Like a kick in the face

For any precious metals investor who isn't a lightning fast HFT robot or the Bank of Nova Scotia, investing in Gold has been a proverbial and perpetual kick in the face.

But this might be ending ...

Here's all of the reasons why

1. Top US banks are now offering essentially 0% down mortgages. This is as, if not more risky than the subprime stuff that nearly tanked the global economy.
2. Foreign Central Banks are dumping US debt at the fastest rate since the 70s.
3. Central banks (except Canada ...) are still net buyers of Gold.
4. China now has one of the largest Gold exchanges in the world.
5. Smart money has been moving away from Riskier high yield bonds toward safer assets to the tune of billions of dollars in the last few months.
6. Brexit happened. This is a black swan sort of event in the sense that there is a lot of uncertainty now that the UK is officially out. Conservative economists are screaming bloody murder over Brexit.
7.  Debt to GDP ratios in just about every developed nation is utterly insane. Japan is up over 400%, the US is close to 200%, Greece and Ireland are up to 300%. It was thought that at 120%, your country's currency would collapse. Perhaps in the new math of the global economy, this is no longer the case. If all of the big players are adding debt liberally, then debt will perhaps become the new normal (or I'm thinking that's the hope). Perhaps the debt numbers will get so utterly massive that they will become an irrelevant abstraction. Perhaps they already are.

Each of these things leads me to believe that Gold is in prime position for a huge run.

Survive The Coming Slow-Burn Crash

By Money Morning Editorial
www.moneymorning.com

The money pundits in the press and on TV are gleefully reporting that the blue chips are up over 13,000. They seem to be saying, "Happy days are here again!"

But they're completely wrong.

The seemingly miraculous climb in the Dow - from 6,443.27 after the market crash in 2008... to over 13,000 today- didn't happen all on its own. It has taken trillions of dollars of money from the U.S. Federal Reserve to boost these share prices back near their 2007 highs. 

That means this run of market growth isn't related to real growth. The Dow you're invested in is dangerously inflated. The value of the REAL Dow is much lower than what you see every day. 

In fact...the REAL Dow is at 8,800 right now - and when this market bubble pops, that's where the Dow will go. The real explosion will happen after January 1,2013. That's when the unavoidable "fiscal cliff" of tax hikes and spending cuts will begin to inflict massive damage on the economy.

If you don't protect your investments now, you could see more than half of your money wiped out by the coming financial crisis and resulting market collapse. In a minute I'm going to give you specific and immediate steps you can take to guard your money. But first, let me show you exactly what is happening. 

The Real Value of the Dow

The reason the Dow's real value is a staggering 50% lower than where stocks are now trading stems from intervention by the U.S. government. You see, the U.S. government has intentionally decoupled the stock market from the economy. That is, the connection between the stock market and the U.S. economy has been erased. Obliterated. And that's a problem. A big problem. 

EDITOR'S NOTE: How big a problem is it? A group of prominent economists believes a devastating economic collapse is not only coming... it's a mathematical certainty. The evidence is startling... and undeniable. See it here.

We can pinpoint the precise moment this "decoupling" began - February 23rd, 1995, at the Federal Reserve's bi-annual Monetary Policy Report to Congress. That's when Fed Chairman Alan Greenspan first suggested the loose monetary policy that has stolen the American dream from so many investors. This abrupt reversal of policy spurred an immediate rally in stocks. And overnight, an unthinkable precedent was put into effect.

The Fed's policies could now be used to pump up the market - not strictly as an emergency measure in response to a national crisis, but just because. This opened the floodgates to Quantitative Easing, money printing, interest rate manipulation, and other "stimulus" shenanigans that have become The Fed's MO over the last 17 years. The result: An artificially engineered "Franken-bubble" unlike any in U.S. history.



Remember what happened after 9/11? Greenspan cut interest rates to stimulate the economy, creating the housing bubble. That caused the "crash" of 2008 - which as you can see, was really just the market reverting to its fundamental economic value. However, before the Fed started manipulating the market in February of 1995, the Dow and S&P 500 accurately reflected America's economic growth. 

The following facts plainly show this. 

Why the Dow Should Be at 8,800

Since 1947, U.S. GDP has grown by an average of 3.3% annually, with an average inflation rate of 3.4%. That's a combined 6.7%. At the end of '47, the Dow sat at 177.58. Multiply this by 6.7% - compounded annually through 1994 (47 years) - and you'll get 3,742.

