE 3 sent them soaring. Our primary concern now is that by announcing QE 3 at this time, the Fed has removed the primary driver of stock prices: the anticipation of more Fed intervention.

Remember, the NY Fed has admitted publicly that without the investor anticipation of Fed action, the S&P 500 would be at 600 today. Thus, by making QE 3 an “open” or “unlimited” program, the Fed has removed this anticipatory effect as going forward investors already know what the Fed will be doing in the future.

Moreover, this open-ended intervention has dramatically raised the bar for any future potential Fed action. Barring a systemic crisis or the collapse of a major bank, the Fed’s hands are now tied due to it having an ongoing intervention in place.

Which leads us to the multi-trillion Dollar question: what if this QE program proves to be a dud? What if the Fed, by announcing such a program, has not only removed the anticipation of future Fed action, but has in fact played its hand too far?

After all, stocks are now extremely overbought and due for a correction. What would a correction do to investor perception of the Fed’s abilities coming so soon after a new large program such as this?

These are the issues to consider going forward. Our view is that it is quite possible the Fed has played its hand too strongly and thereby damaged its future efforts to maintain market stability via intervention. Given that stocks were already decoupled from the underlying economic realities, this has made the market highly vulnerable to a sharp correction.

And then of course, there is the coming inflationary storm to consider.

On that note, we are currently preparing a Special Portfolio of unique inflation hedges: investments that will not only maintain their purchasing power but will outperform even Gold and Silver as the Fed and ECB debase their respective fiat currencies.

We’re talking about investments of extraordinary value that 99% of investors are unaware of: asset plays trading at massive discounts to their underlying values. The kind of investments that can show you double-digit returns in a very short period.

This portfolio will be made available only to subscribers of our Private Wealth Advisory newsletter. The last time we opened a similar portfolio, we saw gains of 28%, 41% and 42% in a matter of months. We expect similar returns this time around as well.

To find out more about Private Wealth Advisory and get on board for this Special Inflation Portfolio which is to be released later today…

Click Here Now!

Phoenix Capital Research

Yesterday the Fed announced QE 3: an open ended program through which the Fed will purchase $40 billion worth of Mortgage Backed Securities every month until it decides that the world is right again.

The implications of this are severe. However, the first question we have to ask is, “why now?”

After all, stocks were already at 4-year highs, food and energy prices were soaring, interest rates were at record lows, etc. On top of this, the Fed failed to announce QE 3 for over a year (QE 2 ended June 2011). Why announce it now?

There are only two reasons:

1)   Things are in fact far worse behind the scenes than we know (the Fed HAD to do something to get more money into the system)

2)   Politics

Regarding item #1, I want to be very clear here. The fact that my timing was off on predicting a European collapse doesn’t mean Europe will not collapse. Instead it simply means that my timing was off.

With that in mind, we have to look at the Fed’s move from an EU perspective. We know that Obama literally pleaded with Angela Merkel to keep the EU together until the election was over.

Moreover, we know that Europe is in a very bad place. Here’s a quick 30,000 foot view of Europe in bullet point form. I’m focusing on the country that’s in the most trouble (Spain) and the country that is the backstop for the EU (Germany).

All of the following are facts:

Spain:

1)   Spain’s banking system saw a bank run to the tune of €70 billion in August. The market cap for all of Spain’s banks is just €114 billion. So Spanish banks need to raise at least €20+ billion or so per month in the coming months to stay afloat. This is without depositors pulling additional funds in September onwards. That’s really bad news.

2)   Spain’s now nationalized Bankia just took another €5.4 billion from Spain’s in-country rescue fund. This indicates that once nationalized, problem banks DO NOT cease to be problems.

3)   The region of Andalusia is requesting a bailout from the Spanish Federal Government. This comes on the heels of bailout requests from the regions of Valencia, Murcia and Catalonia (none of which want any “conditions” on the funds).

4)   Spain has set aside €18 billion to bailout its regions. The current bailout requests already amount to €10.8 billion. That’s just from this year alone.

Simply put, Spain has MAJOR problems. And this is after the ECB put over €1 trillion in liquidity into the EU banking system to cover three year funding gaps for EU banks.

Despite these measures, Spain has already asked for a €100 billion bailout for its banks from the EU. However, it’s yet to request a formal sovereign bailout.

