Thursday Items for Discussion

The New England Patriots have their final preseason game tonight and will not play any starters. I will check it out anyway to see who might be making the team. NFL opening day is only about a week away! The only thing about Fall that I like. I do plan on a Friday night entertainment post, so get your requests in.

Your Economic Policy Makers at Work
One of the first rules of leadership is to maintain a united front. You may well be totally wrong about an action, but there should be outward agreement on said action to be taken seriously. While certainly our own Federal Reserve has been wrong about plenty of things, it seems they are unable to maintain a united front while doing them.

Here is a perfect example of the bipolar nature of public comments by FED participants.

From August 22, 2009:
Fed official: rates to be kept low past upturn

JACKSON HOLE, Wyoming (Reuters) - Financial markets have not fully understood that the U.S. Federal Reserve's pledge to keep interest rates exceptionally low for an extended period means they will stay low beyond when officials normally would raise them, a top Fed official said on Friday.
"I don't think markets have really digested what that means," St Louis Fed President James Bullard said in an interview.
The Fed's strategy is aimed at promoting a future rise in inflation, which should provide an immediate boost in activity in anticipation of a future boom, but that hasn't happened, Bullard said.
The St. Louis Fed official's comments suggest the Fed will be in no hurry to raise rates when signs of an economic rebound take firmer hold and that the central bank will be willing to tolerate higher levels of inflation over the short term as it nurses the ailing economy back to health.

From September 3, 2009:
Fed President: Be Prepared For Aggressive Rate Hikes

Once we're back to growth, the Fed could be forced to hike rates rather quickly as per Philly Fed President Richard Plosser. This could feasibly happen as early as 2010;
"Our exit strategy is really quite simple: we have to begin to pull back from our extraordinary programs, we have to begin to shrink our balance sheet, otherwise we will feel inflation in the months and years ahead,"
"And that may mean raising interest rates very rapidly, at least as aggressively as we cut interest rates, if the time is right."

I think Bullard tells it like it is and Plosser is telling it as foreign creditors would like to hear it. Perhaps they can set up a friendly wager between them on when rates my rise.

Quote of the Year Candidate
A submission for quote of the year comes from The Big Picture author Barry Ritholtz in an interview for the NJ Star Ledger:

"But if you want to save the banking system, you don’t care about individual banks. The best example of that is Japan in 1989. They had zombie banks around for 10, 15 years. They didn't put any of their banks out of their misery, and they had a decade-long recession.

The idea of saying Citigroup is insolvent was unthinkable to them. They were a sacred cow. If the sacred cow gets mad cow disease, you’ve got to put it down. The problem with bailouts in general is when an industry or company goes bankrupt it typically means that there is a structural flaw in the setup of that company."

Mad Cow banks! Instant classic.

The Automatic Earth Makes it Simple
Sometimes I can be drawn into debates about monetary policy views (Austrian vs Keynesian), or about budget deficits (good or bad). Sometimes you have to boil things down and get to the common sense truth of it all, and nobody is better than Ilargi of The Automatic Earth. From today's missive (read the whole thing):

"You can't rise up from a recession or depression by shifting money around that you don't have in the first place. You'll have to take some sort of natural resources and add value to them though hard work and craftsmanship. And if you put it that way, it becomes glaringly clear how far America, as a society, is from being able to pull off anything of the kind. Against that backdrop, the idea of money as an abstract notion capable of miracles looks mighty tempting to a nation of 300 million obese burgerflippers."

A bit harsh, but hits the bulls eye. We rely on financial innovation and ever expanding credit to function as an economy, not real output of real goods.

Gold and Silver Observations
As I remarked last post, I would prefer gold and silver do their thing without so much attention. That said, I found at least 3 times the stories related to gold out today than yesterday which was a high news volume day by itself!

The most interesting news item (there were about 10 great technical indicator posts that I found great as well) was this small snippet about Hong Kong wanting to become a King Kong of bullion storage for Asia:
Hong Kong recalls gold reserves, touts high-security vault
In a challenge to London, Asian states invited to store bullion closer to home

It seems Asia would like to keep their gold a bit closer to home, as well as handle ETF's based on the gold (oh no!!). Let's hope London has the gold in their possession, otherwise they may have to go out and buy tons of the stuff on the open market to return to Hong Kong, which would push the price up. We have no indication of anything of the sort of course (except rising gold).

My only worry is this tidbit:

"The 3,660-square-foot depository, located at the city's main Chek Lap Kok Airport, will serve as a "storage facility for local and overseas government institutions," according to the government statement."

I would refer Hong Kong to the film "Goodfellas" as we all know all the big heists came from ripping off the airport!

All kidding aside, I was amazed at the reaction among more mainstream press over the past two days. When the S&P 500 goes up 10% in a week they argue the market MUST be pricing in some thing or another. They think the market is never wrong, never irrational. Upside movement is proof of the move up in and of itself. They ask no questions. Compare that with gold moving up 10% in a week and they want documented proof, supported by at least 17 fundamental indicators and published scientific papers, as to why in the world gold would be making such a move. It is really funny to see this happen.

My thoughts on today's action:
-Gold closed right near the highs of the day, which was strong. The mythical $1000 barrier looms large and in charge, and I was a little put off by the pause so close to that level. There is almost a physical barrier there. Still, a solid two days.
-Silver, my personal favorite, blew past $16 and closed over that level for the day. This is far more bullish in my view for silver.

Tomorrow's jobs number is going to clarify things quite a bit. A worse than expected number and we will see if the metals rise was a bet on a weaker economy. A better than expected number will be even more revealing in my opinion because it offer two possibilities:
-metals dive, the bet on a weaker economy is abandoned
-metals hold or climb, there is something else afoot

I can offer no predictions, but I think gold and silver have great appeal going forward.
Full disclosure: I own gold, silver, and miners of both metals so I am biased.

Have a good night.