That's almost dead-on the 3,793 reading the Dow posted at the close of 1994. However, since February of 1995, America's average yearly inflation rate has been 2.48%. And the average annual GDP growth has been only 2.38%. That's a combined 4.86%. This means that if the historic relationship between GDP growth, inflation and the stock market had held true after 1994, the Dow would've closed the second quarter of 2012 at 8,808. 

A recent report from the Federal Reserve Bank of New York proves that these calculations are accurate. According to that July 11 report, as much as 50% of the S&P 500's gains since 1994 are due to market reactions to Fed monetary policy announcements. 

What this Means for You

There are two critically important things you need to know if you want to actually make any money in the comatose, Franken-bubble market we're facing.

ONE: The Fed's "market cocaine" is losing its pop - The effectiveness of Quantitative Easing and other stimulus at pumping up equities is diminishing fast.

For instance, QE2 expended 50% more stimulus cash for every point it raised the Dow, compared to QE1. And The Fed's "Operation Twist" is costing even more per market point than did QE2. This latest stimulus attempt from the Fed could do even less. And those who get caught in it could have a big price to pay.

TWO: The economy won't "re-couple" with stocks until 2021 - Eventually, today's hyper-inflated stock market will reconcile with the rock-hard realities of the U.S. economy. It's simple economic physics.

So, let's say that for the foreseeable future, the U.S. economy posts a modest 2% annual growth, and 3% annual inflation. Using the same formula that held true from 1947 until the market's 1995 "decoupling" from the economy, it'll be nine years before the real economic fundamentals catch up to where the market is today! Here's what these two things mean.

For at least nine more years, we can expect a "comatose" stock market - flat overall, with occasional spikes and drops of volatility. And that's only if the U.S. economy grows at 2% annually. Right now, there's very little evidence to suggest that the U.S. economy is capable of growing at a 2% annual rate for the foreseeable future.

Morgan Stanley just revised downward its forecast for America's GDP growth in 2013 - to 1.75%, from this year's 2% growth estimate. MS also issued a warning that because of the unavoidable "fiscal cliff" of tax hikes and spending cuts, the U.S. GDP could get a lot lower after 2013.

But even this gloomy forecast could be extremely optimistic. So the best case scenario: The Dow takes nine years to catch up to its real value, meaning little to no growth in the market. The worst: The Dow collapses to its real value - and takes 50% of your money with it. 

Four Ways to Protect Your Money from the Dangerously Inflated Dow

Now that you know the real value of the Dow, would you trust your savings, your retirement, to this over-inflated market bubble? Here are assets that will let you not only hold on to your money but also turn a profit while the Dow corrects to its real value. 

1: Precious Metals

While QE1 and QE2 clearly did little to strengthen the U.S. economy, their effects on the markets were undeniable.

Commodities soared.

Since March 2009, gold is up 97%, silver is up 162%, and the Continuous Commodity Index (CCI) is up 55%. Thanks to the Fed, this trend has just been rebooted. That means you should maintain exposure to inflation-sensitive assets, like precious metal favorites silver and gold. They will continue to do as well or better than they did during QE1 and QE2. The only difference with this round of QE is that it's going to be much bigger and go on much, much longer. So as a result of the Fed doubling its balance sheet over two years, Bank of America says they expect massive inflation, enough to see gold double as well. They foresee gold to $3,350 an ounce. The outcome is so obvious now even a major bank can see it coming. 

2: Oil

Just like precious metals, oil prices have been on a tear since 2009, up 122%.  While oil's price rise cooled this year, new forecasts show that will not be the case for 2013. Bank of America expects inflation to double oil prices, sending them to $190 a barrel. But there's a lot more to oil's price rise than inflation.

Money Morning oil expert Dr. Kent Moors outlined three key reasons other than inflation that point to higher oil prices in 2013 and beyond: 

• Demand continues to rise in those parts of the world most directly affecting price. Those areas are not North America or Western Europe, but are markets in which unconventional oil will not have an effect for some time.
• Oil production costs are rising. The cost of extracting a barrel of unconventional oil extracted will increase the price of the crude. Energy research experts Bernstein Research said that the average marginalcost of oilaround the world today is $92 a barrel, and is set to rise because it is more expensive to lift, process, refine, and distribute these new sources of crude oil.
• Oil prices are affected by the regionalization of supply for both crude and refined oil products. As we move toward 2015 and beyond, the demand curve will dictate pricing premiums for regions where imbalances of supply are present.

