More Euro Disappointment Ahead?

As European leaders prepare for this week's summit, here's a look back at some of the key moments in the crisis so far...

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Global Money-Printing Update

The impact of America's QE2 – one year on – on currencies, bonds, banking, and Gold Bullion prices...

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Copper, Gold & the Eurozone Crisis

How the Euro debt crisis, and the subsequent move into gold, dented copper...

The EUROPEAN UNION's equivalent of "shock and awe" – a €750 billion rescue package of standby funds and loan guarantees, for heavily indebted member states that can't raise funds cheaply in the capital markets – enabled the Eurozone banks to survive another near death experience, writes Gary Dorsch at Global Money Trends.

Still, on May 31st, the ECB warned that Eurozone banks would face a new wave of potential loan losses – up to €195 billion over the next 18 months – from loans extended to the private sector, that are going sour.

Thus, although the specter of a Greek bond default is postponed for a later date, another lethal phase of the European debt crisis began to erupt, a frightful situation where European banks become unwilling to lend money to the private sector.

There were latent fears of a Eurozone "credit crunch," looming on the horizon that could suffocate the $14 trillion Eurozone economy, and in turn, weaken the demand for industrial commodities, including copper and other base metals.

Eurozone banks are hoarding a record amount of cash, and buying German, French, and Swiss government bonds, and gold, rather than lending Euros to the private sector. As liquidity dries up, the credit default swap for the Eurozone's top-50 junk bond index of lesser creditworthy companies became a key benchmark for measuring the risk of a "credit crunch".

Each upward surge in Eurozone junk bond CDS rates ignited a knee-jerk sell-off in the price of copper – often called the metal with a PhD in economics, thanks to its strong correlation with near-term economic growth worldwide.

Conversely, each decline in CDS junk bond rates has given a boost to the red-metal.

The Euro's slide against the US Dollar to a four-year low at $1.1850 also began to exert downward pressure on the copper market.

The European Central Bank (ECB) has vowed to print vast quantities of Euros, in order to monetize the debt of financially weaker Eurozone governments. The ECB's lack of clarity over the size of its printing operations left the Euro vulnerable to speculative attack, and a loss of confidence among central banks, that hold more than $2 trillion of the currency.

However, in the aftermath of copper's 20% slide from its recent highs, to as low as $2.75 per pound in New York, bargain hunters and contrarians, began to wade into the long-side of the market, betting on a rebound for copper, on ideas that the Euro would ultimately stabilize above the psychological $1.20-level. In the commodity and currency markets, trader sentiment is fickle and can turn on a dime

Fears that Beijing was dumping Euro from its $2.25 trillion FX stash were alleviated on June 10th, when Dai Xianglong, manager of the China's National Security Fund said, "I think it is quite normal for the Euro to be experiencing swings because of the European debt crisis. However, I do believe the Euro will gradually stabilize and survive the crisis." Within minutes, Dai's soothing remarks lifted the Euro towards $1.2100, and in turn, the copper market hit bottom at $2.75 per pound.

Over-extended short sellers in the Euro began to panic, after Dai indicated he was more concerned about a slide in the value of the US Dollar. "The US fiscal deficit is still big, so there is a risk that the value of China's forex assets will contract," Dai warned. Nowadays, currency fluctuations are used as an excuse to make speculative trades in industrial commodities. Along with the Euro's rebound to $1.2350, the copper market jettisoned 10% higher to $3.02 per pound.

At-the-end of the day, copper – the metal with a PhD in macro-economics – is a great place for wagering bets on cyclical swings in the global economy, the whims of G-20 central bankers, gyrations in the US Dollar, and the direction of Shanghai red-chips, all intertwined within a hotbed of speculation...

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Eurozone Debt, CDS and Gold

What gold alone knows about the Euro credit default swap (CDS) crisis...

FEW FINANCIAL TRADERS know much about the credit default swap (CDS) markets, writes Gary Dorsch, editor of Global Money Trends.

CDS are traded on an unregulated, over-the-counter market, far from the public's view. Yet nowadays, the CDS market has become a major battleground between high-stakes speculators and Eurozone politicians, with the fate of the Euro currency hanging in the balance.

In turn, the violent swings in the CDS markets are having a profound impact on the global bond, commodity, currency, Gold and stock markets.

Credit default swaps have existed since the early 1990s, but the volume of trading began to increase dramatically in 2003. By December 2007, the CDS markets had grown in size to $62 trillion of contracts outstanding, before shrinking to $38 trillion by the end of 2008. Huge throngs of "naked" short sellers were wiped-out in the CDS market following after Lehman Brothers defaulted on $365 billion of liabilities, which were settled at just 8-cents on the Dollar.

Fourteen months later, the obscure CDS markets were again at the center of another major financial crisis, this time, raising the specter of a sovereign debt default. CDS traders were among the first to recognize that the government of Greece was technically insolvent, and unable to repay its €300 billion of outstanding debt. The size of Greece's debt rivals the size of Lehman's, when it defaulted, and is almost four times of the size of Argentina's debt, when it defaulted in 2001.

Typically, a bond-holder can hedge against the risk of default by purchasing a CDS contract, and making quarterly insurance payments to the CDS seller. If a company or a national government defaults on its debt obligations, seeks a restructuring, or declares bankruptcy, the CDS seller is obligated to pay the CDS buyer the par value of the bond, in exchange for physical delivery of the bond. Most CDS contracts are in the $10-to-$20 million range with maturities of 1-to-10-years.

However, speculators can buy "naked" CDS contracts without actually owning the underlying bond. Likewise, sellers of CDS contracts might not have sufficient funds to cover their obligations, in the event of a default. These "naked" credit default swaps constitute the majority of trading volume, and permit banks and hedge funds to place bets on whether or not a company, or even a country, will default on it debts.

The nature of CDS trading – which doesn't require reporting of transactions to a government agency – is such, that CDS speculators have an incentive to push companies or countries toward bankruptcy. CDS traders nearly toppled the Greek finance ministry, and are now betting on defaults in Eurozone junk bonds. Attracted to the highly indebted Greek bond market like vultures to a decaying corpse, the CDS traders at major banks and hedge funds moved in for the kill in April.

Trading in credit default swaps linked to Greek debt surged over the past year, prior to the upward explosion in CDS rates in late April and early May. The overall amount of insurance on Greek debt hit $85 billion in February, compared with $38 billion a year earlier. CDS speculators nearly hit the jackpot on May 7th, when the cost of insuring $10 million of Greek bonds soared to $1.2 million, worsening the budgetary plight of Greece and bringing it closer the specter of default.

Prior to the climactic surge in late April and early May, each time CDS traders bid-up the cost of insuring Greek bonds against default, Eurozone politicians and the IMF were quickly forced to ante-up more bailout money. Initially, Eurozone politicians pledged a paltry €22-Euros to prevent Athens from defaulting on its debts. When that gambit failed, the ante was raised to €45 billion.

However, on April 26th, the S&P credit rating agency – which usually lingers far behind the credit default curve – lit a fire in the CDS tinderbox, roiling Eurozone politicians and shocking the global markets, by downgrading Greece's €300 billion of debt three notches to junk status, at BB+.

Greek CDS rates soared to 1200-bps (12%), and yields on Greece's two-year notes jumped to 25.8% as prices sank. Eurozone politicians and the IMF quickly raised the ante for the Greek bailout to €110 billion, citing the risk of another global financial meltdown, as explained by German finance minister Wolfgang Schauble on April 20th:

"We cannot allow the bankruptcy of a Euro member state like Greece to turn into a second Lehman Brothers," he told Der Spiegel.

"Greece's debts are all in Euros, and it isn't clear who holds how much of those debts. The consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank."

On the day Greece's 2-year CDS rate surged to a record, it triggered the historic "flash crash" on Wall Street – an intra-day, 1,000-point  meltdown in the Dow Jones Industrials, climaxed by a shocking 700-point drop in less than 20 minutes, taking the index below the psychological 10,000 level.

Since the mainstream media was unfamiliar with the movements of the Greek CDS market, it peddled a story, that a computer glitch caused the "flash crash".

The rebellious CDS speculators in Greek bonds refused to fold their cards, knowing that Athens would need to raise €50 billion for each of the next five years, in order to roll-over debts and pay interest. That adds up to €250 billion, easily topping the EU's €110 billion bailout offer. So on May 8-9th, European politicians, finance chiefs, central bankers, and officials from the IMF – all taken aback by the CDS traders – and huddled behind closed doors for an emergency summit, trying to devise a decisive plan of action that could stamp out the speculative attack against the Euro and to bring some calm into the Greek bond market.

"We now see wolf-pack behavior, and if we will not stop these packs, they will tear the weaker countries apart," Swedish Finance chief Anders Borg told reporters before the meeting. "We need resources to stop the market turmoil. If this goes on for more than a couple of days it will be very, very problematic for the recovery," Borg warned on May 8th.

French Prime Minister Francois Fillon added:

"The joint action taken to save Greece will defeat and put an end to speculation which has been unleashed against this country and which represents an attack on the entire Euro zone."

On May 10th, after two-days of deliberations, the EU leaders unveiled the financial equivalent of "shock-and-awe" – a €750 billion package of standby funds and loan guarantees that could be tapped by Eurozone governments shut-out of credit markets, plus central bank purchases of bonds, to steady markets – all designed to crush CDS speculators by its sheer scale.

