Posts Tagged ‘silver’

Fed Targets Inflation At 2%

Thursday, January 26th, 2012

The Fed yesterday said it plans to keep interest rates low through at least late 2014 and Chairman Ben Bernanke said policy makers are considering more bond purchases to boost growth. U.S. equities turned lower after new home-sales unexpectedly decreased, erasing gains triggered after earnings and orders for durable goods topped forecasts and initial jobless claims remained below 400,000. A third, fourth and fifth round of easing “lie ahead,” Bill Gross, wrote in his Twitter post. Talks on a debt swap to avert a Greek default resume today. Stocks reversed early gains that sent the Dow Jones Industrial Average to the highest level since 2008.

Ten-year Treasury yields slipped five basis points to 1.95 percent at 11:07 a.m. in New York after decreasing the most in two weeks yesterday. Nickel, wheat and copper climbed at least 1.9 percent to lead gains. Treasuries and commodities rose for a second day after the Federal Reserve yesterday pledged to keep interest rates low and said it is considering more bond purchases.

Weekly jobless claims gained 21,000 last week to a seasonally adjusted 377,000, according to the Labor Department. Still, despite the increase, the figure still held below the 400,000 mark and the underlying trend continued to point to improving employment conditions. Economists had forecast claims rising to 370,000. New home sales posted a surprising drop of 2.2 percent in December for the first time in four months to a seasonally adjusted 307,000. Durable goods orders increased 3 percent in December, the second straight monthly gain, according to the Commerce Department. And leading indicators increased 0.4 percent to 94.3, rising to a five-month high in December, according to the Conference Board, pointing to continued momentum in the recovery. Economists had expected the index to increase 0.7.

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Fed To Keep Rates Low Until 2014

Wednesday, January 25th, 2012

With Congress paralyzed by partisan politics, the central bank faces intense pressure as one of the few government institutions that can foster economic growth. Its actions to serve that mission have drawn critics from all sides. The Fed has repeatedly underestimated the challenges facing the economy and, as a consequence, has not responded strongly enough. As part of an effort to provide more insight on its thinking to financial markets and the public, the Fed today began publishing individual policymakers’ projections for the appropriate path of the benchmark federal funds rate. If the Fed can convince financial markets it will be on hold longer than they had anticipated, long-term interest rates could drop as investors price in the new information. Federal Reserve Chairman Ben S. Bernanke has pushed for greater openness at the Fed since he took office five years ago. The chairman hopes that by routinely giving the public more information about the Fed’s expected plans, it will be easier for the central bank to influence the markets. U.S. Federal Reserve said it will not raise interest rates until at least late 2014, even later than investors expected, in an effort to support a sluggish economic recovery. After the announcement, U.S. stocks pared losses while Brent and U.S. crude futures rose. The dollar erased gains against the euro. U.S. Treasurys hit session highs, and gold and silver gained. 

Without making major shifts to its outlook for the economy, the central bank described the unemployment rate as still elevated and said it expects inflation to remain at levels consistent with stable prices. It depicted business investment as having slowed, downgrading its assessment from the December meeting. Eleven Fed leaders said it is appropriate to start raising rates in 2014 or beyond, 18 months longer than previously planned; just six said it is more appropriate to raise rates this year or next. Previously the Fed said that it would keep interest rates near zero through mid-2013.

The Fed’s predictions for economic growth, inflation and the unemployment rate stayed largely unchanged since the November meeting. The Fed slightly reduced its projections for economic growth this year to between 2.2 percent and 2.7 percent, though it predicted a slightly better unemployment rate of 8.2 percent to 8.5 percent. The Fed said it expects inflation to come in slightly below 2 percent, which it generally regards as appropriate. Fed officials also dismissed the risk of inflation and suggested that it wasn’t likely to be a concern any time in the near future. The Central bank also highlighted persistent challenges, including the depressed housing market and financial crises abroad, that stand in the way of a more rapid economic recovery.

All in all, the Fed statement suggested the central bank was prepared to take more action if necessary to support economic growth, such as by purchasing additional mortgage assets to drive down rates, though it did not say that it would take any such step soon.