The reason for this is Spain doesn’t want the EU or IMF to impose conditions on its already troubled economy (youth unemployment at 50% and total unemployment at 25%).

Also, Spain doesn’t want IMF and EU bean counters to sift through its book. Case in point, the country just discovered another €28 billion in debt on its books. One wonders what else is hidden in the darkness of Spain’s officials “numbers.”

Germany:

1)   The country is now sporting a Debt to GDP of 90% courtesy of its EU bailouts.

2)   Germany has committed over €2.1 trillion in backdoor bailouts to the EU.

3)   German Chancellor Angela Merkel is up for re-election next year. The EU bailouts will be THE election topic. And she is facing backlash from members in her own party as well as opposition leaders concerning her actions in helping the EU.

So, we see a problem country (Spain) facing a severe bank run, regional bailouts, and more at the precise time that its ultimate backstop (Germany) has put its own solvency into question due to various EU bailout schemes.

I believe that the Fed’s decision to announce QE 3 now was in part due to the severity of these issues. One has to remember that a significant number of the Fed’s Primary Dealers are based in Europe. The Fed will be feeding them liquidity via QE 3.

Remember, the ECB’s recent open-ended bond program requires countries to meet “conditions.” The Fed’s QE 3 doesn’t. So this can be seen in some ways as a potential back-door bailout to Europe in that it will get liquidity into European banks.

Again, I firmly believe that one of the primary reasons the Fed did this was to deal with liquidity issues that are occurring “behind the scenes.” The fact the Fed piggy-backed this announcement after the ECB’s announcement of its open-ended bond purchasing program makes this a coordinated central bank intervention.

Why would the Fed and ECB do this? Because they’re scared stiff of what’s happening and are trying to shock and awe the markets into submission with terms like “open ended” and “unlimited.”

There is only one reason to do this: things are in fact much worse than anyone has admitted.

In this regard the announcement of QE 3 should in fact be cause for serious concern about the stability of the financial system. Again, there is no logical reason for QE 3 now. Food and energy prices are high as are stocks. Interest rates are low. US unemployment (based on the official numbers) is not that bad.

So we have to see this QE 3 announcement as a kind of desperate move to support the ECB in its attempt to rein in a European Crisis that is rapidly spinning out of control.

As I’ve noted in earlier articles to you, the EFSF bailout fund has only €65 billion left in funding. And the ESM (which Germany has ratified) is meant to receive 30% of its funding from Spain and Italy. So Europe was about out of options as far as bailouts go. QE 3 is meant to help Europe get through the US Presidential election at which point a larger program might be announced.

Now on to the second reason for QE 3: politics.

I have to say, the Fed’s decision to announce QE 3 now was a real gamble. Mitt Romney has stated several times that he would replace Bernanke if elected. So the fact the Fed decided to announce QE 3 now as opposed to any time in the last year should be perceived as a very political move.

In plain terms, this is Bernanke trying to juice the stock market (and perhaps the US economy) for all its worth to help Obama’s re-election chances. There is simply no other way to perceive this move. Bernanke is doing a “Hail Mary” pass to try and keep his job.

The consequences of this will be complicated. For one thing, with food and energy prices already high (Oil just cleared $100 again). So the Fed is running the risk of increasing the cost of living to the point that voters potentially turn on Obama. The economy is already entering another recession (the recent ISM reading was sub-50 which is recessionary territory). To pile even inflation of top of this is not a wise move.

We also have to consider China and the Middle East.

China’s economy is entering a hard landing. With food prices already high, the Chinese Government is desperate to channel the country’s frustrations towards an external problem rather than face rampant civil unrest.

Thus far the focus of this has been Japan (the long-standing dispute over who actually owns the Senkaku islands). But with the Fed now announcing QE 3 (which will push food prices even higher), we will see a resurgence in the US/ China conflict: more accusations of currency manipulation, trade wars, and other political issues.

In plain terms, the Fed just handed China another problem (even higher food prices). Don’t expect China to ignore this. That’s unintended consequence #1.

As for the Middle East, we need to remember that the entire Arab Spring was started when QE 2 pushed food prices to record highs. With anti-Americanism on the rise in the Middle East (see the numerous embassy attacks), the consequences of more food inflation in the Middle East courtesy of QE 3 will NOT be pleasant.