The European Central Bank (ECB) immediately began implementing its part of the deal – unleashing the "nuclear option" – buying Greek and Portuguese government bonds in the open market.

With the ECB pledging to buy Greek bonds, yields on its two-year note plunged in the blink of an eye, from an intra-day high of 24% down to 7.5%. Since May 10th, the ECB has effectively locked Greece's two-year yield between 7% and 9.5%.

However, the cost of insuring Greek debt with CDS is still hovering around 850-bps today, very high by historical standards. CDS traders reckon that at some point, Athens might grow tired of trying to pay-off an insurmountable mountain of debt, and will demand a restructuring – invoking perhaps a 50% haircut or more for its creditors.

Since May 10th, the EU's "shock and awe" effect has worn-off. The EuroStoxx-600 Index briefly fell to new lows on May 25th, and the Athens stock index fell to within 5% of its March 2009 lows. The Euro failed to gain any traction, and is still sliding lower along a slippery slope towards $1.20 versus US Dollar. While the "Big Bang" bailout has subdued the threat of a Greek debt default, the next lethal phase of the European debt crisis is starting to materialize – a frightful situation where European banks become unwilling to lend money to the private sector.

There are latent fears that a Eurozone "credit crunch" is looming on the horizon which could put the $14 trillion Eurozone economy into a deep freeze. On May 31st, the ECB warned that Eurozone banks could face a new wave of loan losses – up to €195 billion of losses over the next 18-months. Eurozone banks would need to raise additional capital in order to cover expected losses of €90 billion this year and €105 billion in 2011, on top of €238 billion in bad debts already written off.

Banks have already begun hoarding a record amount of cash at the ECB, opting for the safety of the central bank, rather than risk more profitable lending in the private sector.

Eurozone banks are finding it very difficult to find buyers for their debt in the capital markets. Bond issuance has slumped to $2.6 billion in May, down from $82 billion in January. Also, indicative of a potential credit crunch in the offing, the credit default swap rate for the Eurozone's top-50 junk bond index, measuring lesser credit worthy companies, jumped as high as $625,000 on May 25th, from around $460,000 four weeks ago. Each upward surge in Eurozone junk bond CDS rates has ignited a sell-off in the EuroStoxx-600 Index. Conversely, each decline in CDS junk bond rates has lifted the fortunes of the Eurozone stock market.

The Eurozone is a major player on the world economic stage, accounting for roughly 22% of the world's economic output. The Eurozone buys 20% of China's exports, and 15% of Latin America's, and nearly a quarter of S&P-500 multinational income is earned by US affiliates located in Europe.

Given the increasing synchronization of the world's economy, any sharp downturn in the Eurozone economy, precipitated by a lending freeze, could undermine global commodity and stock markets.

Traders got their first look at what a European credit crunch might do to the global economy on June 2nd. The Eurozone's factory Purchasing Managers' Index (PMI) for May sank to 55.8 from a reading of 57.6 in April. The factory sector is still where global recessions tend to begin and end. For this reason, the factory PMI's in the top industrialized nations are watched very closely, setting the tone for the upcoming month and other key economic indicators.

The Eurozone's factory PMI figures might have already peaked in April, since Eurozone governments are starting to remove large dosages of fiscal stimulus. EU leaders have rescued the Eurozone banks from enormous losses, but also vowed to cut their budget deficits to 3% of GDP, to meet a 2013 deadline for compliance with EU stability criteria. In order to do so, the Eurozone countries and Britain will have to slash their budget deficits by a total of €400 billion ($492 billion).

Greece is aiming to reduce its budget deficit by €30 billion over the next three years through wage and pension cuts, slashing social programs and a 2% increase in VAT (sales tax) to 23-percent. Spain voted to cut spending by €80 billion, with a one vote majority in parliament. To this end, 13,000 jobs in the public service will be cut, the salaries of state employees will be reduced by 5%, and pensions frozen. Britain's budget deficit will be cut over the next four years by more than $120 billion. This will include slashing 300,000-jobs in the public service and a freeze on public sector pay. Italy agreed to spending cuts of €25 billion by 2012.

But whereas the ECB has just crossed the Rubicon, finally embracing "Quantitative Easing" (QE) – otherwise known as printing vast quantities of Euros in the year ahead, in order to monetize the debts of the Euro's most reckless delinquent borrowers – the People's Bank of China (PBoC) is moving in the opposite direction.

The world's fastest-growing economy is removing a large chunk of the stimulus that the People's Bank injected into the Shanghai money markets last year. PBoC chief Zhou Xiaochuan said on May 24th that domestic issues are by far the most important factors in determining Chinese monetary policy, and the European liquidity crunch wouldn't necessarily affect the central bank's calculations on when to hike interest rates.

Zhou thinks the global economy will likely maintain the pace of its recovery despite the Eurozone's woes. Therefore, there's a risk that the PBoC might continue to tighten its monetary policy in the months ahead, despite signs of rough patch in global factory activity developing in May.

Even in the midst of the turmoil in Europe, on May 2nd, the PBoC lifted the reserve requirement ratio for its largest banks by 50-basis points, up to 17%, its third increase this year and thus draining about 900 billion Yuan ($132 billion) out of the Chinese banking system.

The PBoC is trying to contain an accelerating inflation rate, while deflating a housing price bubble. April's 12.8% jump in property prices in China's top-70 cities defied the government's crackdown on speculation. Meanwhile, producer price inflation jumped to 6.8%, and consumer price inflation climbed to 2.9% from 2.4% in March. New lending of 774 billion Yuan ($113 billion) was far above target, and retail sales were 18.5% higher in April from a year earlier.

In order to deflate asset bubbles, the PBoC aims to reduce bank lending by 22% this year, from a record $1.4 trillion of yuan loans extended in 2009. The PBoC has also stepped up its drainage of Yuan via open market operations. By tightening the money spigots, the PBoC has slowed the growth of the Chinese M2 money supply, down from a 29.7% annualized clip in November to 21.5% in April.

In turn, by draining excess liquidity, the PBoC has sucked some helium out of the Shanghai stock market.

While the benchmark Shanghai Composite Index has tumbled 22% this year, down as low as 2568 points, the worst performing sector in the marketplace is the property index.

Tracking 34 real estate firms, it briefly fell below the 3200 level, or 48% below its high of 6137 seen in July 2009. China's property market is vulnerable to a crash, warned Li Daokui, a top advisor to the PBoC. "China's housing market problems combine a possible bubble with the risk of social discontent," he said.

Beijing's efforts to deflate the real estate bubble include measures that restrict pre-sales by developers, curbs loans for third-home purchases, doubled mortgage rates, and lifted down-payments to 50% for second-home purchases. Property sales in Beijing, Shanghai and Shenzhen fell as much as 70% in May as developers delayed sales following government tightening measures. A tax on residential real estate has been submitted to the Chinese central government for review.

The sharp slide in Shanghai red-chips, led by a slumping property sector, combined with a decline in China's Purchasing Managers' Index to a reading of 53.9 in May, from 55.7 in April, and combined with the headwinds from the Eurozone credit crunch, conspiring to knock the Reuters CRB Index of 19 commodity futures 8.2% lower in May, the biggest monthly plunge since the collapse of Lehman Brothers.
Traders are betting that the slide in the CRB commodity index is signaling a peak in global factory activity. According to US regulators the CFTC, speculative net-long positions – or bets on rising prices – for 16 major commodity futures have plunged 33% in the past three weeks. Industrial commodity kingpins, such as copper and crude oil, have tumbled by roughly 16% from their highest levels in April. The shakeout in the CRB Index might also reflect fears of smaller position limits in the US commodity markets, under a financial reform bill, that is under debate in Congress.

The outlook for the Chinese economy is of utmost importance to speculators in key industrial commodities, since Chinese consumption as a percentage of global demand last year was 68% for nickel, 44% for aluminum, 36% for iron ore, and 10% for crude oil. In addition to a potential credit crunch in the Eurozone, a big risk for industrial commodities is a miscalculation by Beijing – in tightening its monetary policy too aggressively. A bursting of the Chinese real-estate market may put China's 8% annual growth target in jeopardy.

Despite the 15% slide in key industrial commodities, however, the Gold market remains resilient, fighting off nagging worries about deflation, or a downturn in the global economy. Instead, Gold knows what know one knows!

At the end of the day, the nations of Greece, Portugal, and Spain are technically insolvent, and living on artificial life support, courtesy of their wealthier neighbors.

As much as French and German taxpayers resent the idea of guaranteeing the debts of their delinquent neighbors, Greek and Spanish workers abhor the idea of working slavishly for decades to pay-off the debt, accumulated by corrupt politicians.

The only easy way out of dealing with the Eurozone debt crisis is the ECB's monetization of the debts, by printing vast quantities of Euros, to buy sovereign bonds. Thus, gold has soared to above the psychological €1000 an ounce level in recent weeks.

So far, and using its new Quantitative Easing program, the ECB has bought about €35 billion of sovereign debt, mainly Greek. It probably needs to buy debt on a far larger scale, in order to prevent yields on Club-Med bonds from rising again. Spanish 10-year bond spreads have already widened to 180-basis points over German Bunds, a record since before the credit crisis began. Italy's odds of default have followed Spain's in sympathy. Italian CDS rates are trading at 240-basis points, a record high, and 10-basis points higher than before the ECB's bond-buying scheme was launched on May 10th. Spanish CDS rates are trading at 270-basis points, also near a record.

