ECB's Praet Says Stimulus Losing Effectiveness

It has never been a question of whether or not the stimulus from the ECB has ever been effective, because it hasn't been.

ECB Executive Board member Peter Praet confirms this over the long term, as he said the longer the European Central Bank attempts to stimulate by throwing money at banks, and keeps interest rates at below-market levels, the less effective the measures become.

The longer we carry on with a highly accommodative monetary policy, characterized by extremely low interest rates and excess liquidity in the banking system, the more we will see a phenomenon manifesting itself with greater and greater evidence.

I am referring to what used to be known as 'instrument instability' in policymaking: the need to apply larger and larger doses of the same policy interventions only to see their macroeconomic influence becoming more and more tenuous.

Praet added the low interest rates also removes the incentive of governments to lower their deficits.

It's interesting to see Praet take on the role of the minutes read from the latest Federal Reserve meeting, where the markets were rocked after it was revealed that some of those in attendance questioned the stimulus policy of the Federal Reserve, just as Praet appears to be in Europe.

That was undoubtedly orchestrated, as are these statements by Praet. What appears to be happening is the central banks of the U.S. and Europe are using the media to manage the movement of various markets in response to the unrestricted quantitative easing.

More than likely it's an attempt to keep commodity prices in line, and inflation down. This is why the illusion of economic recovery and reporting continues to be asserted, even though there is almost nothing to reinforce the wishful thinking of those trying to blur the terrible global economy we still face.

Marc Faber: Invest Where Fed Has Least Impact

Now that the Federal Reserve has painted itself into a counter it will have difficulty getting out of, it's uncertain how long it will continue to stimulate and keep interest rates at artificial lows.

Also part of the larger problem is the decision for other major economies to print money as well, with ECB, Bank of Japan and China all using their central banks as an attempted means to boost their economies. None of it is working, and so the question now is where should investors place their money in a world of economic stimulus.

Marc Faber believes he has the answer, as he says the stimulus party is now over because asset prices will drop if stimulus efforts are stopped, and if the central banks continue stimulating, which they will for some time, the economies of the countries or regions will remain weak.

The problem is these countries refuse to allow the economy to heal itself; attempting to prop them up wit funny money while their respective currencies continue to plunge in value because of the resultant debasement. It's no different than the giant banks being allowed to fail when the opportunity arose for them to do so.

Faber recommends investors to look for areas where the Federal Reserve especially has minimum effect. Interestingly, one suggestion is telecom companies in Europe, and companies residing in places like Vietnam.

One the fallout comes from the stimulus measures, Faber sees nowhere to go for profits except places where there is lower impact from the actions of the central banks.

U.S. Started Currency War, Will it Continue it?

Everyone is pointing to Japan as the culprit in the currency wars, but the truth is the U.S. has escalated the war by refusing to rein in spending and continuing to print money at a rate that continues to push the value of the U.S. dollar down, which pressures exports in other countries.

Consequently, other nations, if they don't want their exports and own economies crushed, must respond with their own money-printing scheme in order to keep their currencies from rising too high against the U.S. dollar.

The silly and nonsensical statement coming out of the G7 nations caused even more problems, as it said the monetary policies promoted wouldn't be focused on the debasing of currencies. That's an outright lie, as printing money by definition is the debasing of currencies. Period.

Unless the nations agree to stop printing money and start to really cut back on government spending, the currency wars will continue on, and currencies will continue to fall in value, as the U.S. dollar has to the tune of over 95 percent since the inception of the Federal Reserve 100 years ago.

Counting on most people - including financial and economic writers - to not understand currencies, the G7 made the laughable assertion it was committed to exchange rates driven by market forces. Again, if that was the case, they would stop printing money and shrink the size of government.

Anyone who thinks this is being done allows themselves to be lied to because exchange rates have been manipulated by central banking policies for decades. It's the ramping up of printing to gigantic levels that has forced the issue out into the open; not the decision by Japan to print more yen.