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In Search For A Market Bottom; S&P 1120

Friday, September 23rd, 2011

The bulls took quite a beating yesterday, as an extended post-Fed sell-off and dismal macroeconomic data sparked a mass exit. The DJIA fell 391 points to 10,733.83. Earlier in the session, the DJIA tagged a fresh annual low of 10,597.14 before paring its losses. The S&P dropped 37 points to 1,129.56 bottomed at 1,114.22 before reclaiming some ground. Investors continued to dissect the central bank’s statement of “significant downside risks to the economic outlook,” along with dismal economic reports from both China and Europe sinked stocks further. Federal Reserve’s Operation Twist boosted the US Dollar to multi-month highs, which sent dollar-denominated assets like crude oil and gold down. The DJIA suffered its worst point drop in five weeks, while the Volatility Index (VIX – 41.35) skyrocketed to a one-month high.

Crude futures fell to a six-week low today, as a mad rush for the greenback spooked foreign-currency holders from the dollar-denominated commodity. Furthermore, uninspiring economic data out of both China and Europe weighed on hopes for rebounding demand. Against this backdrop, November-dated crude oil futures gave up $5.41, or 6.3%, to end at $80.51 per barrel. The strengthening greenback also took a toll on precious metals yesterday, as did dismal manufacturing data out of China. By the time the dust settled, December-dated gold futures surrendered $66.40, or 3.7%, to finish at $1,741.70 an ounce. Meanwhile, silver for December delivery fell 9.6% to $36.58 its lowest settlement since July.

S&P (SPX – 1,129.56) – support at 1,100; resistance at 1,400

Markets were oversold yesterday. Today should bring in choppy trading. I expect further selling as momentum has gathered to the southside. I still remain cash with further hedges in short Gold DZZ, Silver SLV hedged with ZSL, and VXX

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Sectors, Commodities, & Currencies

Thursday, June 16th, 2011

Markets gave warning of a pullback when commodities such as silver took the largest percentage losses in a 1 day period ever recorded. Margin requirements were raised by the OME. Since then markets have been just the same. You have the Greek tragedy, Japan nuclear meltdown, Iceland volcano eruption, US debt ceiling, and the Arab spring. Nothing seems to bright. Let’s look back what was gained and lost since the May 2nd high.

Silver has taken the largest hit hitting a high of almost $50. It currently trades at $35.49  down 30% – Hedge funds got of this play way in advance…first sign of market correction

Japan’s earthquake has disrupted the economy so bad that it knocked the country back into a recession. Markets tend to read into a slow down 6 months in advance. Japan, is the #3 largest economy in the world. If they slow down, then you bet the US will feel it.

US Crude oil has taken a huge bite of profits too. Having Oil prices at $115 with a weak economy and having the producers taking the brunt off the added expense hurts corporate profits in a big way. Headlines constantly read high oil prices will hurt the economy. It was inevitable prices will come back to earth. They have since fallen from May 2 $115.27 to $94.94 down 17%

US dollarhas gained after commodities fall. The Euro takes a beating. The Euro has fallen from 1.489 to 1.414 down 5% in 7 weeks. Currencies aren’t normaly this volatile.

S&P 500has fallen down to break all technical support. Charts look badly damaged. It’s currently atop the 200 MA.  It was first noted on May 17th here. It has since fallen from 1361 to 1259 down 7.5% which translates stocks are down +20%.

Financial Sector has taken the biggest beating. The Financial ETF (XLF) has lost 14.65% The Greece tragedy isn’t helping either. It’s said that the US banks are exposed to $41 billion worth Greek debt. It’s unclear what banks are clearly holding, with thexception of Bank Of America which holds $461 billion of Greek issues. I would believe most of the banks sold Greek credit default swaps to European Banks. Explains why capital requirements still remain high. 