In addition to the bond buying spree, the ECB quietly injected €118 billion into the banking system last week the highest amount since the ECB flooded money markets with half-a trillion Euros of ultra-cheap 1-year money in June 2009. At some point, depositors may fear that European banks are too exposed to Club-Med debt, and combined with the ECB's money printing operations, could spark a flight into the king of currencies, a truest safe-haven in times of financial distress – Gold.

Eurozone Crisis Ignites Gold

How the European Central Bank is "rewarding speculators" in Gold Bullion...

ON MONDAY MAY 10th, Jean-Claude "Tricky" Trichet of the European Central Bank made a radical U-turn, writes Gary Dorsch of Global Money Trends.

Bludgeoned the credit-default-swap vigilantes who'd pushed the cost of insuring Greek government debt to record highs, he revealed a backroom deal with EU finance ministers, central bankers and the IMF, saying that Eurozone central banks would indeed buy Club-Med government bonds in the open market.

This "shock and awe" triggered a massive plunge in Greek and Portuguese bond yields and drove CDS rates sharply lower. For their part, the Eurozone politicians and the IMF upped the bailout fund to a staggering €750 billion, including loan guarantees to be tapped by highly indebted Eurozone governments shut-out of credit markets.

Senior IMF official Marek Belka said the emergency package was "morphine for the markets". And like other bailouts before it, this package promises a gigantic transfer of public funds to the big European banks. The biggest winners were major banks in Spain, France, and Italy. Banco Santander, BBVA, Société Générale, BNP Paribas, and Unicredit all saw increases of 20% or more in their stock price.

Like the $750 billion TARP bailout fund in the United States, this money is being handed over to the European oligarchic banks with no strings attached. Teetering on the edge of default, the banks holding €650 billion of Club-Med government bonds averted catastrophe again, with €550 billion in funding from European governments, and €200 billion from the IMF.

However, EU countries with AAA credit ratings, such as Germany, the Netherlands, or France, would have to borrow hundreds of billions of Euros to fund the bailout, thereby undermining their own creditworthiness. Thus, the next phase of the global debt crisis could be an exodus from AAA-rated sovereign bonds. As for Greece, higher taxes, fewer welfare benefits, 10% salary cuts and no bonuses for public workers could provoke a catastrophic collapse of its economy.

The foundation of the Euro rests on the "Stability and Growth Pact" adopted in 1997, by which the signatory countries agreed to enforce strict fiscal policies, including limiting budget deficits to 3% of GDP and public debt to 60% of GDP. But today, only three of the 16 Eurozone countries are in compliance, casting doubt over the viability single currency experiment. Greece is the worst offender, with a budget deficit of 14% of GDP and total debt equaling 115% of GDP.

The wildfires blazing in the bond markets of Greece, Portugal, and Spain, drove the Euro down sharply to the $1.25-level. ECB chief "Tricky" Trichet came out fighting on its behalf, "I am more than confident than ever in the future of the Euro," he told France's radio one on May 11th. However, by shifting to the radical QE-scheme, Trichet has irrevocably tarnished the ECB's anti-inflation credentials, and set in motion, the eventual disintegration of the Euro.

The ECB won't reveal the size of its bond-buying spree, because "the information could assist speculators." However, such secrecy fuels suspicions that the scope of the Euro printing operation is going to be enormous. Speaking to German radio station Deutschlandfunk, Bundesbank hardliner Juergen Stark said the "ECB would hold the Club-Med bonds, until the end of their maturity," indicating that the massive injections of Euros would be very long-term.

Trichet also denied suggestions that the ECB has adopted the monetary strategy of Zimbabwe. "We have not changed our monetary policy. All liquidity which being put in through these interventions will be taken back. We are not running money printing presses." But alas, Trichet has already dumped the Euro experiment into the trash heap of history. The only defense for the Euro is a foreign currency swap arrangement with the US Federal Reserve, which can increase the supply of US-Dollars in the short-term, and help the ECB to engineer an orderly devaluation of the Euro, and reduce the risk of a frightful free-fall.

"Tricky" Trichet is a crafty poker player. But while he's rescued the French and German banks, he's stripped the Euro of its reserve currency allure.

"We will mop up this extra liquidity again. We've done this in the past," he said, spewing propaganda about sterilization. As part of its war on the bond vigilantes, the ECB is lending of unlimited amounts of Euros to the banking oligarchs at borrowing rates of 1%, encouraging them to buy Eurozone government bonds – i.e. this is backdoor quantitative easing.

However, central bankers holding roughly $2 trillion worth of Euros in their foreign currency reserves can see through the smoke and mirrors, and they're nervous. Already, a massive flight for safety from the Euro and into the king of currencies – Gold Bullion – is underway.

Gold has soared in parabolic fashion, up 20% from a month ago, zeroing in on the psychological €1,000 an ounce level. After parabolic rallies, gold becomes subject to minor bouts of profit-taking. However, it's increasingly obvious that all paper currencies are at risk of collapse compared with Gold Bullion, due to the extreme abuses of central bankers worldwide.

"What the ECB is doing is a 180-degree about-face," declared Eurosceptic economist Joachim Starbatty on May 12th, noting Greek bonds were already rated at junk level by ratings agency S&P. "If a central bank buys bonds that international ratings agencies have declared are junk, then it should not be surprised that the Euros it produces are quickly seen as junk as well," he said.

Starbatty said the ECB is "rewarding speculators who are betting on higher inflation..."

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Once More, With Ouzo

Gold traders have seen the Greek horror movie – and its ending – before...

With an EERIE SENSE of déjà vu, German finance minister Wolfgang Schauble pleaded with his country's citizens on April 20th, to back a joint EU-IMF bail out for Greece worth up to €45 billion, warning that failure to act would risk another global financial meltdown, writes Gary Dorsch of Global Money Trends.

"We cannot allow the bankruptcy of a Euro member state like Greece to turn into a second Lehman Brothers," he told Der Spiegel. "Greece's debts are all in Euros, and it isn't clear who holds how much of those debts. The consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank..."

The next phase of the global debt crisis could be on the horizon, however, if Eurozone politicians fail to take swift action, and prevent Athens from defaulting on its debts.

German banks have $330 billion of loan exposure to Greece, Portugal, and Spain, while French banks had $307 billion of claims, and British lenders have $156 billion. However, the European banking oligarchs, such as Credit Suisse, UBS, Société Générale, BNP Paribas, and Deutsche Bank have a stranglehold on the public purse, and Eurozone politicians readily submit to the economic interests of the powerful bankers.

Yet official German backing for a bailout of Athens failed to stop spreads on Greece's 10-year bonds from surging 300-basis points to 660-basis points over German Bunds, over the past two weeks, the widest yield spread since the launch of the Euro. Only two years ago, Greece's cost of borrowing for 10-years was only a half-percent above Germany's.

Until recently, Greece's membership to the Euro club had relieved investors' fears about currency devaluations and inflation. Trust in Greece's budgetary statistics was always shaky, but overlooked. The under-pricing of default risk gave Athens easy access to longer-term loans at low interest rates, - until now.

However, Greece needs to raise €50 billion ($68 billion) for each of the next five years, in order to roll over existing debt and pay interest. The rescue package that's on the table right now, crafted by the IMF and Euro-zone governments, would only buy a year's worth of time for Athens to get its financial house in order. But bond investors are looking longer-term, and questioning the resolve of wealthier Eurozone states to cover Greece's debts beyond April 2011.

Yields on Greece's 2-year note soared to as high as 17% week, from as low as 2% at the start of December, after Greece admitted that it auditors missed a few line items on the income statement, resulting in an even bigger budget deficit of 13.6% of GDP in 2009, up significantly from the previous estimate of 12.9%, and nearly double the 7.7% deficit recorded in 2008. That's far above the average Euro-zone government budget deficit-to-GDP ratio of 6.3% last year.

Germany's PM Angela Merkel wants Athens to agree to tough austerity measures for the next several years, before handing-out German taxpayer money. But Athens has already slashed public sector wages, and raised taxes – setting off violent protests and strikes across the country, where unions control half of the nation's workforce.

Greece's jobless rate rose to 11.3% in January, with 69,000 jobs lost in December. The bitter medicine of fiscal austerity is unpalatable for Athens, and with its membership in the Euro, it lacks the ability to monetize its debts away.

Will Greece become the Lehman Brothers of sovereign credit? Greece's outstanding debt is roughly equal in size to that of Lehman's when it collapsed in Sept 2008. If it's forced into debt rescheduling and restructuring, it could trigger a domino selling effect in other vulnerable European bond markets in Portugal and Ireland, both wrestling with exploding levels of sovereign debt, and lacking the ability to engage in "Quantitative Easing" – otherwise known as printing vast quantities of money.

Even if the Euro-zone politicians and the IMF can cobble together a bailout of Greece, they simply lack the financial resources to bailout the next wave of European sovereigns. With G-7 central bank interest rates pegged near-zero percent, global finance houses are able to borrow money at next to nothing and deal in of all types of speculation. Trade is soaring in one of the most speculative forms of derivatives - credit default swaps (CDS), which played a key role in driving Lehman Brothers, Bear Stearns, and American International Group (AIG) into bankruptcy.

