Jim Sinclair on Cyprus Theft

Eric King:  "Jim, we now know the answer to the 'Cyprus Solution.'" Sinclair:  "Yes, Cyprus depositors have now been flushed.  The Bank of Cyprus, the island's largest bank said it has converted 37.5% of deposits exceeding 100,000 euros into a Class A share, with an additional 22.5% held as a buffer for possible conversion in the future. Anther 30% will be temporarily frozen and held as a deposit.  So the amount of money that has been taken from the Cyprus depositors is an all practicality almost their entire accounts.  Major depositors funds have now been taken in grand style.  Depositors everywhere are now defined as lenders to the banks.  Today is a day of financial infamy.  History will see this event as serious as the flushing of Lehman Brothers....

Click here to read the full article on KingWorldNews.com

 

Eric King Interviews Eric Sprott

Eric King:  “We’ve been discussing quite a bit on King World News the desperation of the central planners, and especially when we saw the very unnatural action taking place in gold and silver.  When you see that kind of desperation, Eric, what does it tell you?  Because it’s become more pronounced than we’ve ever seen it.”   

Sprott:  “It’s just pure insanity.  When gold and silver got hit, gold traded about 120% of its annual production in one day (in the paper market).  We had offerings of 25% of the world’s mine production at one time, and who in the hell would have 25% of the world’s mine production available for sale in a minute?  And who would want to sell it in one minute?  It’s just ridiculous....

“So we see all of these paper (trading) volumes going through that bear absolutely no relationship to what’s going on in the physical markets.  As you know I have always been a proponent of the fact that supply in the gold market was way less than demand, and by a very large factor.  I think demand exceeds supply by at least 60%.  The central banks are surreptitiously supplying that gold, and ultimately they will be running on fumes.

When we hear about the LBMA not willing to deliver gold, and JP Morgan’s inventories at the COMEX have gone from 2.4 million (ounces) down to 160,000 ounces, it just makes you realize that all of this paper trading means nothing.  It’s the real physical market that you have to rely on.  

Everything I believed in keeps pointing to more and more buying.  God forbid that I might be able to say that investment demand might go up 100% this year because everyone is buying gold.  Where would it come from?  There is already a shortage.  So it’s just pure insanity.  

I think we will look back at the gold chart and you will see this panic selling at the bottom and (we will be at) new highs in the market.  We will realize when we breakout through $1,920, and we got down to $1,320, it’s going to count for the gold price being another 50% higher.

We are going to have an excellent shot at $3,000 gold because this thing is totally sold out here based on the action of the Friday and Monday of the previous weeks.  The whole exercise backfired.  If it was central bank manipulation or somebody trying to break the market, it totally backfired. 

I can’t believe that I can say to you that the US Mint has sold 1,000% more gold this month, than April of last year, and the month is not even over.  I’m shocked that I can say the UK Mint has sold 200% more.  You hear numbers out of China and India of hundreds of percent differences.

I mean these are staggering developments in a market where the supply has been essentially fixed for 13 years.  The mining supply went down last year.  Mining supply will go down this year, and yet we see a huge surge of physical buying all over the place.  This has been a wonderful response from people who realize the ridiculousness of what the central planners are doing.”

http://www.kingworldnews.com/kingworldnews/King_World_News.html

Different Take on Take Five

Vodoo Chile - Gayageum-style

"Jimi Hendrix’s 1968 song “Voodoo Chile” is already a classic. But it becomes all the more so when you see it performed by Luna Lee on a Gayageum, a traditional Korean stringed instrument. The first Gayageum dates back to the 6th century."

http://www.openculture.com/2013/03/watch_jimi_hendrixs_voodoo_chile_performed_on_a_gayageum_a_traditional_korean_instrument.html

...from Dr. John

"Rule o’ Thumb: When the cover of a major financial magazine features a cartoon of a bull leaping through the air on a pogo stick, it’s probably about time to cash in the chips."