3: Dividends

Dividends represent the biggest source of returns you can get from stock investing. Now, to a lot of people, dividends may not sound very sexy. That's because they don't realize that 90% of the U.S. stock market's returns over the last century have come not from share appreciation, but from the cash that companies pay their shareholders. 



When you think about this, it's like having the thousands of people employed by these dividend-paying companies all working to make you rich. But you can't just go for high yield. As we enter a period of slow economic growth, you have to find companies that not only have a long history of dividend increases, but can survive a U.S. recession. 

That's why Emerson Electric (NYSE:EMR) and Procter and Gamble Co. (NYSE: PG)rank among our favorite dividend stocks. They have more than half of their business overseas. Both have raised their dividends every year since 1957 and 1954, respectively. Emerson yields 3.2% and P&G 3.6%. 

Another top dividend stock is OmegaHealthcareInvestors(NYSE: OHI). OHI is a real estate investment trust (REIT) andthe company's leases have an inflation-protection clause built in, so your nominal yield - in this case 7% - is even better than it looks since the dividends tend to rise with inflation. 

4: Farmland

Legendary Wall Street trader Jim Rogers recently offered this unconventional advice: If you want to get rich, you should be investing in farmland. "It's the farmers, the producers, who are going to be in the captain's seat when the prices go through the roof," he toldThe Australian Financial Review.

Over the last 100 years farmland, based on income and capital appreciation, has consistently delivered positive returns -- with only three brief periods of negative returns (1930s, 1980s, and 2008). And as the saying goes, they just aren't making any more of it. So a severe imbalance is developing in the supply and demand of farmland. Farmland is also an opportunity to invest in an asset class not directly correlated to stocks and bonds, and one with significantly less volatility. Rogers believes investing in farmland is "in its third inning." In other words, there's still plenty of time to get in.

One way is to invest in agricultural futures through ETFs like the PowerShares DB Commodity Index (NYSEArca:DBC). The fund tracks an entire basket of agricultural commodities including corn, soybeans, wheat, cotton, sugar, coffee, cattle and pigs.

There's also Adecoagro S.A. (NYSE:AGRO), a Luxembourg-based company that owns significant farmland holdings in South America. It owns nearly 500,000 acres of farmland, consisting of 23 farms in Argentina, 13 farms in Brazil, and one in Uruguay.

Canadian citizens can invest in Agcapita Farmland Investment Partnership, a farmland private equity fund, with significant holdings in Saskatchewan, Alberta and Manitoba. Jim Rogers is actually an advisor to the fund, currently open to retail investors for a minimum investment of $10,000.

One More Thing You Should Know About...

As you now know, governments and central banks of the world have spent and borrowed us into oblivion by wasting our tax dollars, hard work, and loyal citizenship. And all the money printing by the Fed has occurred while our debt has surged to astronomical levels... Eventually foreign countries are not going to trust that investing in America is a safe bet.

Even worse, our debt is creating an incomprehensible threat that is quickly bearing down on all 313 million Americans. 

To understand the truth about America's economic future, take a look at this gripping investigative documentary. 

You owe it to yourself to learn what else the government is hiding from you.

Source: http://moneymorning.com/2012/11/15/dont-lose-half-your-savings-four-ways-to-survive-the-coming-crash/

Proposed Deposit Tax in Cyprus Undermines the Very Notion of Deposit Insurance

By Martin Hutchinson

www.moneymorning.com

Even by the standards of the EU bureaucracy, raiding the private deposits of Cyprus' banks is spectacularly foolish.

For a measly $5.8 billion euros, the EU has now put the entire Eurozone on edge-not to mention the entire global economy.

It revolves around something as simple as trust. And as a former banker, I can tell you that there's no substitute for the belief that your deposits are safe and sound.

It's a thin line and once it's been crossed it's nearly impossible to repair.

Now savers in Spain, Italy and elsewhere in the Eurozone are left to wonder about the safety of their own accounts.

Here's why savers everywhere should be concerned...