That’s unintended consequence #2.

Finally, the Fed’s QE 3 program will result in higher operating costs for US companies. Higher operating costs mean lower profits. With companies already lowering their earnings forecasts (in the last month we’ve seen Fed Ex, Bed Bath and Beyond, Proctor and Gamble, Adobe, Starbucks, and McDonald’s do this), the Fed just greatly increased the potential for even more earnings surprises to the downside.

The Fed has also increased the likelihood of more layoffs in the private sector. When operating costs rise, corporations will cut whatever other costs they can. This means firing people. So look for unemployment to actually rise based on QE 3.

So, to recap all of this, the key takeaway items from the Fed’s QE 3 announcement are the following:

1)   This should be seen as a tag-team effort between the ECB and the Fed to try and rein in the European Crisis

2)   It’s also a clear and obvious political move to attempt to boost the Obama re-election campaign (and save Bernanke’s job)

Both of these issues indicate that the Fed is very concerned about issues in the short-term (Europe and the US Presidential election). This should be a big red flag to all of us that things are very likely far worse than we realize.

On top of this, the Fed’s move will have severe consequences for the US’s foreign relations as food prices add fuel to the fire for conflicts in China and the Middle East.

How precisely these issues will play out remains to be seen, but it’s clear none of the consequences will be good (what are the odds the Middle East or China end up grateful to the US/Fed for this?)

So the Fed’s decision to announce QE 3 should be seen as a very big negative if anything. True, stock prices will soar. But:

1)   Profit margins will shrink resulting in lower profits (which will likely lead companies to lay-off workers to cut their costs).

2)   The cost of living will increase globally as well as in the US.

None of these are items to celebrate. If anything the Fed has just added fuel to the fire. The fire was bad enough to begin with (Europe, the US, and China were entering recession). Adding higher inflation to this mess isn’t going to do any of us a lick of good.

I’m currently working on a new portfolio of investments that will profit from this new investment landscape. I do not think it’s wise to buy anything today as risk-on assets are sharply overbought and should stage a pullback.

Moreover, it’s never a wise idea to load up on new investments before a weekend, especially when so many major issues are moving forward. There are too many surprises that can occur while the markets are closed.

So I’ll have another update to you next week concerning which investments to focus on. For now, the most obvious items to look into are Gold and Silver bullion. But I’ll have more for you on Monday.

Until then…

Best Regards,

Graham Summers

PS. I’m going to be posting this update to my full client list. However, the next update featuring specific investment ideas will only be available to paid clients Private Wealth Advisory and The Perfect Trade.

For months I’ve predicted we wouldn’t see QE 3. It’s now clear I was wrong. The Fed just announced QE 3. And while the implications of this will not be positive for the cost of living in the US, or ultimately the markets (inflation will eat away profit margins), the fact of the matter is that on this forecast I was totally and completely wrong.

With that in mind, I’m openly admitting that this call was 100% incorrect. Ditto for my predictions of the ECB’s moves.  The ECB’s actions are of questionable value. However, the fact remains that the ECB is monetizing bonds or will at least try to (unless Germany stops them). So I was 100% wrong there too.

I gain nothing from pretending that I’m right when I’m not. And while I hate being wrong, I’m not going to ignore this fact and try to simply move on as though none of this has happened.

So I was wrong on these calls. Everyone’s wrong at some point. Right now, it’s my turn. And I’m admitting it in public, because I pride myself on being honest and upfront about my mistakes as an analyst.

So, with that out of the way, it’s time to re-assess where the markets are heading and what’s going on. I’ll have an email to all of you on this tomorrow.

Until then…

Graham Summers

We’ve entered a truly dangerous environment in the financial markets.

Economic fundamentals are deteriorating rapidly. Consider the US…

By all counts, the latest ISM (a measure of manufacturing in the US) was a complete and total disaster. In August the ISM hit 49. Anything below 50 is considered a recessionary rating.

However, things are even worse below the surface. The ISM is made up of several components. Its Production component is back to May 2009 levels. The New Orders component is back to April 2009 levels.

And worse of all, Prices Paid is up to 54, up from a reading of just 39 in July.