"Presently, margin debt is more than 2.3% of GDP, the highest level in history with the exception of the approaches to the 2000 and 2007 market peaks. Clearly, there have been changes in market structure over time, such as the emergence of hedge funds, long-short strategies and the like. So the long-term increase in margin debt certainly has some “structural” features to it. Again, however, the important feature to observe is not so much the absolute level, but the cyclical tendency for spikes in margin debt to accompany overvalued, overbought, overbullish market peaks. The subsequent market collapses are typically worsened by the inability of investors to simultaneously exit overleveraged positions that were all based on the same investment thesis."

http://www.hussman.net/wmc/wmc130422.htm

The Secret World of Gold - CBC

How Men Think in Relationships - Man Rules

MAN RULES

AT LAST A GUY HAS TAKEN THE TIME TO WRITE THIS ALL DOWN
FINALLY, the guys' side of the story. ( I MUST ADMIT, IT'S PRETTY GOOD.)

WE ALWAYS HEAR 'THE RULES' FROM THE FEMALE SIDE
NOW HERE ARE THE RULES FROM THE MALE SIDE

THESE ARE OUR RULES!

PLEASE NOTE. THESE ARE ALL NUMBERED #1 ON PURPOSE!

1. MEN ARE NOT MIND READERS.

1. LEARN TO WORK THE TOILET SEAT. YOU'RE A BIG GIRL. IF IT'S UP, PUT IT DOWN. WE NEED IT UP, YOU NEED IT DOWN. YOU DON'T HEAR US COMPLAINING ABOUT YOU LEAVING IT DOWN.

1. CRYING IS BLACKMAIL.

1. ASK FOR WHAT YOU WANT. LET US BE CLEAR ON THIS ONE:

SUBTLE HINTS DO NOT WORK!
STRONG HINTS DO NOT WORK!
OBVIOUS HINTS DO NOT WORK!
JUST SAY IT!

1. YES AND NO ARE PERFECTLY ACCEPTABLE ANSWERS TO ALMOST EVERY QUESTION.

1.. COME TO US WITH A PROBLEM ONLY IF YOU WANT HELP SOLVING IT. THAT'S WHAT WE DO. SYMPATHY IS WHAT YOUR GIRLFRIENDS ARE FOR.

1. ANYTHING WE SAID 6 MONTHS AGO IS INADMISSIBLE IN AN ARGUMENT. IN FACT, ALL COMMENTS BECOME NULL AND VOID AFTER 7 DAYS.

1. IF YOU THINK YOU'RE FAT, YOU PROBABLY ARE. DON'T ASK US.

1. IF SOMETHING WE SAID CAN BE INTERPRETED TWO WAYS AND ONE OF THE WAYS MAKES YOU SAD OR ANGRY, WE MEANT THE OTHER ONE.

1. YOU CAN EITHER ASK US TO DO SOMETHING OR TELL US HOW YOU WANT IT DONE. NOT BOTH.
IF YOU ALREADY KNOW BEST HOW TO DO IT, JUST DO IT YOURSELF.

1. WHENEVER POSSIBLE, PLEASE SAY WHATEVER YOU HAVE TO SAY DURING COMMERCIALS.

1. CHRISTOPHER COLUMBUS DID NOT NEED DIRECTIONS AND NEITHER DO WE...

1. ALL MEN SEE IN ONLY 16 COLORS, LIKE WINDOWS DEFAULT SETTINGS..
PEACH, FOR EXAMPLE, IS A FRUIT, NOT A COLOR. PUMPKIN IS ALSO A FRUIT. WE HAVE NO IDEA WHAT MAUVE IS.

1. IF WE ASK WHAT IS WRONG AND YOU SAY 'NOTHING,' WE WILL ACT LIKE NOTHING'S WRONG. WE KNOW YOU ARE LYING, BUT IT IS JUST NOT WORTH THE HASSLE.

1. IF YOU ASK A QUESTION YOU DON'T WANT AN ANSWER TO, EXPECT AN ANSWER YOU DON'T WANT TO HEAR..

1. WHEN WE HAVE TO GO SOMEWHERE, ABSOLUTELY ANYTHING YOU WEAR IS FINE...REALLY.

1.. DON'T ASK US WHAT WE'RE THINKING ABOUT UNLESS YOU ARE PREPARED TO DISCUSS SUCH TOPICS AS FOOTBALL OR MOTOR SPORTS.

1. YOU HAVE ENOUGH CLOTHES.

1 .. YOU HAVE TOO MANY SHOES.

1. I AM IN SHAPE. ROUND IS A SHAPE!

1.. THANK YOU FOR READING THIS. YES, I KNOW, I HAVE TO SLEEP ON THE COUCH TONIGHT.. BUT DID YOU KNOW MEN REALLY DON'T MIND THAT? IT'S LIKE CAMPING...