The Problem With the Cyprus "Bailout"

Like Ireland and Iceland, Cyprus has a banking sector that's not only shaky but is far bigger than its overall economy, with deposits of around $90 billion, or five times its GDP.

Unlike most banking systems, more than half of those deposits are in large chunks of over 100,000 euros ($128,000), the limit of Cyprus' deposit insurance. Indeed, about $20 billion of Cyprus' deposits are held by the Russian mafia.

Since Cyprus' president Nicos Anastasiades didn't want to shut down the island's attraction as a money haven and playground for the Russian jet-set, he agreed to a deposit tax of 6.7% on deposits up to 100,000 euros and 9.9% on deposits above 100,000 euros, to satisfy the EU's demand of 5.8 billion euros ($7.2 billion) part of the bank bailout.

But like most schemes designed by politicians and EU bureaucrats, this one has huge flaws, including the fact it angered Russian president Vladimir Putin. Even at this level, with much of the money coming from Cyprus' modestly well-off citizens, Putin described it as "unfair, unprofessional and dangerous."

But the main flaw isn't about Putin. It has to do with the idea of deposit insurance itself.

Under a separate scheme introduced by the EU after the 2008 financial crash, deposits under 100,000 euros are insured by the Cyprus government.

Of course, the "tax" on deposits is a supposedly clever way to get around this without the Cyprus government itself defaulting. However, all this little trick does is call into question deposit insurance throughout the EU and, indeed, worldwide.

That's why this tiny country, with a population of only 800,000 and $17 billion in GDP, has roiled the world markets-- it attacked the central principle of deposit insurance.

After all, if governments can just seize deposits by means of a "tax" then deposit insurance is worth absolutely zippo.  

Meanwhile in Cyprus, there were a number of alternatives to breaking this underlying bond of trust. The banks have some bond debts outstanding, which certainly should have been written down before the deposits were attacked.  In fact, the tax is an attempt to avoid this, and should be resisted on that ground alone.

Instead, because the large deposits are so big, you could raise the required 5.8 million euros simply by a 15% tax on large deposits - but that would make Putin REALLY angry (he personally may or may not have money in Cyprus, but lots of his friends do).

They could also write down Cypriot government bonds, but because the banking system is relatively so huge the write-off would have to be a big one. To get 5.8 billion euros it would take more than a 50% write-down.

In the big picture, Cyprus doesn't matter much, unless EU incompetence and the recalcitrance of its own politicians makes it leave the euro altogether, in which case that currency unit yet again faces the prospect of break-up.

Who Can You Trust?

But in this case, the effect on global deposit insurance systems is much more important.

Deposit insurance was first invented in the United States during the Great Depression as a means to reassure savers about the solvency of banks, a third of which had just gone belly-up. It worked beautifully. Americans trusted the federal government (at least, they did back then), so once deposit insurance was in place savers came to have complete trust in the banking system.

Unfortunately, that same trust had a very bad effect on the banking system itself.

From leverage ratios of $4-5 of assets to $1 of capital in the 1920s, banks leveraged themselves ad infinitum, having leverage ratios of $10-12 of debt to $1 of capital in the 1970s, and up to $30 of assets to $1 of capital in 2008.

Even today, after de-leveraging, J.P. Morgan Chase (NYSE: JPM), in many ways the most solid of the big banks, had assets of $2,359 billion at the end of 2012 and tangible equity of only $146 billion -- or a ratio of 16.2 to 1.  As recently as 2010, JPM's leverage was 19.3 to 1.

At those levels you can see the dangers that kind of leverage presents.

In fact, I counseled the National Bank of Croatia to this effect, when they were designing their deposit insurance system in 1996-97, advising them to have insurance covering only 90% of deposits. Unfortunately the politicians in the Croatian parliament overruled us, so Croatia now has the same damaging 100% insurance as everywhere else.

So the depositor today ends up with the worst of both worlds. He can't rely on the banks not to go bust, given their current absurd levels of leverage (which are of course encouraged by Ben Bernanke's money printing). On the other hand, now there's a question of whether he can rely on deposit insurance either.

If these worries become really serious, it will be devastating for the world economy. Small savers will take their money out of banks and resort to household safes and a shotgun.