Let’s face it…markets are in a Correction. We’ve gone overextended from the commodity play that we need a breather now. As I have indicated several times during May and will continue to stress during the summer, stay at cash. Of course we’ll have a few bounces, which some will be 100 points plus, but it is not indicative to a market turn around. We need at least 2-4 months to recoup the damage. We’ll recover, but it won’t be an easy summer, and no we won’t head into a double-dip recession.

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Oil Takes A Beating, After Gold & Silver Drops

Thursday, May 5th, 2011

The beginning of the week was dominated by fears China and India will have to get more aggressive on interest rates, screwing down their economy and sacrificing more growth than expected in their so-far vain attempts to kill off stubborn inflation. Well……that did happen. Stocks in China have been stagnant for almost a year and trading sideways.

From Tuesday that caused a gradual sell-off in commodities, as seen in the fall of the Australian dollar AUD/USD  1.0638, which is a commodity currency. The sell-off in the Aussie accelerated through the week.

Thursday’s dramatic twist is the sudden weakening of the euro EUR/USD 1.4573 against the dollar as European Central Bank President Jean-Claude Trichet failed to signal higher interest rates for the euro zone next month.

The sudden breakout Thursday of the Dollar Index DXY  74.00 against a basket of currencies instantly makes commodities priced in dollars worth less than before.

When Trichet was asked Thursday about the strength of the euro, he replied by very deliberately quoting statements from Tim Geithner from April 26 and Ben Bernanke on April 27 in support of their “strong dollar” policy.

OIL Short (NYSE:SCO)

US Dollar Bull (NYSE:UUP)

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Dollar Is Strengthening, Commodities Falling

Thursday, May 5th, 2011

Dollar re-adjusting Upward +/- 5% ($22.50) before next leg down

In a turn of events, the Dollar is now strengthening while commodities and stocks are faltering. Stocks fell after an unexpected jump in jobless claims, and as the dollar rose on comments from European Central Bank President Jean-Claude Trichet. 

The euro slid against the dollar and yen after European Central Bank President Jean-Claude Trichet said inflation risks will be watched “very closely,” signaling the ECB may wait until after June to raise interest rates again. Trichet refrained from using the phrase “strong vigilance” that would have signaled a June rate increase, saying only that the ECB will monitor inflation risks “very closely.” Policy makers may want more time to assess the health of the euro-area economy before adding to April’s monetary tightening. While inflation accelerated to 2.8 percent last month and economic growth is gaining momentum, higher borrowing costs may exacerbate Europe’s debt crisis, which has already forced Greece, Ireland and Portugal to ask for external help. Trichet’s comments seem less hawkish than the market had anticipated and the euro is coming off sharply. While recognizing policy remains accommodative, he is using none of the word cues that point to a June hike.

Monetary policy elsewhere is becoming tighter. Central banks in the Philippines and Malaysia today raised interest rates, and India this week increased its borrowing costs for the ninth time since March 2010. Rates in China, Asia’s biggest economy, may rise further after its central bank said yesterday that taming inflation is its top priority. With surging oil costs fueling price pressures, the period of “abnormally low” interest rates will be ending.

Initial claims for unemployment

Initial claims for unemployment rose 43,000 to 474,000 from an upwardly revised 431,000 the week before, the Labor Department reported Thursday. Economists surveyed by Reuters had expected claims to drop to 410,000. Claims are at the highest level since mid-August. The four-week moving average of unemployment claims rose by 22,250 to 431,250, the highest since November.  The news comes a day after a report showed a slowdown in the pace of private payroll growth and a decline in job cuts. The closely-watched monthly nonfarm payroll report from the government for April will be reported on Friday. Economists expect the nation added 186,000 jobs.

Nonfarm productivity in the first quarter, meanwhile, rose at a 1.6 percent annual rate, down from a 2.9 percent pace in the fourth quarter, the Labor Department also reported.