PASS THIS TO AS MANY MEN AS YOU CAN - TO GIVE THEM A LAUGH...

PASS THIS TO AS MANY WOMEN AS YOU CAN - TO GIVE THEM A BIGGER LAUGH, BECAUSE ITS TRUE!

Global Markets on Thin Ice

“Explanations for this gold selloff abound everywhere in the mainstream media and nearly all of them are inane and incorrect.  The silliest among all the reasons offered for the current bear market in gold is that Bernanke has recently morphed into a form of Paul Volcker; even though he has maintained the Fed’s zero percent interest rate policy and massive money printing continues unabated.  His policies have, and will continue to significantly weaken the intrinsic value of the dollar—so you can just summarily dismiss that reason. 

Another vacuous reason to explain the drop of the gold price is that the U.S. is eventually headed towards a trade surplus....

“This is because some predict our energy independence in the next ten years, which will cause the dollar to soar sometime in the future.  But the dollar fell from 83 to 82 on the DXY during the month of April, which coincided with the selloff in gold, so that can’t be the reason either.  In addition, our national debt should be near $30 trillion in 10 years; and that would far outweigh any benefit for the dollar that would be gained from a potential trade surplus. 

To understand the real reason behind gold’s selloff, investors first need to acknowledge that it’s not just gold coming under pressure.  Industrial and growth stocks are plummeting across the board.  For example, Caterpillar (CAT) is down 20% in the last 30 days, base-metal commodities are headed into bear market territory.  Copper is also down 15% since February and is now trading at a over a 52-week low.  Oil is dropping sharply of late, falling down to $86 per barrel from the mid-90’s a few week ago. Also, the recent stock market rally has been very narrowly based.  Those equities that have been working are defensive in nature like healthcare and consumer staples … that is not representative of a healthy market. 

So it comes down to this; investors should not make the same mistake they did during the fall of 2008, namely, ignoring the deflationary forces that are at work in certain parts of the world.  Commodity bear markets aren’t good for earnings if they are representative of a worldwide economic collapse.  Going long equities in September of 2008 because oil was headed from $147, to $33 a barrel wasn’t a very good idea. To be clear, I’m not claiming that this is at all the case today.  Indeed, Japan and the U.S. are well on the way towards reaching their inflation targets.  

But investors should be aware that the European economy may be facing a long, drawn out battle with deflation.  It should be noted that deflation is a necessary circumstance when rebalancing an economy from the ravages of inflation; but in the short-term it is very negative for stocks.  Global GDP will be weak and this will put downward pressure on stocks and commodities that are pegged to growth.  However, central banks that are pursuing inflation targets should help boost precious metal prices as they guarantee a stagflationary environment in those economies. 

The truth is that deflationary forces are currently very strong in Europe and, to a lesser degree, in China.  This week, the IMF lowered the projection for global GDP and reduced its eurozone GDP forecast, saying it would fall by 0.3% in 2013.  Meanwhile, European car sales are approaching a 20-year low; registrations fell 10% in March to 1.35 million vehicles, the 18th consecutive monthly decline. 

Major global economies and markets have become bifurcated between those that are aggressively seeking inflation and those that are embracing austerity and deflation?  Japan and the U.S. are printing money at record paces, while Europe’s monetary base is static.  This makes investing extremely difficult at this time.  Investors must be very selective in which country they place funds and also be careful to avoid the trap of believing growth will accelerate later in 2013.  That is why it is imperative to hold a portfolio that is diversified among countries that are pursuing inflation targets and avoid being over-exposed in sectors of the market that rely on growth.  

The bottom line is the selloff in gold bullion is almost over and the vicious bear market in mining shares is soon coming to an end.  Those countries that have adopted inflation targets will keep printing until they are achieved, and those that have yet to state they are officially pursuing inflation goals should soon (but foolishly) join in the fight.  Once all major economies are again in sync with inflation as their goal, the investment climate will become much clearer.  Investors need to buckle their seat belts because—as I have warned many times in the past—major global economies will be whipsawed between inflation and deflation until they finally crash due to currency and bond market meltdowns."   