In very simple terms this tells us that inflation appears to be hitting “lift off” in the US at the very same time that we are entering another recession that could potentially be on par with that of 2008. And with corn and soybean prices at or near record highs, we could be on the verge of a stagflationary disaster combined with a food crisis at the very same time.

We get additional confirmation of a major economic contraction from corporate earnings. Recently we’ve seen earnings forecast cuts from Fed Ex, Bed Bath and Beyond, Proctor and Gamble, Adobe, Starbucks, McDonald’s and more.  Indeed, when you remove financials, S&P 500 earnings FELL year over year for 2Q12.

This is hardly indicative of a strong economy. The fact a record number of Americans are on food stamps doesn’t bode well either. And the Rasmussen Employment Index indicates worker confidence is at levels not seen since the FALL OF 2008!

Against this backdrop, stocks have rallied higher and higher on hopes of more liquidity from global Central Banks. As a result, the market has completely disconnected from underlying economic realities. Based on the business cycle alone, the S&P 500 should be closer to 1,000. And even the NY Fed has revealed that without the impact of Fed meetings, the S&P 500 would be at 600!

This is a truly staggering admission from a Fed official. This is the Fed admitting to us, point blank, that without investors trading based on hopes of Fed intervention, the markets would essentially be even lower than they were in March 2009.

Again, this is a truly dangerous environment. Because if investors lose faith in the Fed or ECB, then it’s GAME OVER. This process is definitely already underway already as the impact of each successive intervention by a Central Bank is having a shorter and shorter lifespan.

I cannot say when exactly the Central Banks will lose control of the markets. But we’re not far from it. Some major takeaway items you should consider:

1)   The Fed will likely be dismantled or restructured in the coming years. It’s clear from various dynamics that some Fed Presidents are positioning themselves to replace Bernanke if Romney wins. Moreover, even former Fed Presidents are admitting they’re concerned about the future of central banking.

2)   Politicians, worldwide, have proven incapable of implementing real fundamental fiscal reforms (all the talk of “austerity” is a lie as few if any countries have begun a serious process of deleveraging). Central Bankers are beginning to catch on to this game and are increasingly blaming politicians for the fact the Crisis has yet to be resolved. Look for this relationship (between Central Bankers and politicians) to continue to deteriorate with serious consequences.

3)   Europe will be the first area in which the “End Game” hits. We’ve just had the promise of “unlimited” bond buying. In terms of verbal intervention, you cannot go any further than this. When this promise turns out to be a bluff (see yesterday’s article for why this will prove to be the case) then the markets will crater.

I give this last item perhaps a month or so before it takes hold. Unless Germany completely changes and goes along with the idea of Eurobonds (unlikely given that it violates the German constitution and would cost Angela Merkel her bid for re-election in 2013), then the ECB is essentially out of bullets. You cannot say “unlimited” and bluff about it. And the ECB is doing nothing now but bluffing.

On that note, if you’re looking for someone who can help you navigate and even profit from this mess, I’m your man. My clients made money in 2008. And we’ve been playing the Euro Crisis to perfection, with our portfolio returning 34% between July 31 2011 and July 31 2012 (compared to a 2% return for the S&P 500).

Indeed, during that entire time we saw 73 winning trades and only two losers. We’re now positioning ourselves for the next round of the Crisis with several targeted investments that will explode higher when the next leg down begins.

To find out what they are, and take steps to protect your portfolio…

Click Here Now!

Graham Summers

Yesterday we worked through the illusion to the reality of the ECB’s “unlimited” bond purchases, the end result being that we discovered the ECB:

1)   Didn’t announce anything new

2)   Is implementing the same policies it’s tried twice before with no success (see Greece)

3)   Is implementing policies that neither Spain nor Italy will go for…

And finally…

4)   Has solved nothing due to the fact that of the two mega-bailout funds, one has only €65 billion in firepower left and the other has yet to be ratified by Germany

Today we turn our attention to the US’s Federal Reserve where the whole world expects the Fed to announce QE 3 at its FOMC meeting this Wednesday and Thursday.

There is a small problem of math with this. The Fed currently owns all but just $650 billion of the outstanding 10-30 year Treasuries. At this point, even a $200-300 billion QE program would create serious liquidity problems for the financial system. So scratch that idea off the list.