****The way to play the dollar strength is by buying PowerShares DB US Dollar Index Bullish; (NYSE:UUP) currently $20.99

****Short silver by buying (NYSE:ZSL) now up 22% since my bottom call at $14!

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Which Hedge Funds Are Selling Silver & Gold

Wednesday, May 4th, 2011

Silver, gold fall for third day from record highs

More pressure is likely to show up in silver futures markets in coming days after the Chicago Mercantile Exchange notified traders today that it’ll raise margin requirements for a fourth time in a little more than a week. Effective after the close of business Thursday, the CME’s initial margin requirements — the minimum amount of cash that must be deposited when borrowing from brokers to trade silver — will increase to $18,900 per futures contract, up from $16,200. About a year ago, the margin was $4,250. Gold & Silver is often considered a hedge against possible currency depreciation.

Today was the first full-day of the CME’s third recent margin hike on silver contracts. The latest round means that investors will get two days of trading in before costs go up again. Separately, billionaire Carlos Slim has been selling silver futures to hedge the production of his silver mine. Slim, recently designated the world’s richest man by Forbes magazine, has been selling futures contracts dated out two to three years.

The report comes after today’s WSJ story detailing how several big hedge fundmanagers such as George Soros have been moving out of silver and gold. Soros Fund Management, one of the biggest hedge-fund firms in the world, sold much of its gold and silver investments over the past month because there’s less chance of deflation. One hedge-fund manager who holds a big gold position said that Soros could, in theory, sell gold and silver to take profits and then build positions back up within days, or even hours. Indeed, Soros said in September that gold was the “ultimate bubble,” even as his hedge-fund firm built big positions in the precious metal. A Soros spokesman declined to comment. Soros Fund Management, a $28 billion firm now run by Keith Anderson, bought gold to protect against deflation. It now believes there’s less risk of a sustained drop in consumer prices because the Federal Reserve is still pumping money into the financial system, the Journal reported, citing unidentified people familiar with Anderson’s thinking. Soros Fund Management isn’t too worried about a surge in inflation because the Fed may signal at the end of 2011 that interest-rate increases are coming — possibly early in 2012

In contrast, Paulson sees gold as a hedge against currency devaluation, rather than something to trade. Nevertheless, gold could climb as high as $4,000 an ounce over the next three to five years, according to John Paulson, head of hedge-fund giant Paulson & Co., speaking to investors. Paulson said he still has most of his personal wealth in gold-denominated funds run by Paulson & Co.. Many hedge funds may be sticking with their gold investments because they’re worried about a medium- to long-term decline in the value of the U.S. dollar.

John Burbank of Passport Capital also remains a long-term gold bull and expects to buy more gold-mining shares when they decline.

Silver for July delivery settled lower by $3.20 an ounce, or 7.5%, at $39.388 an ounce on the Comex division of the New York Mercantile Exchange. That was the lowest close since April 6. Gold for June delivery dropped $25.10, or 1.6%, to settled at $1,515.30 an ounce on Comex. That represented the contract’s biggest one-day percentage drop since March 15.

Meanwhile, the iShares Silver ETF (NYSE:SLV) fell 5.7% and the Global X Silver Miners ETF (SIL) closed down 0.2%.

The SPDR Gold ETF (NYSE:GLD) finished 1.4% lower and the Market Vectors Gold Miners ETF (GDX) closed up by 0.2%.

The sibling Junior Miners Gold Trust (GDXJ) also managed to finish in positive territory, closing with a 0.1% gain.

Top holdings include Silver Standard Resources (SSRI), which was up 1.6%, andSilvercorp Metals (SVM), which gained 0.8%.

Note: Barclays has sent a late note advising clients to sell their silver positions. The firm’s analysts are now projecting that the correction will deepen and that futures could fall to around the $34 an ounce level before finding technical support. Gold’s floor appears to be around $1,475 an ounce, the report added. The analysts remain bullish on both, however, over the medium- to long-term view.

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Silver Bull Run Just Ended: Correction Commenced

Monday, May 2nd, 2011

A correction has certainly started in Silver. We’ve plotted silver’s distance from its 200-day MA. Note that following previous spikes, the market always tested its 200-day MA and it didn’t take long for it to happen. We also compare the current spike to the spikes in 2004 and 2006. Those spikes retraced a little bit more than 62%. The 62% retracement of this spike is nearly $30. I would target for re-entry at around the $27-$30 range. A market that makes a new all time high for the first time in decades is a market that moves even faster in the future. If Silver follows the same path as gold then we could be looking at $90-$125 silver in 2014-2016.