Michael Pento: President & Founder of Pento Portfolio Strategies and the author of

“The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market”

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/4/19_Pento_-_Gold_Reveals_Global_Markets_On_Thin_Ice.html

Fed and Bank of Japan caused gold crash

By Ambrose Evans-Pritchard
7:22PM BST 17 Apr 2013

It is becoming ever clearer that the roaring boom in global equities since last summer has priced in an economic recovery that does not in fact exist. The International Monetary Fund has had to nurse down its global growth forecasts yet again. We are still stuck in an old-fashioned trade depression, with pervasive over-capacity in manufacturing plant and a record global savings rate of 25pc of GDP.

German car sales fell 17pc in March. That should puncture the last illusions that Germany is about to pull Europe out of a self-inflicted slump.

As you can see from the chart below, the divergence between stock markets and the Deutsche Bank index of raw materials is astonishing to behold, so like the pattern in early 1929.

Steel has fallen 31pc this year. Brent crude is off 17pc since early February, and copper 15pc.

You have to be careful reading too much into commodities, distorted by China. The time-honoured cycle is a surge of investment that comes on stream at once with a lag. America's shale drive has turned the gas market upside down, diverting liquefied natural gas to Europe and Asia. Copper output in Chile rose 7pc last year. The crash in the Baltic Dry Index for shipping rates is partly a tale of too many ships.

Yet excess supply does not explain the collapse in gold over the past week. Cyprus may have been an incidental trigger. If the EU-IMF Troika is determined to strong-arm the Cypriots into selling most of their pint-sized holding of 14 tonnes, it may do the same to Portugal when the time comes, and then you are talking about the world's 14th biggest holding of 382 tonnes.

Bank of America says the gold crash since Friday has already discounted sales of the entire Cypriot, Portuguese and Greek gold reserves combined. "As we believe additional gold selling in the European periphery is highly unlikely, we find it hard to fully justify the sell-off," it said.

The central banks of China and the emerging powers bought 535 tonnes last year to escape dollars and euros, the biggest wave of state purchases since 1964. Their strategy is to buy the dips, and they are no fools. The head of China's reserve manager "SAFE" used to run a US hedge fund.

They won't try to catch a "falling knife", prefering to wait until the dust settles. The upward trend of the great bull market has been broken. The technical damage is brutal. Bank of America expects a further drop to $1,200. Be patient.

My view is that the US Federal Reserve and the Bank of Japan "caused" the gold crash. The rest is noise. The Fed assault began in February when it published a paper warning that the longer quantitative easing continues, the harder it will be for the bank to extricate itself.

The report was co-written by former Fed governor Frederic Mishkin, often deemed Ben Bernanke's "alter ego". It said the Fed's capital base could be wiped out "several times" once borrowing costs climb. The window will start shutting by 2014, with trouble then compounding at a "dramatic" pace.

This was a shock. It suggested that the Fed has lost its nerve, and will think long and hard before launching a fresh blitz of money if growth falters.

Then came last week's Fed Minutes, with hints of tapering off QE earlier that expected. That was the next shock. What they seemed to be saying is that the US economy is groping it way back to normality, that the era of silly money is over, that the dollar will stand tall again.

If that were the case, gold should fall. But it is not the case. The US economy is growing below the Fed's own "stall speed" indicator. Half a million people fell out of the workforce in March. Retail sales fell in March. So did manufacturing.

The US faces fiscal tightening of 2.5pc of GDP this year, the most since 1946. Ex-labour secretary Robert Reich said the effects have been disguised so far, but a "stealth sequester" is just starting: $51m of grant cuts to Brandeis university; $1m for schools in Syracuse; and so on, the reverse of the stealth stimulus before.

My guess is that the Fed will be forced to row back smartly from its exit talk, but first we must look deflation in the eyes.

As for the Bank of Japan, it had been assumed that the colossal monetary stimulus of Haruhiko Kuroda would revive the yen-carry trade, leaking $1 trillion into world asset markets. But the early evidence is the opposite. Japanese investors brought money home last week.

"Mrs Watanabe" is selling her Kiwi and Aussie bonds to bet on stocks and property at home. And she is selling gold like never before. That too is a shock.

Japan's "Abenomics" may prove a net drag on the world over coming months. It is exporting deflation through trade effects. This already visible in Korea and China, where soaring wages have eroded competitiveness. "Investors may have forgotten that yen weakness was one of the immediate causes of the 1997 Asian currency crisis and Asia’s subsequent economic collapse," said Albert Edwards from Societe Generale.