The activities of CDS speculators are not restricted to Greece. In the past few weeks, they have increasingly turned their firepower on Portugal's bond market.The odds of default for Portuguese debt over the next two years, has shot-up 135-basis points in the month of April to 335-points today. At the same time, the yield on Portugal's 10-year note has risen 150-basis points from four-weeks ago to 5.75% today.

The bond markets of Greece and Portugal are tiny, with trading volume of less than €1 billion per day, making them easy and tempting targets for heavy hitters. Greece's outstanding debt equals €300 billion, and Portugal's debt is about €126 billion. Still, the nature of CDS trading, which is unregulated, gives speculators a big incentive to push companies or countries toward bankruptcy. There's an incentive to burn the house down, in order to hit pay-dirt.

Attracted to the highly indebted Greek bond market like vultures to a decaying corpse, CDS traders have moved in for the kill. By attacking Greek and Portuguese bonds, traders have injected greater volatility in the Euro currency, thereby leveraging little nations' problems into gigantic trading-floor profits.

The surge in Portugal's CDS and bond yields is very uncharacteristic for a country which enjoys a AA- rating from Fitch and Moody's, and A- rating from S&P. Could the rating agencies be lagging far behind the eight ball again, getting it right long after the fact?

The CDS market is a hotbed of speculation, where banks and hedge funds, can bet on contracts without holding the underlying bonds. The threat of sovereign default, most immediately by Greece, has provided an opportunity for speculators to drive up the price of insuring the countries' bonds, thereby further undermining confidence in the countries' debt, and increasing the prospects of contagions sales.

If other Club-Med countries would require a bail-out, the final price tag could be so large, that it could backfire, by forcing French and German bond yields higher, especially if accompanied by a plunging Euro. Despite the specter of a Greek moratorium on its debt payments – and a replay of the Sept 2008 meltdown of the global stock markets, triggered by the bankruptcy of Lehman Brothers – in a strange twist of logic, the German DAX-30 Index has been thriving on Greece's woes, benefitting from a weaker Euro and ultra-low German 10-year bund yields.

Even Spain's IBEX index was climbing higher in tandem with the German DAX, since early February, tracking the Dow Jones Industrials and Transports, figuring the Greek tragedy is strictly an isolated affair, with little risk of contagion fallout to the rest of Club-Med. In any event, traders have seen this horror movie before, and the ending is always the same – a massive government rescue with a bailout.

Still, there was a noticeable divergence last week, between the Spanish IBEX index, which tumbled 5%, and the German DAX, which continued to climb 2% higher to the 6,350-level, its highest in 19 months. Spain's IBEX was dented by a quarter-percent jump in its 10-year bond yield to 4.10%, while Germany's 10-year bund yield fell 15 basis points to 3%. Spain must service 560 billion Euros of outstanding debt, nearly double Greece's debt, but it's more manageable, since Spain's debt-to-GDP ratio is only 53% compared with Greece's 115%.

Finally, a bit of reality set in the delusional German DAX Index on April 27th, after S&P shocked the global markets, by cutting the credit rating of Greece three notches to BB+, or junk status, and lowering Portugal's credit rating two notches to A- from A+ earlier, while putting Ireland on negative watch. In regards to Greece, the outlook is negative, meaning S&P could downgrade the rating again.

"In our revised projections, we forecast Greece's net general government debt-to-GDP ratio reaching 124% of GDP in 2010, and 131% of GDP in 2011," S&P warned.

Within minutes after Greece's credit ratings were slashed into junk territory, the UK's FTSE-100, Germany's DAX, and France's CAC-40 lost a combined €80 billion in market capitalization.

Bullish speculators in the top-3 European bourses had figured that the Greek debt crisis would be fully contained, with the aid of the €45 billion bailout package, and would no longer be a nagging headache. As John Maynard Keynes famously observed, "The market can stay irrational longer than you can stay solvent." However, once Greek 2-year CDS rates jumped above the psychological 1,000-level, the German DAX bubble quickly popped, and plunged 200-points.

The sighting of an "inverted" yield curve is as rare as spotting a lunar eclipse today. So it's of great interest, to observe the deeply "inverted" yield curve in the Greek bond market, where the 2-year note is yielding 680-basis points more than 10-year notes. If the yield curve inversion persists for an extended period of time, the fate of the Greek economy would be perilous – perhaps, a 1930s style Great Depression. The "green shoots" rally on the Athens stock exchange has gone bust, with its economy suffocating under the chokehold of double-digit bond yields.

Traders betting on a strong global economic recovery were dumping Greek shares and shifting the proceeds into the German DAX, a safer haven. The Bundesbank said on April 18th, the German economy is on track for a solid rebound in the second quarter, with its manufacturing sector expanding at a record pace in April. German carmaker, Volkswagen said its first-quarter operating profit nearly tripled.

Athens aims to unwind the inverted yield curve as soon as possible. Greek Finance Minister George Papaconstantinou warned CDS speculators they will "lose their shirts," if they bet cash-strapped Greece will default. He said market rumors of Athens cutting or delaying payments to bond investors, is a "red herring, and restructuring is off the table. Greece will not leave the Euro," he added. The next day however, the bottom fell out of the Greek bond and stock markets.

Opting out of the Euro currency regime, and reinstituting a sovereign central bank to print Greek Drachmas and monetize debt, carries huge risks for Athens. Abandoning the Euro for the Drachma could spark hyper-inflation, and send 10-year bond yields soaring into the mid-20% range, which in turn, would send its economy spiraling into a Great Depression.

Still, the alternative – adopting draconian austerity measures, tied to IMF and German loans – is also a poison pill leading to severe recession. According to the latest opinion poll, 70% of Greek citizens are opposed to dealing with the IMF, or accepting loans from the European Union.

Last week, the ECB kept interest rates at a record low of 1% for the 11th month in a row, pointing to the debt problems facing the Club-Med governments. With German and French banks holding more than 650 billion Euros of Club-Med debt, many traders prefer the safety of gold, over German DAX shares, since the Greek tragedy could turn out far worse than anyone could imagine right now.

Gold is soaring to record heights against the Euro, as traders bet that at some point in time, the wealthier Eurozone governments would lose their resolve to finance Greece over the next five-years. The EU-IMF rescue package of €45 billion will only cover Greece's financing requirements for one year. Fears about a default, restructuring, or rescheduling of Greece's debt payments in the medium term would still persist. Either scenario could hurt European bank earnings.

In the event that Athens decides to opt out of the Euro, or calls for a moratorium on its debt payments, after the first tranche of EU-IMF bailout money is used-up, gold is a good hedge against a devaluation of the Euro.

However, gold is also following time honored fundamentals, such as acting as a hedge against commodity inflation. The CRB Commodity Index is surging +22% higher against the sinking Euro from a year ago, signaling an outburst of inflation in the months ahead, as factories pass along the cost of increasingly expensive raw materials, to end users.

Bundesbanker Juergen Stark, the ECB's token inflation hawk, said on April 15th that policymakers must consider the consequences of keeping ECB rates "too-low for too-long", creating stock market distortions and cause banks to become addicted to cheap money.

"Central banks ought to be aware of asset prices. There are times when it would be appropriate to raise interest rates to cool them if they appear to be overheating. Risks to the global inflation outlook are tilted to the upside. A multi-speed recovery of the world economy has the potential to exert upward pressure on prices...

"In the same vein, we also need to closely monitor the adverse impact from fiscal developments on the inflation outlook. High levels of government budget deficits and debt may push up inflation expectations, and place an additional burden on the monetary policy of central banks. Additionally it could push up the borrowing costs of troubled countries, constraining growth, and leave little capacity to support economies in future crises."

However, Stark's boss, ECB chief Jean "Tricky" Trichet, is strongly opposed to lifting interest rates anytime soon, arguing that inflation is dead.

"We have inflation under control and that's the reason why I have said on behalf of the governing council that interest rates are appropriate," Trichet said on April 26th.

Of course, "Tricky" Trichet is pointing to phony inflation statistics massaged by government bureaucrats, and not taking an honest look at commodity inflation that is galloping ahead.

For European banks, Greece is too-big to fail, but it remains to be seen whether the Greek populace would choose to live under the yoke of EU-IMF austerity for the next several years. In the event of the un-thinkable, a Greek exit from the Euro, or debt restructuring, a Lehman style shake-out would ensue, rocking global markets. The odds of that happening are higher than most believe, about a 50-50% chance.

The German economy is emerging from its deepest post-war recession, led by its booming export industry, with two-thirds of Germany's exports shipped to other Eurozone countries and 75% sold to Europe.

In February alone, Germany earned a trade surplus of €12.1 billion. Germany uses these surpluses for foreign direct investment and bank lending to its Eurozone partners, which in turn, buy German goods. However, along with the buying binge, huge increases in personal debt have sprung-up in countries such as Greece and Portugal.

Germany was the world's biggest exporter of goods for five-years thru 2008, before being overtaken by China. Die-hard bulls bidding-up the German DAX since it hit bottom in early February, are optimistic that German multinationals can deflect a downturn in the Club-Med economies, such as Spain, where the jobless rate is above 20%, by increasing sales to the booming Chinese economy, where GDP expanded at a sizzling +11.9% annualized rate in the first quarter.