The ECB has been attempting to shrink its balance sheet, with banks paying back cheap money printed by the central bank in 2012. If the U.S. and Japan continue to expand their money supply, the euro will undoubtedly rise against the two currencies, which will result in the region having to respond with an effort to weaken the euro.

It's improbable Japan will stop its strategy (although it may publicly assert it does), so a full-blown currency war involving numerous nations could expand. The question is when will the U.S. stop its part in the wars and cut back on its outrageous printing of money. Until that happens, we'll see this continue to be an issue; one that will worsen before it gets better.

Currency Wars Heating Up

With domestic economic health at stake of a number of countries at stake because of the Federal Reserve's continual debasing of the U.S. dollar by printing an almost endless stream of money, a currency war has quietly broken out as nations attempt to devalue their own currencies in order to keep exports competitive on the world market.

Of course the currency war has been going on since the Federal Reserve implemented QE2 in August 2010, but it's ramping up because of the continual plunge in value of the U.S. dollar against a number of currencies, which in turn makes exports from other countries more expensive.

Japan is the latest player in the stimulus fiasco to boost their part in the money wars, with new Prime Minister Shinzo Abe committing to printing billions in yen to lower the value of the currency.

This will put pressure on other Asian players, who will be sure to respond in kind.

Other central banks printing money recently, along with the Federal Reserve and the Bank of Japan, have been the Swiss National Bank, the Bank of England, and the ECB.

To give an idea of how the Federal Reserve has attacked the U.S. dollar, it has plummeted by approximately 11 percent in value since the first round of quantitative easing in 2009.

Expectations are many other countries will debase their currencies through central bank stimulus in order to protect their exports.

This should be very positive for commodities, and investors need to take a close look at this, especially in regard to how Asian nations outside of Japan respond to the unfolding circumstances.

Over the long term this will be a disaster as the central banks attempt to unwind their positions.

Unemployment in Spain Surpasses 25 Percent - ECB Awaits

The economic news for Spain continues to worsen, as the National Statistics Institute said in Madrid that the unemployment rates has soared past 25 percent, to stand at 25.02 percent. That's up from 24.6 percent in the last quarter.

Projections are the economy of Spain will continue to sputter, with unemployment probably reaching 27 percent in 2014.

Painting a much rosier picture is the Prime Minister Mariano Rajoy, who sees the employment picture improving in 2013, and the Spanish government saying the economy will drop by only 0.5 percent. Economists watching the situation see it contracting by almost 1.5 percent.

This puts even more pressure on Rajoy to apply for the loan aid offered by the ECB, although he asserts he feels no pressure to do so at this time.

According to an analyst with Madrid-based consultant firm Analistas Financieros Internacionales, Sara Balina, she told Bloomberg that the third-quarter wasn't nearly as good as the data suggest, as "they were distorted by a temporary increase in demand before a value- added tax increase and by exports that may suffer from weakening growth in the euro zone.”

Although positioning for time, it's clearly approaching when Spain will have to apply for financial aid, which it is delaying in having to do because of the austerity measures included in the package.

The only question is how far and how long will the politicians in Spain go and wait until they finally do what everyone knows they'll have to do: apply for the aid.

This will result in the price of commodities, especially gold and silver, rising significantly, which along with QE3 from the Federal Reserve in America, will push the price of the precious metals up.

Silver, Gold Await Printing Presses

While there is no doubt the Federal Reserve and other central banks around the world will continue to ramp up the money printing presses, we remain somewhat in a holding pattern, at least in the United States, after Ben Bernanke announced the Fed will buy $40 billion in mortgage-backed securities on a monthly basis indefinitely, with indefinitely measured by the health of the job market, with hints the Fed and Bernanke want to see it at about 5.5 percent.

Even though some business and economic writers and investors have attempted to paint gold and silver has having reached a plateau at this time, with the probability they will fall in price, there is not doubt nothing will stop central banks from feeding the out of control spending habits of governments around the world, and the price of gold and silver will continue to rise over the next 10 years, with gold and silver miners, which currently, for the most part, are enjoying low valuations, will bring investors solid returns, especially for silver investors, where the gold-silver ratio continues to be far higher than historical levels, standing far beyond the usual 16 times ounces of silver it takes to buy an ounce of gold, to weigh in at a hefty 54 times the usual amount it takes to buy an ounce of gold with silver.