If savers no longer have a solid place in which to put their money, we will have undone the financial revolution of the last 300 years, and returned to a world in which Samuel Pepys didn't trust the local goldsmith, so buried most of his wealth in the back garden. Needless to say, that won't do much for small business - the entire flow of finance will seize up altogether.

The solution is to do away with deposit insurance, forcing banks that want to attract depositors to hold $1 of capital for every $4-5 of assets, at most.

Eliminating Ben Bernanke and going back to a gold standard will probably be necessary too-even though that's not likely to happen anytime soon.  

But if politicians continue behaving as badly as those who designed the Cyprus bailout, the gold standard will be the only economically viable alternative.

With this "bailout" all the EU has done is open up a Pandora's Box.

Source: http://moneymorning.com/2013/03/19/why-the-cyprus-bailout-could-set-banking-back-300-years/

Shah Gilani Provides us With Some Insight Now that the Market is Way Up.

By Shai Gilani
www.moneymorning.com

It's time for some insight.

I'm constantly asked where I think the stock market is going next. Since the Dow recently reached new highs and the S&P 500 is pushing its old October 2007 highs, it's no wonder that's the question on everyone's mind and lips. My answer is: I don't know where it's going.  But I do know what to do about it.

Here's the thing...

The stock market is like the lottery, you've got to be in it to win it. And that includes being out of it at times, too. That's not contradictory. Here's why. Being fully invested is taking a big position. Being partially invested is taking a smaller position. Being out altogether is still a position. That's how professional traders think. Everything you do puts you in a position. Being in cash is a position every bit as much as being fully invested is having a position.

What's important - and what all successful traders do - is to watch your position. If you're in stocks, what is your exit strategy on the profit side? On the loss side? How are your stocks performing relative to firm-specific issues or the market's general trend? Equally important-as in always, always-is when and where to apply that cash? With that in mind, here's what I'm looking at as we hit record after record - and what I recommend doing about it.

First you must ask yourself:

Why have markets risen while domestic economic growth has been stagnant? What is moving markets higher? And what can change? The Fed has been keeping interest rates for interbank lending and borrowing at essentially zero. That drives down all interest rates. They're doing that by buying government bonds and agency paper - meaning government guaranteed mortgage-backed securities. They're buying $85 billion worth per month, and they expect to keep it up. What the Fed is doing, besides prodding consumers to spend in an attempt to keep access to installment credit cheap, is supporting a recovery in the banks' balance sheets.

The Fed is giving them cheap money to buy the same government bonds they're buying, so banks' inventory of bonds will appreciate along with paying them interest. By buying agency paper, they're supporting the valuation of mortgage-backed securities on the banks' balance sheets, hopefully long enough to see housing - and those bond prices - bounce back. The by-product of the Fed's action has been articulated as its primary intention, which, they say, is to help drive up markets, confidence, and the economy.
It's been working for the markets, but not so much for the economy.

Why?

Because banks are more interested in themselves and repairing their balance sheets (in other words, making safe money) than lending at low rates.

They are not in the lending business, especially loans to small businesses and consumers - unless it's through revolving credit lines, dispensed with myriad penalties and exorbitant interest rates through credit card issuance. They're not into allocating capital to borrowers, either, as much as they're into creating products. There's a big difference.

Fortunately for corporations, earnings have been great. And with low interest rates they have been able to refinance higher-interest debt and amass large quantities of cash. Incidentally, that's not good for banks. When corporations have positive cash flows, when they are flush with earnings and sitting on reserves, they don't need to borrow from banks.

A lot of corporate earnings are coming from overseas. That's been good on account of slow domestic growth.
But, those earnings have benefited from a weak dollar. As other countries work to devalue their currencies to make their exports cheaper, and as the dollar continue to strengthen, overseas earnings-when translated into a more expensive dollar-will not be as robust as they have been. On top of that, if global growth falters, earnings will take a bigger hit.

The domestic hope is that housing is bouncing. That's important because in spite of the $10 trillion in growth from a rising market, fewer and fewer people are actually in the market other than in their pension and retirement funds. Average Americans need a robust housing market; it's where the bulk of their wealth has traditionally resided.

I worry about banks not lending to potential homebuyers, which can cause housing to stall. I worry about contagion from the ongoing mess in Europe. Cyprus is a real problem. It is another canary in the coalmine, like Greece was. Europe's problems are not going away.