However, what's been overlooked is the recent sharp slide in Shanghai red-chips, skidding 8% lower over the past 10-days, after Beijing ordered local governments to take strong steps to control speculative buying in real estate. Banks listed on the Shanghai and Shenzhen stock exchanges fell sharply on fears that a government clampdown would increase the number of bad loans, since Chinese banks have lent a large amount of money to property companies and speculators. Beijing says property values on average rose 12% from a year ago, but in some sectors of the country, property prices have skyrocketed by 45%.

On March 27th, former Fed chief "Easy" Al Greenspan was asked whether there is a real-estate bubble waiting to burst in China.

"I think so. To be sure, there are significant bubbles in Shanghai and along the coastal provinces. Some of that is going back into the hinterlands as well.  Remember, the bursting of a bubble by itself is not a big catastrophe. We had a dotcom bubble, it burst and the economy barely moved. It is hard to tell when that bubble bursts, what the consequences are, because we do not have enough data on China."

And who would know better than Greenspan, the world's top serial bubble blower...?

The specter of a bursting real-estate bubble in China could wreck havoc upon the global economy. Most impacted would be the satellite countries, which rely heavily on sales to China, such as Korea, Taiwan, Japan, and Australia. A shake-out in Asian stock markets would also ricochet to the European sphere, and eventually hit North and South American markets. The earliest signal of trouble ahead, would be a break-down in the Shanghai index below the key 2,900-level.

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Stocks, the Economy & Gold

Every $1 trillion of extra US debt has translated into $125/oz on the Gold Price...

WITH ONLY the slightest of hesitations, the Dow Jones Industrials penetrated the psychological 11000-level this week, writes Gary Dorsch at Global Money Trends.

Extending its historic gains to 70% above its March 2009 lows, the US stock-market has melted away deep-seeded skepticism over whether equities have gone "too-far, too-fast" in what is the least-loved bull market in history.

Bearish skeptics might want to judge the outlook for the US economy through the lens of the stock market, rather than vice versa. Just as the decimation of global stock markets in late 2008, erasing $30 trillion in market capitalization from the peak in October 2007, was an accurate predictor of just how severe the economic recession would be, conversely, the V-shaped recovery rally since March 2009, recouping more than $15 trillion of market value, is signaling a robust rebound in the global economy.

China is the locomotive that's pulling the global economy, leading the way at a blistering 12% annualized clip in the first 3 months of 2010.

While a tsunami of money injections by the G-20 central banks initially fueled the stock markets' historic advance, further gains must be earned the old-fashioned way – through a solid recovery in revenues and earnings. On Wall Street, S&P500 profits are expected to rebound 37% from a year ago, and so far, that's looking like a conservative estimate. There's been better-than-expected numbers by cyclical bellwethers such as CSX Railroad, Intel, UPS, and J.P.Morgan, and Fed chief Ben "Bubbles" Bernanke and his band of super-doves, say they'll keep interest rates locked at zero percent for an "extended period" of time.

The US Federal Reserve has its foot pressed firmly on the monetary accelerator, and driving recklessly over the speed limit, favoring faster growth over fighting inflation, in order to insure a sustainable recovery that can lead to a noticeable decline in the 9.7% jobless rate.

The Fed believes it can help the economy to create new jobs, by simply printing money and stoking euphoria and speculation in the stock market. So news that US employers added 162,000 jobs in March was one of the most encouraging signs that the Fed's radical "quantitative easing" (QE) scheme is bearing fruit.

With job creation strengthening, US businesses have restarted to rebuild inventories from record low levels, and according to the Purchasing Manager's Index, orders for US exports soared to its highest level in 21 years. Retailers reported growth in sales across a broad spectrum of categories.

Behind the scenes, the Fed has kept the stock market rally intact, by funneling $1.75 trillion into the coffers of the Wall Street oligarchs, and locking down short-term interest rates at zero-percent. Banks have funneled the Fed's high-powered money into high-grade corporate and junk bonds (see the LQD, JNK and HYG exchange-traded funds), making the stock market look more attractive.

In turn, ultra-low bond yields – forced by zero-Fed interest rates and quantitative easing of longer-term bond yields by the Fed's money creation scheme – have prevented any meaningful decline in the stock market, and fueled a parabolic V-shaped recovery in asset prices.

In the next phase of the rally, otherwise cautious investors typically capitulate, by returning to the equity markets, and buying stocks at marked-up prices. Will that happen now?

Alongside the booming stock markets, industrial commodities are also responding to stronger economic growth in China, India, Brazil, and other fast-emerging nations.

Speculators are re-engaging in the "Yen carry" trade too, funding their purchases of industrial commodities at ultra-low interest rates of 0.1% by borrowing from Japanese brokers.

Driving the hard-asset rally, China's voracious demand for crude oil, aluminum, iron-ore, copper, and rubber showed no let-up in March, with imports rising rapidly despite higher prices paid by factories after the Lunar New Year holidays.

Chinese crude oil imports jumped to 5 million barrels per day in March, their second-highest monthly level on record, and 29% higher than a year ago. Imports of copper surged to 456,000 tons, up 22% from a year ago. Traders estimate that the amount of copper in Shanghai warehouses is bulging at 200,000 tons, twice February's level. China even recorded a trade deficit of $7.2 billion in March, the first gap since April 2004, with imports surging 66% higher from a year ago.

Global crude steel production rose to 108 million tons in February, up 24% from a year earlier, with nearly half the world's steel output emanating from China. Capacity utilization for steelmakers worldwide rose to 79.8%, a 15-month high and 12% higher than a year ago. Iron-ore, used in making steel, skyrocketed on the Chinese spot market to $167 per ton last week, nearly tripling above last year's low. The price of DRAM computer chips in Taiwan have also tripled from a year ago.

The explosive rallies in key raw materials, utilized by factories, poses a major inflationary threat to big importers such as China and India, where food and energy account for more than half of the average household budget. So far, the central banks of China and India are still favoring faster growth, over combating inflationary pressures. India's wholesale price index is 10% higher than a year ago, and the Bank of India is expected to hike its cash rate a quarter-point to 6% next week.

Despite growing signs of a rebounding US economy, and healthy profit growth for S&P-500 companies, the propaganda artists hired by the Federal Reserve continue to paint a gloomy picture of the economy in the media.

Fed officials are aiming their gloomy rhetoric at the bond market however, as part of a brainwashing operation, working to keep bond yields locked at artificially low interest rates and thus funding Washington's record peace-time deficit at artificially low cost.

"There are a lot of people who are unemployed. There are a lot of factories that are not producing at full steam, so we have excess slack. There is little inflationary pressure in the economy that is operating well below its potential..."

So said Dallas Fed chief Richard Fisher on April 13th. "The pain is still with many of us to be sure, and we are a long way from a full recovery," added Richmond Federal Reserve Bank Jeffrey Lacker. But there is no pain on Wall Street.

In fact, the hallucinogenic side effects of QE have made any attempt at short-selling the stock market as futile as trying to submerge a helium filled balloon under water. In the United States, the Dow Jones Commodity Index is hovering 20% higher than a year ago, an early warning signal that inflation will accelerate in the months ahead, regardless of what government apparatchiks say. In theory, signs of a rebounding economy, accompanied by higher commodity prices, should lead to higher Treasury bond yields. But in reality, that hasn't been the case.

Instead, the Fed has demonstrated its mastery over the Treasury bond market, by locking longer-term bond yields within narrow trading ranges.

As the Dow Jones Industrials blasts thru the psychological 11,000 barrier, and the S&P500 index climbs through the 1,200 level, Fed officials are aware that the stock market rally could short-circuit – and fizzle out – if Treasury yields are allowed to climb above key resistance levels.

Another threat to the stock market is a possible "Oil Shock" as crude oil prices surge to $86 per barrel and above.

Last month, when the US Treasury's 10-year yield briefly climbed to 4.00%, a key resistance level, the Fed covertly intervened at the weekly T-note auction, disguised as an indirect bidder, to knock yields lower. Keeping a lid on the pressure cooker is essential, to keeping the euphoria on Wall Street intact. A record 4-to-1 cover at the 10-year auction convinced short sellers in Treasury notes to scramble for cover, however, driven out by fear of the magical powers of the "Plunge Protection Team" (PPT).

Former Fed chief "Easy" Al Greenspan pointed to the PPT's aims when he warned, on March 27th, that the 10-year Treasury note yield should be capped at 4.00% if the Fed and the Treasury want to avoid trouble in the stock market.

"If the 10-year yield begins to move aggressively above 4%, it's a signal that we are in difficulty. There is basically this huge overhang of federal debt, never seen before. It's going to have a marked impact eventually unless it is contained, on long-term rates. That will make a housing recovery very difficult to implement and dampen capital investment..."

Just hours before the latest 10-year and 30-year Treasury auctions last week, Fed chief Ben "Bubbles" Bernanke tried to reassure skeptical foreign central banks that the US budget deficit would not lead to higher inflation. "Inflation is not really the issue here, because the Federal Reserve is not going to monetize the government debt," Bernanke said.

No.1 Treasury holder China was a net seller of $61 billion of US debt over the past four months, but cash rich investors buying via the United Kingdom – most likely Arab petro funds – picked up the slack, purchasing nearly $125 billion during the same time period.