That alone will dramatically push up the price of silver, as its historical ratio to gold should have it stand at over $100 an ounce as of this writing.

So in the short term, in spite of the announcements by the Federal Reserve and the ECB to stimulate the respective economies of the United States and the euro zone, they still haven't launched their buying programs, which has temporarily kept the price of silver and gold in holding patterns.

It's apparent in the case of Bernanke that he's waiting to implement QE3 when it is seen as not an attempt to influence the upcoming presidential election. With that soon to end, it won't be much long afterwards when it'll begin, and then silver and gold will jump, and it could even before that as investors begin to price in the effect of the stimulus on precious metals, and the resultant fall in value of the U.S. dollar.

For the European Union, what is causing the holdup there is the temporary decision by Spain to attempt to make it appear they have a chance of not needing the money to bailout its economy. That's a fallacy, and largely based upon the need to make it look like they're fighting to keep their people from having to face forced austerity in order to secure the loans.

But like Germany, it will cave on the borrowing end, just like the German leaders do on the lending end. Spain will accept the loans, and when they do, that will also cause silver and gold to rise in price.

One uncertainty in regard to currencies is the major competitors are all debasing their currencies through stimulus programs of one type or another, so it's unclear whether there will be much in the way of the impact of the fall in the U.S. dollar on gold and silver. In that regard inflation and safety will be the impetus behind the rise in the two precious metals; much more so probably than the weakening of the U.S. dollar. Again, it depends on how the market reacts to and views the impact of QE3 in the U.S., and if it deems it as more dramatically weakening the U.S. dollar against major competing currencies, we could see it push up the price of silver and gold even quicker and further than most think.

Another short-term consideration is the selling off of assets by those making decisions based upon tax strategies. That could push down silver and gold some as investors sell off at foolishly low prices. But there is no doubt the duo will continue to rise, even in the short term, as you simply can't bet against the practices of the Federal Reserve and other central banks, which have placed a floor under the precious metals, and which will soar up from there for years to come.

It's a matter of how to invest in silver and gold, not whether you should.

Finally, it is believed that QE3 could even expand beyond the $40 billion spent monthly as Operation Twist comes to an end. The thought is Bernanke will probably start to buy treasuries again in an attempt to jump start the economy, even though that has repeatedly failed to achieve results.

Gold and silver miners, because of ridiculously low valuations will soar in price as an asset class, with some doing far better than others of course. But the rising price of silver and gold, and the relatively new focus on dividends will be a powerful attractant to investors, who will be able to cash in on both fronts if they invest in the right companies.

Another element to watch is mergers and acquisitions among miners, which will make a lot of money for those that can anticipate where those moves are likely to be.

Of course in the end, gold and silver are first a place of safety and hedge against inflation, so that is the number one priority for those putting money in the precious metals. But with little in the way of growth in equities, they will increasingly be looked at by general investors as places they can also make money over time. That will also push up the price of miners, which will benefit everyone holding positions in them.

The silly talk of a gold or silver bubble is off the table at this time, as the everyday investor has yet to really enter the market in a significant way, and until that happens en masse, there is little we need to be concerned about concerning a bubble.

We will need to watch it closely, but we have yet to see the outrageous bidding up of gold and silver prices, and even when that does happen, which shouldn't be for a while, it can sometimes take several years before the prices stop climbing.

For now, investors way for the printing presses to start up, and when they do, there is nothing in the way to keep the price of gold and silver from jumping in the short- and long-term.

Spain Will Tap Aid from ECB

The disingenuous and dishonest assertions by some in the Spanish government that they are thinking about not taking the bailout money from the ECB are ridiculous, as there is no doubt, regardless of the posturing of Spain, that they will keep on going as they are without aid, or take the route of getting a line of credit. Both ideas are ludicrous, and won't fly under the growing pressure from the eurozone for Spain to access the capital.