China's growth rate fell to 7.7pc in the first quarter. It will fall further, though the catch-up boom in the hinterland cities of Chengdu, Chonquing, Changsa and Xi'an may have further to run.

Fitch Ratings says credit has surged from €9 trillion to €23 trillion over the past four years, a rise equal to the entire US banking system. Beijing pumped up loans yet again after its recession scare in the summer, but is gaining less traction. The GDP growth effect of credit has halved. It is the classic sign of an economy sated on debt. China too will have to deleverage.

The world is still in a contained depression. Sliding commodities tell us global money is if anything too tight. "There is a threat of deflation almost everywhere. A lot of central banks will have to follow the Bank of Japan, whatever they say now," said Lars Christensen form Danske Bank

The era of money printing is young yet. Gold will have its day again.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10001937/Fed-and-Bank-of-Japan-caused-gold-crash.html

10 Iconic Bikes

Prof Steve Keen from 10/11

Wide Web World

Holy Shit...

Dear Readers,

We at AFE were compelled to send this out today, Below is what Jim Sinclair, who was once called on by former Federal Reserve  Chairman Paul Volcker to assist during a Wall Street crisis, has posted.

Countries Preparing For Bail-Ins

Posted April 9th, 2013 by Jim Sinclair & filed under General Editorial.

Why does everyone seem to think that Canada, Cyprus and New Zealand are the only countries preparing for bail-ins?

Basel Committee on Banking Supervision Report and Recommendations of the Cross-border Bank Resolution Group

Click here to read the full report:http://www.bis.org/publ/bcbs169.pdf

This is the policy that the central banks are following. Check out the list of central banks consulted on the formulation of this – last page. The Fed is represented, so it should not have come as a surprise to Mr. B or was it the tilt of the cards that provoked the “angry” reaction?

Underlining is mine in the below quote.

Recommendation 10

National authorities should adopt crisis management and resolution strategies that reduce moral hazard by minimizing public expenditures. Losses should be allocated among shareholders and other creditors, where possible; and private sector resolutions rather than public ownership should be facilitated. Where temporary public ownership is necessary, authorities should seek to return assets to private ownership and management as soon as possible. At the time of public intervention, national authorities should seek to develop public understanding about the amount of fiscal support that may be necessary, estimates of the time horizon for intervention, risk sharing arrangements and the possible losses borne by the taxpayers.

SIGNATORIES to the document which proposes that creditors of financial organizations, the depositors, carry responsibility to "bail in" bankrupt organizations.

• Members of the Cross-border Bank Resolution Group

• Swiss Financial Market Supervisory Authority

• Federal Deposit Insurance Corporation Banco Central de la República Argentina National Bank of Belgium

• Commission bancaire, financière et des assurances, Belgium Banco Central do Brasil

• Office of the Superintendent of Financial Institutions, Canada Commission Bancaire, France

• Deutsche Bundesbank

• Bundesanstalt für Finanzdienstleistungsaufsicht, Germany Banca d’Italia

• Bank of Japan

• Financial Services Agency, Japan

• Commission de Surveillance du Secteur Financier, Luxembourg De Nederlandsche Bank

• Banco de España

• Sveriges Riksbank

• Swiss National Bank

• Swiss Financial Market Supervisory Authority

• Bank of England

• Financial Services Authority

• Board of Governors of the Federal Reserve System Federal Reserve Bank of New York

• Office of the Comptroller of the Currency

• Office of Thrift Supervision

• Federal Deposit Insurance Corporation

• European Commission European Central Bank (ECB)

• Financial Stability Board

• Offshore Group of Banking Supervisors

• Bank for International Settlements

• Financial Stability Institute

• Secretariat, Basel Committee on Banking Supervision

The backpedalling and denials which have emanated from just the same bodies that signed on to this Cyprus template is because it was used in Cyprus, revealing its existence ahead of time. This was constructed for the next large banking problem and not for slamming an island tax shelter like Cyprus. Here is the undeniable template to confiscate deposits with legal grounds. Clearly if this was expected by any public, few would carry large balances in any bank. This should answer clearly the question, can central planners do really stupid things at just the wrong time and wrong targets?