At the same time however, "Bubbles" Bernanke is playing a shell game, by jigging-up the stock market to sharply higher levels, with ultra-low interest rates. "The Fed has stated clearly that it anticipates that extremely low rates will be needed for an extended period," Bernanke told the Joint Economic Committee this week, touching-off a wild buying frenzy on Wall Street.

At the same time, primary bond dealers are loathe to lift the Treasury's 10-year yield above 4% without the Fed's permission, reckoning the central bank would intervene again, to put a lid on yields.

"If huge amounts of government borrowing push up bond yields would the Fed then step in and buy a bundle of Treasuries just to hold rates down? I think not," declared Dallas Fed chief Richard Fisher on March 27th.

"Monetizing the debt via Fed purchases of government bonds, inevitably leads to hyperinflation and economic destruction, and the central bank will not be complicit in that action, if it were pressured to do so.

"The markets, fearing the consequences of runaway deficit financing, have bid-up longer-term nominal rates, resulting in a yield curve that is now historically steep. Some of this might reflect an improvement in economic growth, but we cannot turn a blind eye to the effect that growing government indebtedness has on confidence and Treasury yields..."

Traders have bid-up the Gold Price in response, pushing it as high as $1170 per ounce this week, seeing through the haze of the Fed's smoke and mirrors.

The fact is, the Fed has already monetized trillions of Dollars of new supply through its QE scheme, and many investors have lost all faith in the anti-inflation resolve of the G-20 central banks – and ultimately, therefore, lost faith in the value of paper money.

In fact, the ballooning size of the US Treasury's debt, which hit a record $12.8 trillion last month, has been a steady linchpin supporting the historic rally in the gold market over the past decade.

As a general rule of thumb, every $1 trillion of fresh debt issued by the Treasury equates with a $125 per ounce increase in the Gold Price, regardless of how the Fed is manipulating the federal funds rate or bond yields. As long as the Fed and G-20 central banks continue to peg interest rates ultra low – and as long as G-20 governments continue to flood the debt markets with huge quantities of IOU's – it translates into monetization, and the trajectory for the gold market will stay bullish.

Situated in a sweet spot, alongside booming global stock markets and soaring prices for base metals, are the mining companies listed on the Australian Stock Exchange.

Carry traders are borrowing Japanese Yen, and gaining exposure to the higher yielding Australian Dollar, by speculating in Australian mining and natural resources shares. Also fueling the Aussie Dollar's gains from ¥77 in early February to ¥87 this week are high and rising Australian interest rates, and a surge in the spot price for iron ore, which hit $167 per ton, led by frantic Chinese steelmakers.

Vale, the Brazilian mining giant, recently said it negotiated a whopping 90% increase in the contract price for iron-ore with one of its key Asian customers, Sumitomo Metal, Japan's third-biggest steelmaker. Australian miners BHP Billiton and Rio Tinto quickly re-negotiated the terms of their iron ore sales, and moved future sales to quarterly contracts, adding to volatility on the spot market.

Global demand for iron-ore is expected to reach a record 1 billion tons this year, boosting Australia's terms of trade. Iron ore and coal account for nearly 40% of Australia's exports by value, and price increases for these two commodity exports alone could add $21 billion to the local economy.

If Beijing allows the Yuan to appreciate against the US Dollar, as expected, it would cut the cost of China's imports of commodities, which totaled $244 billion in 2009. Last year, China spent CNY 607bn ($89 billion) on importing crude oil, CNY 343bn ($50 billion) on iron ore, and CNY 206bn ($30.2 billion) on copper. However, the Chinese ruling elite are fearful that any revaluation would backfire, by touching off a global stampede of speculators into commodities.

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Asset Targeting Reaps the Whirlwind

The Fed's asset-targeting policy all adds-up to an outbreak of inflation ahead...

"I GUESS I SHOULD WARN YOU," Gary Dorsch, editor of Global Money Trends, quotes former Federal Reserve chairman Alan Greenspan.

"If I turn out to be particularly clear, you've probably mis-understood what I've said," Greenspan was fond of saying when he controlled the Fed's money spigots. So for many Fed watchers, it was a great relief when "Easy" Al finally retired from the Fed, since there is nothing more vexing than trying to interpret Green-speak.

"Everything depends upon proper listening. Of ten individuals who listen to the same speech or story, each person may well understand it differently – perhaps only one of them will understand it correctly," an eighteenth century theologian observed. So it was of great interest, while listening to a March 27th interview on Bloomberg TV, with the maestro, Mr.Greenspan, who is settling into his twilight years. This time, Greenspan spoke more clearly about such arcane subjects such as "Asset Targeting" and manipulation of markets.

Asked about his outlook for the US economy, Greenspan answered by saying everything depends upon the ability of the monetary authorities to influence the direction of the stock market...

"Ordinarily, we think of the economy affecting stock prices. I think we miss a very crucial connection here in that this whole economic recovery, as best as I can judge, is to a very large extent, the consequence of the market's bottoming last March, and coming all the way back-up. It is affecting the whole structure of the economy, as well as creating the usual wealth effect impact."

Thus, what Mr Greenspan is describing are the contours of the monetary policy that he pursued as Fed chief – "Asset Targeting", or the utilization of the Dow Jones Industrials index as a key instrument of national economic policy.

By "actively managing" the direction of stock index futures contracts, the Fed could impact the wealth of tens of millions of US households, and by extension, influence consumer confidence and spending. Greenspan generally pursued an "asymmetric" monetary policy – in other words, always quick to slash interest rates and flood the markets with liquidity whenever the stock market was tumbling, but was very slow in draining liquidity or raising interest rates, when stock markets were booming. There was always an inherent bias towards asset bubble inflation, under the Greenspan Fed's policies.

For big-time risk takers in the US stock markets, speculators could usually rely on the safety net of the "Greenspan put" – or a quick easing of monetary policy – to cushion the market from steep losses when risky bets turned sour.

Under the tenure of the Fed's next chief, Ben "Bubbles" Bernanke, speculators have enjoyed the easiest monetary policy in history, which also earned Mr.Bernanke the designation of Time magazine's "Man of the Year" for running the printing press at lightning speeds.

According to Greenspan, the aggregate value of stock markets worldwide has rebounded by $15 trillion from their lowest point a year ago, with the US stock markets recouping $5.4 trillion of lost wealth.

"We're going to get a significant rise in employment," he predicted. But as the long-term unemployed re-enter the job market seeking work, the 9.7% jobless rate would stay little changed, he said.

In the United States, the Fed's central mechanism for inflating the stock market and fueling a powerful stock market rally, has been the radical shift towards "quantitative easing" (QE), in which the Fed printed $1.75 trillion of high powered money – and channeled the cash into the coffers of the Oligarchic banks on Wall Street, which in turn, bid-up the prices of high-grade corporate and junk bonds, thus narrowing their yield spreads with US-Treasuries.

"Remember, it is the market value of equity in a financial institution that determines the ratings of its debt. It's not the book value. As the stock prices have gone up, debt became far more valuable and you can see this blossoming of finance – the huge issuance especially of junk bonds," Greenspan added.

Thanks to the booming stock market, there were $311 billion of new stock offerings on Wall Street, including IPO's, and secondary offerings, in the second half of 2009. Junk bond sales worldwide reached a record $38.3 billion in March 2010, as rising profits and ultra-low interest rates, attracted swarms of yield hungry buyers, who are fed-up with zero rates of return on CD's and money market funds.

There is great optimism on Wall Street that a virtuous cycle is now beginning, in which S&P 500 companies would start to re-hire workers again.

US companies have slashed 8.2 million jobs over the past 27 months, while utilizing the vast oversupply of unemployed workers, to slash wages and medical benefits. Thus, corporate profits jumped $109 billion in the fourth quarter to $1.47 trillion, up 31% from a year ago, as companies benefitted from reduced labor expense. S&P-500 companies bolstered their cash balances to $1.2 trillion, to weather any downturn in the economy.

However, much of the new hiring over the next several months would be for temporary workers by the US Census Bureau, which hired 181,000 workers in the Jan-to-March period. According to some estimates, about 150,000 jobs have to be created every month, in order to keep up with population growth. So although the US economy gained 162,000 jobs in March, the most in three years, a vast portion of American society is either unemployed or underemployed.

About 15 million people are without jobs and another 9.1 million are working part-time, because full-time work is not available. Thus, the main engine of growth for American company growth profits derives from the "exploitation of labor". with US workers, on average, producing 7% more than a year ago, for 6% less wages.

At this critical juncture, with the Dow Jones Industrials index bumping against the psychological 11,000-level, Greenspan was asked about his views for the longevity of the stock market's rally. Greenspan sees the market flattening out in the months ahead, but what spooks him, is the slumping Treasury bond market, which has been trending lower for the past 15-months. Yields on the benchmark 10-year note, are climbing dangerously higher, towards the key resistance level of 4-percent.

"It is a canary in the mine at this stage," Greenspan warned...

"The way I look at it, if the markets are working well, the short term outlook is one of increasing momentum. You can see it developing. But if the 10-year note and the 30-year bond yields begin to move-up, in other words, if the ten-year note begins to move aggressively above 4-percent that is a signal that we are in some difficulty.

"There is basically this huge overhang of federal debt which we have never seen before. It is going to have a marked impact eventually unless it is contained, on long-term rates. That will make a housing recovery very difficult to implement and put a dampening on capital investment as well..."