According to the Spanish government, the company is in the midst of contemplating on the economic direction it wants to go, but this is only for its population, which will resist the expected austerity measures that accompany access to ECB aid.

The idea that Spain will continue to borrow at the high rates it currently is in the bond markets doesn't pass the smell test, and the European Central Bank will surely be given permission to buy bonds in order to lower the borrowing rates of the country.

Those watching the situation don't believe Spain even has several weeks to wait, and its politicians are probably trying to wait until after the elections on this Sunday before caving and tapping into the aid.

Germany, as usual, has also attempted to position itself as against Spain being bailed out, asserting it has no need of one. Angela Merkel will attempt to make it look like she opposes it as well, but like in her past actions, will try to make it look like she valiantly fought against it, right up to the time she gives the go ahead for more bailouts to continue. Again, all of that is so the German people are made to believe she's battling on their behalf, while all the time already knowing and deciding that the bailout will happen for those countries in the eurozone that ask for it.

Investors and those affected by the decisions in the eurozone need to know that the game is completely rigged, and Draghi was telling the truth when he said he's committed to doing whatever it takes to save the euro and the eurozone. There is no question the majority of leaders in the EU agree with him, and support whatever it takes to get it done.

Standard & Poor's downgraded the credit rating of five major Spanish regions Wednesday, including Canary Islands, Andalucia, Aragon, Galicia and Madrid. That puts even more pressure on the country to take aid before investors start to sell of Spanish bonds.

Overall Spanish debt was recently lowered by Standard & Poor's to BBB-, only one step above investment grade ratings. Below that is junk status, which would make it much more expensive for the Spanish government to borrow capital. Bond investors, as mentioned, would flee from their bond holdings if that were to happen, which is a likely probability.

For now, Moody's (MCO) is also keeping its lowest rating on Spanish credit without cutting it down to junk status. It has a Baa3 rating on Spain.

Taking all that into consideration, there is no doubt Spain will get aid from the ECB. The market is simply waiting for that to happen, and when it does, gold and silver prices will get a nice bump.

Euro Climbs to Two-Week High Against Dollar

The euro soared to a two-week high against the U.S. dollar Thursday, as that and other factors accounted for a number of commodities also climbing.

Concerning the euro, European Central Bank President Mario Draghi reaffirmed his commitment to maintain and preserve the euro, as well as the monetary system of the area.
 
That announcement was what pushed the euro up against the dollar, which helped boost many other commodities as well.

Not only were commodities helped though, as the news from the ECB also helped Wall Street equities to soar as well.

Precious metals gold and silver were unsurprisingly higher, as was much of energy, although that was aided by Turkish strikes on Syria, which generated supply concerns, along with a fire at the largest refinery in the U.S, which is run by Exxon Mobil (XOM), along with another refinery fire in Russia.

In agriculture, corn, wheat and soybeans were all up on the day, after hitting a three-month low the day before. Sugar was also up.

Other metals rising included platinum and palladium in the U.S.

Will Oil Trigger Next Recession?

I was confident that the Fed had already begun printing. That seemed quite evident by the overall action in the commodity markets, the dollar, and the fact that stocks were unable to correct in the normal timing band for a daily cycle low. However, I didn’t really expect Ben would come out and publicly admit it. That one took me by surprise Thursday. I guess Bernanke wants to get full value for his attack on the dollar and make sure that markets are rising into the election.

At this point all the pieces are in place for the inflationary spike and currency crisis I’ve been predicting for 2014. We now have open ended QE that is tied to economic output and unemployment. But since debasing currencies has historically never been the cure for the bursting of a credit bubble, all the Fed is going to produce is spiraling inflation. So as this progresses we are going to see the Fed printing faster and faster as the result they are looking for never materializes. This is what will ultimately drive the currency crisis at the dollar’s next three year cycle low in 2014.