With kind regards,
Your Anglo Far-East Team

Cyprus Wake-up Call

Cyprus - a wake-up call: Rethinking money

A Retort to SocGen's Latest Gold Report

By David Franklin (dfranklin@sprott.com) & David Baker (dbaker@sprott.com)
Sprott Asset Management LP

Société Générale ("SocGen") recently published a special report entitled "The end of the gold era" that garnered far more attention than we think it deserved.  The majority of the report focused on SocGen's "crash scenario" for gold wherein they suggest that gold could fall well below their 2013 target of US$1,375/oz. It also included a classic criticism that we've heard so many times before: that the gold price is in "bubble territory". We have problems with both suggestions.

To begin, the report's authors appear to view gold as a commodity, rather than as a currency. This is a common misconception that continues to plague most gold market analysis. Gold doesn't really work as a commodity because it doesn't get consumed like one. The vast majority of gold mined throughout history remains in existence today, and the total global gold stockpile grows in small increments every year through additional mine supply. This is also precisely why gold works so well as a currency. Total gold supply can only grow marginally, while fiat money supply can grow exponentially through printing programs. This is why gold's monetary value is so important - it's the only "currency" in play that is immune to government devaluation. 

Chart A illustrates the relationship between the growth of central bank balance sheets in the US, EU, UK and Japan and the price of gold. This relationship has an extremely high correlation with an R² of about 95%. As central banks increase the size of their balance sheets through 'open market operations' to buy bonds, mortgage-backed securities ("MBS") and the like, they inject more fiat dollars into their respective banking systems. As gold has a relatively stable supply, if there are more dollars available, the price of gold should rise in dollar terms. It's really a very simple and intuitive relationship - as it should be.

Source: Bloomberg and Sprott Asset Management LP

This relationship between central bank printing and gold has existed since the beginning of the gold bull market in 2000. In fact, this relationship shows that for every US$1 trillion increase in the collective central banks' balance sheets, the price of gold has generally appreciated by an average of US$210/oz.

Somewhat surprisingly, it turns out that the collective central bank balance sheets have actually shrunk over the past three months - by approximately US$415 billion. The biggest drop was seen in the ECB's balance sheet, which shrunk by the equivalent of US$370 billion, while other central banks also experienced small declines. Based on our simple model above, a decrease of US$415 billion should produce a gold price decline of roughly US$87/oz. And as it turns out, gold fell by US$76/oz over the first quarter of 2013. Does this sound like a bubble to you? It certainly doesn't appear to be. Gold is performing almost exactly as it should - by acting as a currency barometer for the amount of money being injected into or withdrawn from the economy... which leads us to Japan.

Japan's recent QE announcement is a thing of wonder. It represents an absolutely massive injection of yen relative to the size of the Japanese economy. The Bank of Japan's US$75 billion equivalent per month of yen printing, coupled with the US Federal Reserve's $85 billion per month (through its current QE program) will add US$1.97 trillion to the collective central bank balance sheets over the next 12 months. Given Japan's considerable contribution, we seriously question how SocGen believes gold can drop to US$1,375/oz by the end of the year. For that to happen, we would need to see a collective balance sheet decline of roughly 15%. Does SocGen seriously believe the US Fed (or any other central bank for that matter) is going to reverse its QE accumulation and then start aggressively selling balance sheet assets over the next year?

The only gold 'crash scenario' that makes sense to us at Sprott is if governments begin to balance their budgets and return to sound money practices. There is no question that gold could lose its utility if western governments made a concerted effort to fix their fiscal imbalances, but who honestly believes that's going to happen any time soon? We certainly don't - especially in the US. While US deficit spending may diminish in scale, it will remain well above $1 trillion per year after factoring in unfunded obligations. We don't know of any creditable forecaster who believes otherwise.

We also don't see a chance of the US Federal Reserve ending its QE programs, despite the continual jaw-boning by various Fed officials of a planned QE exit strategy. There is simply too much risk to the US bond market for the Fed to cut the US$85 billion in monthly Treasury and MBS purchases that the current program employs. After all - remember that those purchases are what keep interest rates close to zero today. If the Fed were to remove that flow of capital, the free market would once again dictate US bond yields and stock prices. There's not a chance the Fed will take the risk of finding out what US bonds or stocks are worth to the market without a perpetual government-induced backstop. Why take the risk?  Especially since the cumulative QE programs to date have not caused a drastic increase in inflation expectations.