Of course, the Fed could potentially implement another agency/MBS QE program. But that would be a very political move with the Presidential election so close. This, combined with current food and energy prices, makes it unlikely the Fed would want to do this: too many consequences with too little to gain (stocks are at four year highs).

Indeed, if anything, the Fed is likely to pull a “ECB” move, namely promising something vague that it actually cannot deliver on. Why would the Fed do this? Because, like the ECB, the Fed is running out of bullets. Indeed,  St Louis Fed President James Bullard all but admitted this to the Financial Times:

“I am a little – maybe more than a little bit – worried about the future of central banking,” said James Bullard, president of the Federal Reserve Bank of St Louis, in a Financial Times interview at Jackson Hole. “We’ve constantly felt that there would be light at the end of the tunnel and there’d be an opportunity to normalise but it’s not really happening so far.”

The biggest worry on display at Jackson Hole was whether these bureaucrats, sitting at the heart of every mature economy, still have the power to influence demand now that interest rates cannot fall much further. Lurking behind many debates was this question: if central bank policies are so effective, why is the global economy not growing faster?

http://www.ft.com/intl/cms/s/0/a0e397b6-f8dd-11e1-b4ba-00144feabdc0.html

Here’s a Fed official, not only openly admitting that Fed policies aren’t working, but even calling the future of Central Banking into question. Take note: underlying realities are beginning to be asserted by officials at Central Banks around the globe. They’re running out of bullets.

So where does this leave us? Well, it’s highly unlikely the Fed will actually implement anything major this week. What we could see is a large, but hollow promise for action, much like the ECB’s promise of “unlimited” bond purchases based on certain “conditions” being met (an empty promise if ever there was one).

If this kind of empty promise is made, look for the market to top soon after.

And if the Fed fails to deliver this week… buckle up.

On that note, if you are not preparing for a bloodbath in the markets, now is the time to do so. The reality is that the Central Banks are fast losing their grip on the markets. They’ll never admit this publicly, but I can assure you that Bernanke and pals are scared stiff by what’s happening in the banking system right now.

If you’re looking for someone who can help you navigate and even profit from this mess, I’m your man. My clients made money in 2008. And we’ve been playing the Euro Crisis to perfection, with our portfolio returning 34% between July 31 2011 and July 31 2012 (compared to a 2% return for the S&P 500).

Indeed, during that entire time we saw 73 winning trades and only two losers. We’re now positioning ourselves for the next round of the Crisis with several targeted investments that will explode higher as the EU crumbles.

To find out what they are, and take steps to protect your portfolio from the inevitable collapse…

Click Here Now!

Graham Summers

The financial world has entered a new state of mania with the announcement by the ECB that it will engage in “unlimited” bond buying to maintain lower interest rates for trouble EU sovereigns.

As you no doubt know, our firm’s forecast was that the ECB would not engage in any large-scale bond purchasing programs. We maintain this view today regardless of the ECB’s announcement.

The reason?

The ECB stated very clearly that new bond purchases would only be made under strict conditions. Those conditions involve:

1)   Applying for a bailout from the EFSF

2)   Meeting fiscal budget requirements

3)   Implementing major spending cuts and various other austerity measures

If this list sounds rather familiar, it’s the exact formula the ECB has used on Greece with absolutely abysmal results. And now the ECB is going to apply this failed approach to the EU as a whole?

Let’s cut through the BS here. The use of the word “conditions” completely negates the word “unlimited.” Saying that you’ll buying “unlimited” bonds as long as EU sovereigns meet certain “conditions” actually means nothing. Greece has received over €200 billion in bailouts under “conditions.” How did that work out?

So the ECB is not actually announcing a massive new bond-buying program. Instead it’s just announced that it’s willing to provide more money as long as EU nations hand over their fiscal sovereignty and implement austerity measures.

This is nothing new. In fact, this has been the exact same program that the ECB’s had in place ever since the EU Crisis began in 2010. The fact that it has changed the wording around a bit changes nothing from a fundamental standpoint. Indeed, the program the ECB “announced” is, if anything, the last thing Spain or Italy actually wants.

Spain already has an economy that is bordering on a Greece-like disaster. And this is before implementing any real austerity measures of note. So the likelihood that Spain will actually go for any of the ECB’s “conditions” is remote. Indeed, Spanish politicians have shown that they want their funding “unconditional.”