Greenspan is spooked by the "dangerous divergence" that is developing between a high and rising S&P 500 stock index and the simultaneous slide in the Treasury bond market. They are moving dangerously in opposite directions. And at some point in the future, if the Treasury bond market continues to tumble sharply lower – lifting yields sharply higher, either under the weight of massive new supplies, or Chinese dumping of T-bonds, ahead of a probable revaluation of the Yuan against the US Dollar – then the divergence between the asset classes would grow even wider, to the breaking point that triggers a stock market crash of unknown magnitude.

Amongst the delirious stock market bulls, there's an unshakeable faith in the magical powers of the "Plunge Protection Team" (PPT). These bulls are convinced that the Fed and Treasury can deftly prevent the yield on the key benchmark 10-year Treasury note from spiraling above 4%, no matter how much supply hits the debt market. For now, the Fed is trying to put a safety-net under the T-bond market, by promising to keep the fed funds rate pegged near zero-percent for an"extended period of time," hoping to attract yield starved investors to the long-end of the curve.

"The economy continues to require the support of accommodative monetary policies," Bernanke told lawmakers on March 25th. "If it were positive to take interest rates into negative territory I would be voting for that," said the radical inflationist, San Francisco Fed chief Janet Yellen on Feb 22nd. Yet the Fed is winding down its year-long $1.75 trillion monetization scheme this week, which could make it difficult for Washington to finance its massive budget deficit in the months ahead.

Instead, there could be a torrent of T-bond sales by Beijing if the US Congress can marshal a veto-proof majority for a fast track bill in May to slap tariffs on Chinese imports.

"My belief is that China will not do anything unless they're required to, and every day we wait is a day we lose wealth, we lose economic advantage, we lose jobs," said New York Senator Charles Schumer on March 23rd, claiming that Beijing continues to keep the Yuan "misaligned" with the US Dollar.

Senator Lindsey Graham, a South Carolina Republican, said he agreed quick congressional action was needed because China's currency reforms are frozen in suspended animation. "At the end of the day, China is too big to be allowed to have this under-valued currency advantage. The only thing they seem to respond to is pressure," Graham said.

In response, "The US internal and external deficits remain large, and its unemployment rate is extremely high. Since US politicians don't want to blame themselves, the best available scapegoat is China and its exchange rate," said Fan Gang, of the People's Bank of China on March 26th.

Yet Fan concedes that Beijing may resume a managed float of the Yuan, once the uncertainty of the post-crisis situation diminishes...

The US Congress should be careful about what it wishes for. A significantly stronger Chinese Yuan would greatly boost China's purchasing power for raw materials and agricultural imports, which in turn, could fuel a generalized rally in the commodity markets, and ignite a whole new round of inflation worldwide.

Although a vast supply of jobless workers would help to weaken US wages further, an outbreak of inflation in the US economy could still become unleashed, linked to soaring global commodity markets, which are stoked by booming Asian economies.

Although official government statistics on inflation are often skewed by apparatchiks, feeding the propaganda of the ruling political party, bond traders are looking beneath the surface, taking their cue on real-time inflation trends, from the direction of the commodities markets. With the Dow Jones Commodity Index hovering 23% higher from a year ago, and Chinese and Indian economies expanding at around 9%, combined with trillions of excess paper currencies floating around in the world's money markets, it all adds-up to an outbreak of inflation in the year ahead.

While Greenspan said he sees little threat of inflation now, in the long-run inflation will pick up unless the Fed withdraws the massive stimulus it has pumped into the economy.

"We are still by any measure in a disinflationary environment," he claimed to Bloomberg. However, "unless we sterilize or unwind the big monetary base we've built-up, inflation will begin to take hold." The size of the Fed's balance is "not sustainable" and will eventually have to be reduced to "something just north of $1 trillion," Greenspan said.

"My concern is that legislation or other actions on the part of Congress may prevent the Fed from withdrawing the stimulus," Greenspan added. Such actions have already taken place in Seoul, where the government has completely hijacked the monetary policy of the Bank of Korea. Texas Representative Ron Paul, a Republican, is leading an effort in Congress to repeal the Fed's immunity to audits of monetary policy, which could expose any clandestine intervention in the stock index futures market by the Fed and its agents on Wall Street.

Still, there's a deep-seeded suspicion in the gold market, that at some point, the Fed will resume its massive money printing operations, in order to prevent a surge in Treasury bond yields, sparking the next big round of inflation. Greenspan mostly lingered far behind the inflation curve when he was Fed chief, and never saw a bubble he didn't like. According to the commodities markets, the break-out of inflation has already begun and is buoying gold above $1100 an ounce.

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Gold & the Dow’s “Optical Illusion”

Measured against the Gold Price, the US stock-market's huge 62% rally is less than stellar...

MARCH 9th 2010 marked the one-year anniversary of the elusive bottom of the most brutal bear market in global stock markets since the 1930s, notes Gary Dorsch at Global Money Trends.

At the time, US job losses were running in excess of 700,000 per month, and fear was rife that the US banking system was on the verge of being nationalized. American factories and miners were using 68% of industrial capacity, the lowest level since records began in 1948. Corporate profits fell sharply for the seventh consecutive quarter, the longest losing streak since the 1930s. The second coming of the "Great Depression" looked imminent.

In a final act of desperation to stop the carnage, the infamous "Plunge Protection Team" – the nickname given in the 1980s to the President's Working Group on financial markets – unleashed the most powerful weapons in its arsenal, resorting to accounting gimmickry and nuclear Quantitative Easing.

Injecting $1.75 trillion into the coffers of the Wall Street oligarchs, the PPT sought to turn the bearish tide. Bankers were set free of mark-to-market accounting, and instead, were allowed to value their toxic assets at "mark-to-make-believe" prices, leading to a strong recovery in the financial sector.

Over the course of the next four-weeks, the Dow Jones Industrials climbed 1,500 points to close at 8,083 on April 9th, 2009. Still, there was great skepticism about the sustainability of the so-called "green-shoots" rally, the third such rally since the horrific crash of Sept-October 2008 that followed the default of Lehman Brothers and the bailout of American International Group (AIG).

Before hitting the ultimate bottom at 6,500, previous Dow rallies ended as "bear traps" that fizzled out before the market turned sharply lower again. There was a 1,500-point run-up during the week that culminated in the election of Barack Obama as US president, after which the Dow lost 2,000 points over the next three weeks.

The Dow Industrials staged another 1,500-point gain in December, triggered by Obama's selection of Wall Street favorite Timothy Geithner as Treasury chief, before plunging 2,500 points during the first two months of 2009.

Since the Dow Industrials hit rock-bottom on 9 March 2009, US stocks have staged a $5.3 trillion recovery, one of the very biggest percentage gains since the Great Depression.

When viewed through the prism of Gold Bullion, however – and thus measured in "hard money" terms – one can see that the performance of the Dow Jones Industrials was less than stellar. The blue-chip indicator has been locked within a narrow trading band for the past 11 months, fluctuating on both sides of 9.5 ounces of gold since April 2009. (Learn more about the Dow/Gold Ratio here...)

The "green shoots" rally is, therefore, an optical illusion, simply reflecting the side-effects of the Fed's hallucinogenic "quantitative easing" drug. Utilizing the chart above, one could argue that the value of the Dow Industrials is artificially inflated by about 2,500 points, engineered by the Fed's monetization scheme and ultra-low interest rates. An ocean of liquidity is buoying the Dow Industrials above the 10,000-level, designed by the PPT to bolster household confidence, since the valuations of 401k retirement funds and investor portfolios can influence the propensity to spend.

Still, there are huge worries about unrelenting job losses, multi-trillion Dollar budget deficits for years to come, and the "Volcker rule", which could put the shackles on the Wall Street oligarchs, and force the liquidation of widely held stocks and commodities. But for now, the market's climb above the 10,000-level means the possibility of a "double-dip" recession is more remote, and instead, trying to short-sell stock indexes, is like trying to push a helium balloon under water.

The broader-based S&P 500 Index of US stocks has rocketed 62% higher over the past year, a gain that would normally take five years to realize on modern trends.

The speed and strength of the stock market's recovery caught many bond traders off-guard, and knocked US Treasuries for their worst annual losses since 1978. Most notably, the yield curve – the gap between short-term interest rates and longer-term government bond yields – rose to its widest level ever. The spread between yields on the Treasury's 30-year bond compared to the one-year T-bill rate hit 440-basis points in December, the widest in history.

Traders reckon that the size of the US national debt – now exceeding $12.3 trillion – is weighing on bond prices, and a huge avalanche of debt still lies ahead. The Treasury is expected to issue $1.6 trillion in new debt in 2010, and $1.3 trillion the following year. Chinese central banker Zhu Min has warned it would become more difficult for foreigners to buy Treasuries when the US government has to fund its deficit by printing more Dollars. China slashed its holdings of Treasury securities by $34.2 billion in December, after months of complaining about the Fed's Quantitative Easing scheme.

The extreme widening of the yield curve also reflects expectations that in the next phase of the Fed's interest rate cycle, the central bank would be lifting short-term interest rates to contain an outbreak of inflation.

"When you have zero rates that go on indefinitely, you are inviting future problems," warned Kansas City Fed chief Hoenig on March 2nd. "Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation," Honeig said on Jan 7th.