While we expect the Fed to continue to threaten to lower its monthly QE purchases, we believe the chances of even a mild decrease to its current US$85 billion per month rate are negligible. Four years into it this grand QE experiment, money printing has become the backbone of the US bond market, and the unsung driver of the US equity market. In our view, gold cannot become irrelevant for the precise reason that QE is here to stay... and the collective central bank balance sheets will continue to increase over time. We would question any pundit who believes otherwise - unless they can clearly articulate how the Fed can exit QE without causing irreparable harm to the very financial markets the QE programs were designed to assuage.

We believe gold is nowhere close to 'bubble territory' today. It is acting exactly as a currency should. Under its current stewardship, we expect the Federal Reserve's balance sheet to continue to expand along with Japan's. SocGen's "crash" scenario would require a complete reversal of this trend, which we do not believe is even remotely possible at this point.

Gold is the base currency with which to compare the value of all government-sponsored money. Investors can incorporate it into their portfolios as 'central bank insurance', or ignore it entirely. Either way, we believe gold will continue to track the total aggregate of the central bank balance sheets of the US, UK, Eurozone and Japan. If SocGen believes the aggregate central bank balance sheet will continue to shrink as it did in Q1, then gold should continue its decline. We strongly suspect that shrinkage is over, however. Given Japan's recent QE decision, we would expect the aggregate to grow a lot bigger, and fast. If there was ever a time for gold to be a relevant currency alternative - it's now.

A Fresh Milestone

by Jeffery Saut

April 1, 2013

“After a painful four-year slog from the financial crisis, the Standard & Poor’s 500-stock index pushed to an all-time high Thursday powered by rising investor faith in the economic recovery. While previous market rallies have been snuffed out by concerns about the European debt crisis or political uncertainty in the U.S., investors now are betting that the economic rebound and improving corporate earnings will carry the day.”

... Alexandra Scaggs; WSJ (3-29-13)

Last Thursday the S&P 500 (SPX/1569.19) notched a new all-time causing Ms. Scaggs to pen the aforementioned story in Friday’s Wall Street Journal. I was particularly interested in a sentence further down in the article that read, “The rally in stocks comes as investors warm up to stocks for the first time in years.” That prose sparked memories of an era gone by. The year was 1982 as the D-J Industrial Average (INDU/14578.54) approached the secular high of 985.21 made in 1968, as well as the nominal high of 1051.70 recorded in January 1973 (the peak of the nifty-fifty stocks). At the time the then gurus in this business were chiding me to sell. “Sell,” I replied, “Why sell?” Their response was, “Sell because for the past 17 years every time the Dow has approached the 1000 level you sold and then waited until the Dow retreated back into the 700 – 800 zone where you bought back into stocks again.” That mindset had been instilled into investors’ psyche not just by the 1965 to 1982 “range bound” experience, but by the entire nineteenth century. Consider this: the stock market’s price peak of 1929 was not exceeded until 1954 followed by a 12-year bull market. The next major high was made in 1966 with another subsequent two-year bull market that crested in 1968, which actually was the “secular peak” of the 1947 to 1968 bull market. The next major high was the “nominal peak” recorded in 1973. That price peak was exceeded in November 1982, leading to an 18-year secular bull market. The point is history suggests that a decisive break to new all-time highs is more likely a sign for more gains to come rather than a trigger event preceding a massive decline. The Wall Street Journalarticle also caused me to reflect on the various stages of a bull market.

The late Sir John Templeton often reminded us that “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” I have added a few more stages to Sir John’s mantra beginning with Stage 1 (Shock and Fear). Bear markets can end with either a bang or a whimper. During the President Kennedy “steel price” panic of 1962, the Dow made a panic V-shaped “bang” bottom. However, the November/December 1974 bottom was much more subtle with a rolling low in November follow by a very quiet lower-low in December and that was it; the bottom was complete. Still, both of those different bottoms were met with pessimism, concern and apprehension as investors denied equities altogether accompanied by the ubiquitous scream, “I will never buy stocks again!” Moreover, following the end of a bear market, and the initial “lift off” move of the beginning of a new bull market, there are tumultuous cries, “This is just a rally in an ongoing bear market,” which brings us to Stage 2 (Guarded Optimism).