Spanish PM Rajoy challenges the European central bank and Germany

Spain will consider seeking extra aid from Europe on top of a 100 billion Euro rescue of its financial sector but does not see any need for new conditions, Prime Minister Mariano Rajoy said in an interview published in European newspapers.

http://en.mercopress.com/2012/09/03/spanish-pm-rajoy-challenges-the-european-central-bank-and-germany

That one paragraph says it all: give me more money with no conditions.

This is coming from a man who demands €100 billion in bailout funds, threatens to blow up the EU, and then goes to watch a soccer match once he’s got the money.

This attitude as it appears to be endemic for Spanish politicians:

Catalonia asks for €5bn bailout from Spain

Spain’s north-eastern region of Catalonia, which represents around a fifth of the country’s economic output, will tap a state liquidity facility for just over €5bn, a spokeswoman for the region’s economy head has said.

We will not accept political conditions for the aid,” she added. Of Spain’s 17 regions, Valencia and Murcia have also said they would need recourse to the fund.

http://www.telegraph.co.uk/finance/financialcrisis/9503633/Catalonia-asks-for-5bn-bailout-from-Spain.html

Again, give “me more money with no conditions.”

In closing, the new ECB program will ultimately prove to be Mario Draghi’s big bluff. By presenting an old, failed program as something “new” and “unlimited” in scope, the ECB has actually shown that it’s essentially out of firepower.

Indeed, consider the following…

The ECB says it will buy EU sovereign bonds if EU nations apply for bailouts from the EFSF. Spain and Italy (the very countries that need bailouts) are meant to supply 30% of the EFSF’s funding.

So this new program involves Spain and Italy bailing themselves out, while simultaneously implementing austerity measures so the ECB will buy their sovereign bonds?!?!

Oh, and by the way, the EFSF only has €65 billion in funding left. That will definitely be enough to bailout Spain and Italy, seeing as Greece has received over €200 billion in bailouts is still imploding.

On that note, if you are not preparing for a bloodbath in the markets, now is the time to do so. The reality is that the Central Banks are fast losing their grip on the markets. They’ll never admit this publicly, but I can assure you that Bernanke and pals are scared stiff by what’s happening in the banking system right now.

If you’re looking for someone who can help you navigate and even profit from this mess, I’m your man. My clients made money in 2008. And we’ve been playing the Euro Crisis to perfection, with our portfolio returning 34% between July 31 2011 and July 31 2012 (compared to a 2% return for the S&P 500).

Indeed, during that entire time we saw 73 winning trades and only two losers. We’re now positioning ourselves for the next round of the Crisis with several targeted investments that will explode higher as the EU crumbles.

To find out what they are, and take steps to protect your portfolio from the inevitable collapse…

Click Here Now!

Graham Summers

The world is breathlessly hoping that Central Banks will somehow save the day. Indeed, when you consider that the markets have rallied so dramatically based on a vague speech from ECB President Mario Draghi, you get a sense of just how desperate everyone is to believe in this.

Outside of beliefs, here are the key developments you need to know:

1)   Spain is now outright demanding that the ECB monetize Spanish bonds (in other words, it’s back on the brink of collapse after receiving a €100 billion bailout a few months ago).

2)   Greece is asking for “room to breathe” because… frankly it’s run out of money again despite receiving €240 billion in bailouts and failing to enact any real meaningful reform.

3)   Both the ECB and Germany have stated that no more funds are coming without strict conditions.

So… we’re essentially where we were before this latest rally began. No new programs have been announced, no new funds released, no new policies enacted.

And that’s been the most frustrating part of what’s going on… nothing has actually happened, but the markets have acted as though some massive new plan has emerged all based on a whole lot of nothing.

Today as was the case a month ago, everything ultimately hinges on Germany. It’s interesting to note that the majority of this rally occurred while Angela Merkel was on vacation (as much of Europe is during late July-August). One wonders if Mario Draghi purposely timed his “bazooka” speech for when Germany was least likely to rain on the parade?

Political intrigues aside, Germany is just about out of money. And Merkel has to decide… save Germany or save the EU. Only one of these options is even possible at this point (save Germany) as the EU is beyond saving.