American growth isn't likely to be robust if the banks aren't lending, and if fiscal restraint (à la Europe's belt-tightening) slows the meek forward momentum that the economy has seen.

That's what worries me about the market being as high as it is - and its prospects for going higher still.
Then again, there is so much sidelined cash, a lot of which is heading back into equities, and the prospect that low rates will see an exodus out of bonds and into stocks, the Great Rotation, that markets have potentially plenty of firepower to go higher. In fact they could go a lot higher.

So, what am I recommending?

• Follow the big trends and trade on the same side, starting with the big macro trends all the way down to the minor trends within bigger trends, if they're all going the same way.

• The markets are going up, so stay in them. Get out as you take profits when your positions slip back and hit the stops you always should be raising as the market rises.

• Apply your cash diligently and sparingly to new positions, especially if they are speculative.

• Take small losses on new positions when you get in. You're late to the party, but the punchbowl is still out there and heavily spiked, so join in but do so incrementally.

• If you're putting on defensive positions (hopefully they pay solid dividends), add to them on dips. But think about an exit strategy if the big picture turns negative.

We may not get a significant correction, in which case you want to be riding this bull market higher.
Then again, the markets love to sucker in sidelined cash right before they crash.

Is a crash possible? Yes it is.

There are technical reasons why the markets are shaky. I'm not talking about technical analysis. I'm talking about high-frequency trading trends and the massive growth of ETFs. The interplay between them is a danger zone that could undermine markets in a New York second.

When it comes to the market, I know I don't know which way it's going, but I always manage to make money when it goes in either direction. My trick is to follow the trend and follow that nagging feeling I get when the trend shows cracks that not everyone else sees.

Source: http://moneymorning.com/2013/03/22/with-another-stock-market-record-in-reach-heres-what-to-do-now/

Gerald Celente (07/08/2012): LIBOR and The Criminal Activity of Banks

Gerald Celente: Founder & Director of the Trends Research Institute - Gerald discussed big news, story of the 21st century, who has taken over, global activity, gold and much more with King World News. Many consider Gerald to be the top trends forecaster in the world. Gerald has been quoted and interviewed in media throughout the world such as, CNBC, Fox, CBS, ABC, NBC, BBC, Time Magazine, New York Times, Wall Street Journal, Business Week, FT, U.S. News, World Report, The Economist and more.

Source: King world news

A Year Later, Core Inflation Doesn't Look So Rotten

A Year Later, Core Inflation Doesn't Look So Rotten: Remember the attack on core inflation? Right about this time a year ago there was a wave of criticism aimed at the idea that core inflation—headline inflation less food and energy prices—is a useful predictor of overall pricing pressures. But a funny thing happened on the way to the lynching of core: the much-maligned concept for looking ahead turned out to be reliable… again.


To read the full story, visit CapitalSpectator.com

Why is the US Dollar Rising?

June 6, 2012
By Keith Fitz-Gerald, Chief Investment Strategist, Money Morning
www.moneymorning.com
 

By all accounts, the U.S. dollar should be the functional equivalent of a Zimbabwean bill.

The Fed has pumped trillions into the worldwide financial system as part of misguided stimulus efforts that should be incredibly inflationary. Yet, instead of a disastrous repeat of the Weimar Republic, the U.S. dollar has strengthened considerably. This despite rising unemployment, slowing economic growth and a debt debate that's about to begin anew.

Since last July, the U.S. dollar has risen against all 16 major currencies while the Intercontinental Exchange Dollar Index is up 12%, according to Bloomberg. In fact, the greenback is now higher than it was when the Fed engaged in Operation Twist in late 2011 as part of a plan to keep the dollar low by buying bonds.

So much for Club Fed's plans...

As usual, they don't really have a clue about how real money works -- let alone why it flows and where it's going.

Taking the Mystery Out of the U.S. Dollar

Here are the three reasons why the U.S. dollar is really rising:

1. Institutions are unloading gold to raise cash against anticipated margin calls, redemption requests, or both. They are parking that money in treasuries and in dollars, creating additional demand. There are simply more buyers than sellers at the moment, so prices for dollars and treasuries are rising. And not just by small amounts, either.