However, the Fed is sending multiple messages to the media, that it's determined to hold the fed funds rate steady at 0.25% through the remainder of this year. "Even though the recession appears to be over, it does not mean that we are where we want to be. Even with my moderate growth forecast, the economy will be operating well below its potential for several years," said San Francisco Fed chief Janet Yellen on Feb 22nd.

"If it were positive to take interest rates into negative territory I would be voting for that," she told reporters.

The Obama administration hailed the latest employment report, which showed a smaller-than expected loss of 36,000 jobs – and the 25th monthly decline in net jobs in the last 26 months – as a vindication of its economic policies.

For its part, the Dow Jones Industrials roared above the 10,500 level, buoyed by the "exploitation of labor" that is still widening company profits. So far then, the recovery in the economy has been limited to Wall Street's oligarchs and S&P multi-nationals, which are profiting from trillions in taxpayer bailouts, virtually unlimited and cheap credit, exports to growing emerging markets, and the use of mass unemployment to slash the wages of Americans working in the service sector, which accounts for 85% of the US economy.

Meanwhile, top Wall Street firms paid their employees a record $145 billion in compensation last year, while social programs for the elderly, such as Medicaid and Medicare are being slashed, and millions of other jobs wiped out. The banking oligarchs, whose greed and speculation caused the crisis, refuse to expand lending to the private sector, but instead utilize zero-percent funds at their disposal to gamble in the markets, and all with the backing of government-financed guarantees.

Stock market rallies often climb along a "wall of worry". Yet despite persistent fears of a relapse into a "double-dip" recession, the most amazing aspect of the "Green Shoots" rally is the upward parabolic trajectory, was punctuated by only two brief corrections that barely caused a dent in the year-long bull market. The first correction in June 2009 was triggered by a sharp rise in 10-year Treasury yields to as high as the psychological 4-percent level. Yields have subsequently tumbled to 3.70%, far out of danger's way, as far as market bulls are concerned.

The second correction, in January 2010, was triggered by China's surprising hike in bank reserve ratios, plus Obama's backing for the "Volcker rule" – banning risky trading by Wall Street Oligarchs – and a surge in crude oil prices above $80 per barrel.

However, Plunge Protection officials quickly put a safety net under the stock market, by promising to leave the Fed's $2.2 trillion balance sheet untouched, and to maintain zero-percent borrowing costs for the biggest banks, for the rest of the year.

Thus, the Wall Street Oligarchs were able to return to the gambling table and re-engage in the most hazardous and riskiest forms of speculation. However, one of the consequences of the Fed's ultra-easy money policies is a surge in crude oil prices above $80 per barrel, further reducing the purchasing power of Americans' shrinking wages. And now that oil prices have latched onto the stock market's joy ride, any attempt by the PPT to catapult the S&P Index rally above the January highs runs the risk of jettisoning crude oil into the $85-to-$90 region.

On March 10th, Saudi Arabia's deputy oil minister, Prince Abdulaziz bin Salman, told reporters that a oil price of around $70-to-$80 per barrel was a satisfactory price for energy companies to invest in oil production capacity, and low enough for consumers that burn the fuel. Saudi Arabia, the Opec oil cartel's largest producer, has shouldered most of the 4.2 million barrels-per-day of supply cuts adopted in late-2008. However, compliance to Opec's output quotas, outside of the Saudis, Kuwait and the UAE, has fallen to 53%, which means the cartel is cheating by 2 million bpd.

"Energy demand is likely to continue to grow, led by rising consumption in Asia and the Middle East," bin Salman said, and the US Energy Information Agency predicts it could grow by 1.5 million bpd this year.

China, the world's second largest oil guzzler, meantime imported 4.8 million bpd in February, the second highest tally on record. If oil prices surge to $90 per barrel – with "carry trade" speculators bidding-up prices using zero-per-cent loans from the US central bank – Riyadh could quietly increase its oil output without much fanfare to cool the market, or China's central bank might be forced into tightening its monetary policy again.

Surging oil prices could thus ignite an "Oil Shock" for the global economy, and the Plunge Protection Team would be forced into action again, intervening in the stock index futures markets in order to limit the fallout. The PPT could also instruct the Fed to buy more T-bonds, so as to prevent yields from rising higher due to inflationary pressures emerging in the commodities markets.

And at that point, "hot-money" flows could once again pour into the precious metals markets, sending Gold Prices to record heights.

China's manufacturing exports are growing again, up 45% from a year ago, and "hot-money" inflows are rising, adding to the pool of cash sloshing about the Chinese economy.

China's stash of foreign exchange reserves has mushroomed to $2.4 trillion. And at the same time, in order to keep the Yuan tightly pegged to the US Dollar, the People's Bank is buying vast quantities of US Dollars, Euros and Yen for its FX reserves, simultaneously printing equal amounts of Chinese Yuan to buy those currencies off local export companies, thus blowing bubbles in the Shanghai commodities pits and buoying the gold market.

Beijing is nurturing fertile ground for the Shanghai gold market, which has already risen 54% against the Yuan since the central bank opened the money spigots in November 2008. Gold demand in China grew by 14% to around 450 tonnes in 2009, outstripping 315 tonnes of supply. Speculation is rife that Beijing is Buying Gold from state-owned miners to avoid sending the international open-market price sharply higher.

Beijing has several "ideas and tool kits to manage inflationary expectations," warned Liu Mingkang, chief of the China Banking Regulatory Commission, on March 9th.

"Don't get into too much of a panic or be afraid about inflation. China's consumer and producer price index may rise slightly, but there's only a small chance that inflation will be more than moderate," he said.

China's consumer inflation rate surged to 2.7% in February, and factory-gate inflation surged to 5.4% last month. Thus, China's inflation rate now exceeds the 2.25% interest rate on 12-month certificates of deposit, encouraging savers to withdraw their cash from banks and Buy Gold bars.

With food and energy accounting for half of China's consumer price basket, soaring commodity prices are a ticking time bomb for social unrest. Yet Beijing is loath to further tighten its monetary policy, for fear of undermining the Shanghai stock market...

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Gold vs. Gilts

UK government gilts have been reduced to rubble in terms of Gold...

STRATEGISTS at Deutsche Bank are stirring up the animal spirits by warning that the escalating cost of insuring against debt defaults by Greece might be a "dress rehearsal" for a similar attack on the British gilt market, writes Gary Dorsch, editor of Global Money Trends.

The UK is running a budget deficit worth 13% of GDP this year, exceeding that of Greece. Proportionately, the UK's budget deficit is the largest ever outside wartime. Britain sold a record £225 billion worth of gilts last year, but that was almost entirely monetized by the Bank of England via its asset purchase scheme to pump money into the economy.

With the Bank of England's "Quantitative Easing" now on hold and more than £200 billion worth of gilts to be auctioned this year, the British government bond market could be a ticking time bomb, ready to explode at the slightest hint of a serious outbreak of inflation.

Nerves were briefly rattled when official data reported on Feb 16th showed consumer price inflation rose to 3.5% in January from December's 2.9%, forcing Bank of England chief Mervyn King to write a public letter of apology for the insidious side-effects of overdosing on the hallucinogenic, queasing drug.

Another sign of underlying weakness in the British gilt market is the widening yield spread between British 10-year gilts and the equivalent German Bunds, climbing as high as 100-basis points, the highest in four years, after the Bank of England signaled a pause in its gilt-buying spree.

Whereas the Bank of England has openly monetized 90% of the gilts sold last year, the European Central Bank (ECB) has been monetizing debt clandestinely, through a strategy of lending vast quantities of Euros at 1% to European banks, who in turn then buy up the sovereign debt of Eurozone nations.

It is estimated that European governments will need to borrow €2.2 trillion (19% of GDP) from the capital market in 2010 in order to finance large deficits and roll-over existing debt, the largest borrowing binge in decades. Gross borrowing (including maturing and new debt) is projected to be largest in France (€454bn), Italy (€393bn) and Germany (€386bn).

One key question is whether the ECB should decide to scale down its lending facilities to Eurozone banks, which would greatly impact the "liquidity premium" enjoyed by German Bunds. There could be a severe credit crunch before July 1st, when banks are required repay €442 billion in 12-month funds to the ECB – more than half the liquidity outstanding.

That could force the sale of Eurozone bonds and stocks if no rollover option becomes available. Shortening the terms of future loans could also trigger sales of longer-term bonds, only worsening the situation for Greece.

Back in London on Feb 24th, alarm bells began to ring after British gilt yields reached 4.25%, putting the UK's fledgling recovery at risk. The Bank of England's Adam Posen quickly rode to the rescue, warning that the central bank would rev-up the printing presses and expand its Quantitative Easing operations if necessary, in order to prevent gilt yields from rising further.

"If we have to, we will. Any of you betting on high inflation in major economies, including the UK, will lose money," Posen warned.

In a knee-jerk reaction, speculators rushed to cover short positions in the gilt market, knocking 10-year yields to as low as 4.07%.

However, looking beyond Posen's propaganda, traders betting on the demise of the British gilts market have profited handsomely, especially by utilizing gold as a hedge against the Bank of England's money printing operations.

Over the past 6 years, British gilts have lost more than two-thirds of their purchasing power when stacked up against the yellow metal. Until the Bank of England begins to drain the liquidity swamp in London, gilts are in danger of sinking further when measured in gold.

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