Why do I say this? The EU banking system is €36 trillion trillion in size. Total Eurozone banking deposits stand at €15 trillion. Even deposits at the current EU “problem” countries (Spain, Italy, Portugal and Ireland) are €5.5 trillion.

Germany doesn’t have the funds to backstop even 10% of this. That’s a fact. No one does. The money simply does not exist. And if the ECB decided to print it, Germany would walk out of the Euro (it may in fact do this regardless of what the ECB does).

These are the facts pertaining to Europe. Everything else (all the claims of new plans/ new strategies, all the stories of secret meetings, all of that garbage) is just one great big distraction.

So if you somehow think Draghi or someone else is going to pull out a magic wand and save the day, you might want to think again. Did you know that Spanish citizens pulled 75 billions Euros out of the Spanish banking system in July? Why is this a big deal? Because the ENTIRE market cap for the Spanish Banking system is just 114 billion Euros.

That might be a problem. Also, consider that France just nationalized its second largest mortgage lender. We all know how things worked out for the US when we started nationalizing mortgage lenders in 2008.

On that note, if you are not preparing for a bloodbath in the markets, now is the time to do so. The reality is that the Central Banks are fast losing their grip on the markets. They’ll never admit this publicly, but I can assure you that Bernanke and pals are scared stiff by what’s happening in the banking system right now.

If you’re looking for someone who can help you navigate and even profit from this mess, I’m your man. My clients made money in 2008. And we’ve been playing the Euro Crisis to perfection, with our portfolio returning 34% between July 31 2011 and July 31 2012 (compared to a 2% return for the S&P 500).

Indeed, during that entire time we saw 73 winning trades and only one single loser. We’re now positioning ourselves for the next round of the Crisis with several targeted investments that will explode higher as the EU crumbles.

To find out what they are, and take steps to protect your portfolio from the inevitable collapse…

Click Here Now!

Graham Summers

So the Fed disappointed on Friday.

I know that everyone in the mainstream financial media along with much of the blogosphere believe that the Fed left the door “wide open” for QE 3 or some other large scale monetary program at its September 12-13 FOMC meeting. But, the reality is that Bernanke used the same tired “we’re ready to act if needed” mantra he’s been running for over a year now.

Regardless of the Fed’s verbage, the two key charts for determining whether or not more QE or some other program is coming are Gold and Silver. Both have just staged breakouts, the question now is whether these moves are a headfake or the real deal.

Given that hedge funds are notorious for pushing Gold and Silver higher at the end of the month for performance gaming, this really is a toss-up.

Here’s Gold:

And here’s Silver:

It’s a tough call here. And things are no clearer in the currency markets where the US Dollar is on the cusp of breaking its uptrend:

What happens next will determine the true state of affairs for the financial system. Keep these three charts on your radar.

If you’re looking for specific investment recommendations along with in-depth macro and micro analysis of the global economy and capital markets, I highly suggest taking out a subscription to my Private Wealth Advisory newsletter.

By focusing on the “unquantifiable” risks and opportunities in the markets (the risks/ opportunities you cannot find in a financial statement or press release)  Private Wealth Advisory subscribers saw a 34% gain in the portfolios between July 31 2011-July 31 2012 (compared to a 2% return for the S&P 500 over the same time frame).

To find out more about Private Wealth Advisory and how it can help you keep ahead of the market…

Click Here Now!

Best regards,

The stock market is closed today for Labor Day.

A few thoughts on the preceding week:

1)   The US Federal Reserve disappointed in a big way during its annual Jackson Hole meeting. It was in 2010 that Fed Chairman Ben Bernanke hinted at QE 2, which kicked off a large rally in stocks and other risk-on assets.

Investors and the mainstream financial media are desperate to claim he did something similar this time around. He did not. Instead, he issued the same message the Fed has issued for over a year: we stand ready to act if things get bad.

However, this has not stopped the media from proclaiming that the Fed has left the door wide open for announcements of QE at its September 12-13 FOMC meeting. This however is virtually impossible due to a) food prices, b) gas prices, c) the upcoming US Presidential election election and d) the fact that the banks don’t need QE, they already have ample liquidity sitting around (this is a solvency crisis, not a liquidity one).