2. Institutional portfolio managers and traders are required to maintain specific classes of assets under very specific guidelines. These guidelines dictate everything from the amounts being held to the quality of specific investments. Many, for example, are required to hold only AAA-rated bonds, or invest in stocks meeting certain income, asset size and volatility criteria. Imagine you're Jamie Dimon and you have to hold reserves against trading losses or you're Mark Zuckerberg and you've got to build up a large legal settlement fund for the Facebook IPO. Or, perhaps you're Tim Cook of Apple and you're sitting on $110 billion in cash for future investments. Chances are you're going to want to buy things that are as close to risk-free as possible to ensure your assets hold their value.

A year ago, you could choose from eight currencies in the G10 that met internationally accepted "risk-free" ratings criteria as measured by the cost of credit default swaps priced under 100 basis points. Now, there are only five to choose from. A year from now, there might only be two or three. In practical terms, what this means is that your capital, along with everyone else's, is chasing a diminishing pool of high-quality, risk-free assets. So the prices for those risk-free assets -- like the dollar and U.S. treasuries -- are going to go up.

This is not unlike the last egg at the grocery store. If there are a 1,000 buyers and only one egg, the price of the egg skyrockets -- like the dollar is now.

3. Bank demand for capital reserves is increasing markedly as they scramble to meet requirements set by the Bank for International Settlements in accordance with Basel III regulations. Created by the International Monetary Fund ostensibly to ensure adequate capital buffers in the event the stuff hits the proverbial fan, the requirements are causing banks to change the composition of the assets used to backstop their operations and to buy even more dollar-denominated assets. This, too, provides upward pricing pressure.

This is the law of unintended consequences at its very best.While the IMF had its heart in the right place, the corresponding connections between the banks subjected to the Basel III requirements will increase the cost of capital, change funding patterns, and produce a migration of risk that wasn't contemplated at the time the regulations were created.

Here's why.

Banks make their money via the spread between income earned on their assets and the cost of their liabilities. Therefore, as banks reduce their debt to meet the new capital reserve requirements, the rules requiring a reduction in leverage ratios actually encourage greater risk taking.

Let me give you an example.

If I buy $1 billion in U.S. treasuries, I have to place them on my balance sheet and accept the corresponding reduction in the return on my equity and my borrowing capacity. On the other hand, if I buy $1 billion in stinky sweatshirt swaps and I'm levered 10-1, I only have to reflect $100 million on my balance sheet. This improves my return on equity and allows me to use the remaining $900 million to buy more stinky swaps, further increasing my equity efficiency.

Then there's securitization.

Banks typically reduce exposure to specific loans, trades, borrowers or holdings by removing assets from the balance sheet. Doing so effectively releases regulatory capital which can then - ta da -- be used to support additional loans and/or investments. This increases equity efficiency even further. Never mind that it also exposes shareholders to true risk levels that remain off the books, invisible and at completely preposterous levels.

The Reserve Status of the U.S. Dollar

So where does that leave us?

There are a couple of things to consider.

As long as the overall de-leveraging process continues, the relative scarcity of risk-free assets will increase. This suggests the dollar will rise further. How much further is unknown, but the key event in an eventual dollar reversal will be either a complete recapitalization of the European banking system or additional stimulus in a concerted U.S./EU effort designed to stave off the day of reckoning.

It won't work, but the illusion will hold for a while longer. Speaking of illusions, if there is ever an argument as to why the USD will eventually lose its reserve status, this is it.  The gradual decomposition of quality assets all but guarantees that the few remaining viable currencies with risk-free status will have to band together in a last-ditch effort to maintain global liquidity. My best guess at this point is that the basket of assets will eventually consist of a blend of currencies and hard assets.

I see that including the USD, the Japanese yen, Swiss francs, a neutered euro and Chinese yuan blended with gold and some form of oil-related instrument.  But there's no question about it. Absent complete financial reform, each is badly flawed in one way or another -- including the U.S. dollar.

Then again, that's what bailouts are for...sigh.

source: http://moneymorning.com/2012/06/06/three-reasons-why-u-s-dollar-is-really-rising/

Is Wall Street addicted to QE?

Answer: yes!

Jim Rickards' Interview with Casey Research

June 6th, 2012

According to Jim Rickards it's possible, but it won't happen without the US dollar being significantly weakened in the process through continued devaluation through continued central bank printing. This currency creation project that central banks are undertaking a story we are well aware of at Gold Avalanche, and it's one of the primary reasons we recommend holding gold today for the long haul.