At this point, watch the price of oil if you want to know when the next recession is going to begin. As I’ve pointed out many times in the past, recessions (well, at least since World War II) have all been preceded by a sharp spike in the price of energy. Any move of 100% or more in a year or less, has historically been the straw that breaks the camel's back. Modern economies cannot survive that kind of shock. It invariably triggers the collapse of consumer discretionary spending and economic activity comes to a grinding halt.

In 2007 oil surged out of the 3 year cycle low into a parabolic advance as Bernanke trashed the dollar in the vain attempt to halt the sub-prime collapse. That 200% spike in oil is what tipped the economy over into recession, which was then magnified in the fall of `08 as the financial bubble and debt markets imploded.

I think it’s safe to say that Bernanke doesn’t understand his role in causing the recession of 08/09 as he is now making the same mistake again. I think he believes the recession was solely triggered by the financial meltdown. That was the icing on the cake, but not the initial trigger that caused the recession.

Despite the complete inability of QE to heal the economy or job market, and since he really has no other tool, Bernanke just keeps doing the same thing over and over expecting a different result, but never getting it.

Commodities are the check that prevents Keynesian economic policies from healing the global economy. Keynesian academics either don’t understand this, or refuse to acknowledge it. Until they do, or we install Austrian economic advisers in the government, we are destined to continue making the same mistakes over and over.

So we will watch the price of oil as it rises out of its three year cycle low. If it hits $160 by next summer that will probably be enough to start the economy on the next downward spiral. If politicians get involved (and I’m sure they will) and try to impose price controls, they will multiply the damage and probably guarantee that the next economic downturn escalates into a truly catastrophic depression.

Until we see the spike in oil and the corresponding damage to the economy, no one has any business try to short anything, well maybe bonds, but even that will be risky because the Fed is going to be actively trying to prop the bond market up and keep interest rates artificially low.

All in all there is going to be so much money to be made on the long side, especially in precious metals, that no one needs to fool around with puny little gains on the short side, especially in a market that is going to be hell to trade from the short side. The time to sell short will be in 2014 after the dollar’s next three year cycle low. The dollar’s rally out of that bottom will correspond with the next global economic collapse, ultimately caused by the decisions made by the ECB and the Fed this past week. I dare say if they could see the damage their decisions are going to inflict upon the world and the dire unintended consequences, maybe they would finally stop kicking the can down the road and let the economy heal naturally. Of course that would entail several years of severe pain and politicians, as we all know, are extremely allergic to that.

2014-2015 is when we are going to see the stock market drop 60-75% and the next great leg down in this secular bear market. But until then there’s probably a pretty good chance we are going to see the S&P at new all time-highs in the next 6 months – 12 months.

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Jim Rogers Says Euro Zone To Pay 'Terrible Price'

Billionaire investor and commodities expert Jim Rogers said in an interview on CNBC today that the euro zone will pay a "terrible price" going forward no matter if the European Central Bank (ECB) launches a large acquisition of bonds or not.

Rogers said: "These guys have been saying the same old garbage for a long time. It's not a game-changer - it's good for the market for maybe a month. The debt keeps going higher and higher and eventually we'll all going to pay a terrible price."

As for what he considers a misguided idea for investors to get back into buying some riskier assets because of the announcement, he said this:

"It's not an opportunity to make money for me. This is not good for the market and it's not going to last. Every three or four months they have a summit and they say: Ok guys, everything is ok now. The market goes up. But we're getting a little tired of this and the market is getting a little tired of this," Rogers noted.

As for the commodities bull market Rogers has predicted and continues to assert will last for a long time, he said this:

"The bull market in commodities will end some day - but some day is a long way away.

"Commodities have been correcting for a while. Now everybody knows they're throwing money into the market, and history tells you that when they do this the way to protect yourself is to own real assets whether it's silver or rice. If the world economy gets better, I own commodities because there's shortages developing. If it doesn't they're all going to print money. It's the wrong thing to do, but it's all they know to do."

There is also a growing belief that the Federal Reserve is poised to introduce another round of quantitative easing in the United States, and the central bank of China is also believed to be ready to provide more stimulus in its slowing economy.