E-v-e-r-y rally after a bear market bottom is encased with Sir John’s pessimism/skepticism as represented by comments like, “This is the last chance to get out.” Recall that was the media’s moments du jour after the March 2009 bottom as various pundits were trotted out to tell us how bad things were going to get. The foreboding example expressed was the 1929 affair where following the October “crash” there was a subsequent sharp rally only to give way to a decline that would erode 90% of the market’s value, ending in 1932 with the Dow at 41. Of course that one-off debacle was caused by huge blunders from the Federal Reserve and the Hoover administration. Yet even in the mid/late-1930s, as participants realized their worst fears would not materialize, a “guarded optimism” set in whereby stocks were bought because of their dividend yield as a conservative mood pervaded the equity markets. As things got better, that “guarded optimism” gave way to “enthusiasm,” or Stage 3.

In Stage 3 the economy actually starts to get better with the news backdrop going from bleak to better, which leads to greater enthusiasm. In turn, the economy strengthens even more, which drives the stock market ever higher creating more enthusiasm. This is the stage where earnings begin to grow nicely, price earning’s multiples start to expand, and confidence grows about a sustainable recovery. It is also where the wrong-footed prognosticators start trying to convince folks they really were not all that bearish on stocks at the bottom. At some point in this stage, the public starts participating in the stock market again and hints of speculation surface; eventually, Stage 3 builds into Stage 4 (Exuberance).

Stage 4: the transition between Stage 3 and Stage 4 is mainly about changing attitudes. As confidence builds, investors are engulfed by a feeling that nothing can go wrong. All stocks go “up,” all portfolio managers are geniuses, companies build inventories in anticipation that the “future is so bright I think I need shades,” etc. Stocks are bought because they are only trading at 50x next year’s earnings, which is less than half of the company’s anticipated growth rate. In this stage new Initial Public Offerings (IPOs) leap by 10, 20, or 30 points from their offering price, and you hear comments like, “The institutions will buy all of this IPO and there will not be any stock left for the public.” You also begin to hear stock “tips” from your barber, taxi driver, waiter, etc. on the hope that you, as a professional, will share your stock insights with them. Such giddiness eventually morphs into Stage 5 – the Surrealistic Phase.

Stage 5 is the very advanced phase of exuberance. New stock offerings are of questionable value, but still they trade “up” from their offering price. In the late 1960s, I called this phase the great “onics” market since any company whose name ended in “onics” soared following its IPO. In the late 1990s, the same phenomena occurred with anything related to the Internet (remember Razorfish?!). New era stocks of the 1990s traded at “eyeball views per minute” valuations changing hands at “merely” 200x earnings. There was a surreal feeling on the Street of Dreams at this stage with investment bankers having $100,000 dinners and the public was back into stocks in full-force. Stocks were no longer bought on anything resembling sound fundamentals. Newly minted Financial Advisors were making $25,000 a month, and we graybeards seem to be way too conservative having lived through Stage 6 in a past life.

Enters Stage 6 – Disillusionment – this is where the Surrealistic Phase ends with the bursting of the stock market bubble. The causa proxima can come from many venues (the oil shock of 1973, 9-11-01, the housing bubble burst, the Financial Fiasco of 2008, etc.), but the result is always the same. Manifestly, Stage 6 is typically a combination of many factors, yet the ending is the same in that the economic outlook is not nearly as positive as has been priced into stocks. At this point investors are “hoping” their stocks rally back to the prices at which they were bought so they can get even and get out. Of course, that doesn’t happen as investors hold on to losing positions, which eventually costs them dearly. Verily, Ben Graham’s mantra, at this stage of the cycle, should be “pinned” to the walls of all investors’ offices in that, “The essence of portfolio management is the management of RISKS, not the management of RETURNS. All good portfolio management begins (and ends) with this premise.” At this stage there is a helpless feeling as “stocks sag” and investors wrongly stay with those losing positions, which actually could be sold at minimal losses, but investors desperately cling to their losses when they should be jettisoned. I will not transgress into past prognostications, but conclude with what I said last week on my friend’s TV show (Susie Gharib’s Nightly Business Report – now on CNBC – at 5:30 p.m.), “I think there is a decent probability that we are into a new secular bull market that has a decade yet to run; and, nobody believes it.

The call for this week: If this is a new secular bull market, I think we are only in Stage 2 with many more years yet to come. While it is true at session 61 (today) this is the longest “buying stampede” EVER chronicled in my notes of over 50 years and we are due for some kind of pullback, I continue to think any pauses/pullbacks are for buying.

http://www.raymondjames.com/inv_strat.htm