2)   The Euro and Euro stocks have lead a tremendous rally ever since the European Central Bank President Mario Draghi promised the ECB would take major action that would prove sufficient to stop the crisis. Saner minds have been asking, what specifically has Draghi accomplished?

From a banking capital basis, the answer is nothing. EU banks remain under capitalized and over leveraged. No new capital has been created.

From a bailout mechanism perspective the answer is again nothing. The EFSF bailout fund has roughly €65 billion in firepower left while the ESM doesn’t even exist yet (and won’t until Germany rules it constitutional on September 12… a development that is not guaranteed).

From a political perspective Draghi once again has accomplished nothing. Germany, which remains the real de facto backstop for the EU, remains opposed to more bailouts. Meanwhile Spain and Greece are back at the bailout trough demanding more funds or more time. And of course, Italy remains in the side-wings ready to take center stage in the coming weeks.

So… no new money, no new funds, and no change in the political landscape. Draghi has obviously learned the power of verbal intervention (the US Fed’s primary tool over the last year)… How long can he use this tool successfully remains to be seen.

Oh, and France just nationalized its second largest mortgage lender. But don’t worry, the EU Crisis is definitely contained and Draghi and others have got everything under control. After all, when the US nationalized Fannie Mae and Freddie Mac in 2008 the financial crisis came to a screeching halt… didn’t it?

3)   I continue to receive email after email assuring me that the Central Banks are capable of hitting print and saving the day. My answer to these messages from a purely logical standpoint is: if that were the case, they would have done it by now.

From a more analytical standpoint, we have to consider that this is a solvency crisis. You cannot solve a solvency crisis via more debt.  Nor does liquidity solve anything major: liquidity only helps in day to day funding which banks need when they are truly on the brink of collapse a la 2008.

So, printing doesn’t help or change anything.

But what about debt monetization? Surely the Central Banks can print money and then use this money to buy bonds much as the Fed did with QE 1 and 2?

Again, this argument doesn’t add up. There is a reason that French, US, and German bonds are yielding so little right now. That reason is that the global financial system is starved for quality collateral: sovereign bonds remain the senior most assets/ trading collateral for the major banks.

QE or printing money to buy bonds actually removes collateral from the financial system. It may be helpful in terms of short-term funding for banks and nations that are truly on the brink of collapse and whose collateral is garbage anyway (Spain and the other PIIGS), but this “help” is much like a shot of adrenaline for a patient who is on the verge of death.

But why can’t cash be used as collateral much like sovereign bonds?

Because the global banking system is based on sovereign bonds, not cash. Look at any bank’s balance sheet and the senior most items are “cash and cash equivalents.”  Read the notes on this “asset” and you’ll see that it’s actually “highly liquid sovereign bonds.”

True, banks use actual cash for day-to-day funding. But when it comes to building their trading portfolios (where much of the profits are made) it’s sovereign bonds backstopping the whole mess. And banks have built some truly insane trading portfolios: the global derivatives market is over $700 TRILLION in size.

This is why the ECB keeps letting banks pledge their sovereign bonds as collateral for cash, only to then give them more sovereign bonds which they can then pledge as more collateral to get more money, rather than the other way around. By the way, the same tactic is being used in the UK and elsewhere.

To return to an earlier point: this is why French, German, and US sovereign bonds are yielding so little: they are considered the least risky of the sovereign bond market and therefore are the best collateral.

Consequently, banks are piling into these bonds, pushing the prices up to the point of little or no yield (the US) or even negative yield (recently France and Germany).

It’s also why everyone was so clear that Greece didn’t actually “default” during the second bailout. And it explains why the ECB and others are doing everything they can to stop any EU sovereign nation from defaulting: because doing so means the collateral for hundreds of billions of Euros worth of trades going up in smoke… and down go the EU banks and the EU banking system.

A question for you on this Labor Day when you’re enjoying a cook-out or playing with your kids… how can the Central Banks fix this mess?

On that note, I’ve already alerted my Private Wealth Advisory subscribers to a handful of investments that will explode higher as the markets realize the obvious truth: the Central Banks are tapped out for now.

To find out what they are… and start receiving my bi-weekly investment research reports including real time “buy and sell” alerts via email, you need to take out a subscription to Private Wealth Advisory. To do so…

Click Here Now!!!

Graham Summers