Over the long term, when added together, it'll be a powerful impetus for numerous commodity price increases.

Euro Falls on Draghi Inaction

After the bravado expressed by European Central Bank President Mario Draghi concerning doing what it takes to support the euro, the announcement today that in the short term he will do nothing caused the euro to come plunging down from its recent strength.

His problem was he raised expectations far too high in the near term, something some experts said may be the case. They were right.

All that Draghi basically said was there are plans being drawn up by the ECB that would allow it to make outright purchases of bonds. Essentially all he did was say they are preparing to take steps that may or may not be taken. And odd and weak climax to the posturing he took concerning the euro.

The one major negative factor is that Germany isn't behind the moves yet, although contrary to public assertions by Merkel, she always has caved when it comes down to more stimulus in the euro zone.

So the real question appears to be how long it will take before all the mechanisms are lined up and where and how large the stimulus will be.

The euro will remain under pressure until that is more clear, and the U.S. dollar will continue to be strong.

It's almost a surety that the Federal Reserve will take some action at its next meeting in September, as the failing presidency of Obama is at risk.

Mario Draghi Catches Shorts by Surprise

The assertion by ECB President Mario Draghi that he will do whatever is needed to save the euro had shorts scrambling to cover their positions.

After his comment, he ended the assertion concerning supporting the euro and what will be done by saying, "... believe me, it will be enough."

Many pros said his comments put a floor on the market.

It seems this is what traders and investors were looking for: more than just Ben Bernanke and the Federal Reserve pointing to intervening in the market with more stimulus.

The market's response shows it was looking for more support than the Federal Reserve, and now they've got it. If China visibly stimulates, it'll send the market soaring, the U.S. dollar plunging, and gold, silver, and other commodities much higher.

Of course this floor is one that can only last so long if measures aren't taken, as the market will then know it was either a general bluff, or something that won't be done until the situation reaches certain levels.

But with Greece surely going to exit the euro and Spain being bailed out, stimulus will surely come sooner than later.

That's the real story emerging over the last couple of days: what looked like a questionable possibility of QE3 in America and stimulus in Europe, now has ramped up to a very short-term window. That's what's moving the markets, not just the usual token statements that central banks stand ready to simulate if need be.

It appears the political pressure and weakening global economy has put the central banks on notice, and they are surely going to do something very soon.

And now with the comments of Draghi, it seems that it's not only immanent, but the size of the stimulus, at least in the case of Europe, appears to be gargantuan.

At least that's the corner Draghi has painted himself into. And anything less than something stupendous would now have a detrimental effect on the markets.

Whether or not all of this is political theater or not remains to be seen. But for now, it appears the plummeting stock market has been halted as traders await where central banks will go next.

If Bernanke and the Federal Reserve stimulate in the next several days at the next meeting, and Europe quickly follows, it would cause some huge upward moves in the market, and even hammer the shorts more than they are getting hammered now.

For gold and silver, they are going to soar as the U.S. dollar falls in value against the euro and other currencies, as will other commodities which are traded in U.S. dollars.

Commodity Surge doesn't support stimulus in any way, but it's going to happen, and we do need to be careful of how long the false supports will remain in place.

Most of us know throwing money at the problem hasn't and won't work, but we do like the predictability of the market immediately afterwards when unwarranted optimism gets investors all worked up and investing irrationally.

That will happen tentatively in the very short term, and when stimulus is announced, stocks and commodities will soar.

Now there is even more pressure on Bernanke and the Federal Reserve to stimulate quickly. If they don't, the effects of the Draghi announcement will quickly dissipate and his words forgotten.

That would in turn reverse the pressure and put it back on the ECB. Now that would make things interesting wouldn't it.

Either way, someone is going to stimulate soon, and whether it's the ECB or Federal Reserve first, it won't take long afterwards for the other to follow.

This is going to be a very interesting ride going forward, with conflicting data and results causing a lot of uncertainty and caution in the markets, while at the same time pushing investors to enter in.