In the chart above, you can see how silver has exploded since early February and now is approaching what could be the last phase of an impressive bull market.

Price acceleration like this tends to bring out the day traders, speculators and a high degree of public interest, and usually these are warning signals that come with the end of most bull markets and eventually lead to the loud popping of the bubble.

On Sunday, May 1st, 2011, silver futures experienced something of a “flash crash” in Asia trading, dropping as much as 12% in just minutes before eventually recovering some of that loss.  This type of volatile action can be the signal for a blowoff top, and with the assassination of Osama Bin Laden, one can expect that a swift decline in silver could occur as the dollar strengthens in response to this historic event.

With prices now reaching thirty year highs and silver’s price acceleration running well ahead of gold’s, the market certainly seems to be reaching an overheated stage.  However, bulls will argue that China will continue to drive sliver prices higher, along with major funds and India, while the CME Group has raised their margin requirements on multiple occasions recently to dampen enthusiasm for the white metal.  Bulls would also argue that $100 silver is a likely possibility and a look back at history would suggest that silver has been even more expensive in ancient times, commanding as much as $800 per ounce in inflation adjusted dollars as early as the 15th century.

If you’re a silver bull, the most popular ETF is SLV, which recently has been trading at higher volumes than even SPY, the S&P 500 Index ETF which is usually the largest ETF by trading volume.

If you’re a silver bear and think the bubble is about to pop, you could use (NYSE:ZSL), ZSL up 16% today, the ProShares Ultra Short ETF, that offers two times negative moves against silver prices or you could buy put options on (NYSE:SLV) SLV itself.

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Is Silver (NYSE:SLV) Targeting $50 Next

Monday, April 25th, 2011

Silver traded to historic highs Monday the 25th of April , taking out the $49.45 an ounce that held for more than 30 years when the infamous Hunt brothers tried to corner the market. After closely reaching $50 where do we go from here. There’s are a technical warning sign in the Relative Strength Indicator (RSI), a gauge of magnitude of advancing days versus declines on down days. The RSI, has reached 89 last week, a level not seen since 2006. A pullback or “blow off top” as more of a short term correction is near, however the ultimate run is not over!

Taking out the old high was psychological. Silver is “not trading on any kind of intrinsic or fundamental value. It’s no surprise that the rally petered out “temporarily”. Regardless, investment demand for physical silver continues with strong demand coming from India and other parts of the emerging world. Momentum continues to side with the buyers.

On the contrarian view of Silver (NYSE:SLV) below I see a rather normalized trending currency, reflecting moderate fiat (dollar) debasement, within a technical framework remarkably similar to late 1980 early 1981. And low and behold, silver has very much been acting within the technical part as it did in 1980. In 1980, it was the Hunt Brothers cornering the silver market. Today, it’s more or less the sentiment of irrationality that is expressed on places like Zero Hedge and through maverick traders like Eric Sprott. One approach is a position in (NYSE:ZSL) (See below link of Silver High Since 1980) as an option trade on the silver market, without the serious risk of time decay you are exposed to with conventional options.

On the inflation side of the trade, I only see a minor pull back with the first major support below the market, to around the $45 an ounce, and $50 is the first major resistance. $125-$150 is the price in real or inflation adjusted terms that I’m targeting in the long run. Buy on any dips. I think this is the perfect opportunity to buy in a pullback price. Ben Bernanke is set to have the Fed’s first impromptu speech of the current fiscal policies to calm the bond and Treasury markets.

Eric Sprott

Canadian asset management firm Sprott Asset Management is lifting restrictions on its popular silver closed-end fund designed to give investors exposure to physical silver, a move that has at least one market observer concerned the fund’s price could be depressed as a result. As silver prices have soared in a parabolic fashion in recent months with New York Mercantile Exchange-traded silver for May delivery nearly touching $50 an ounce earlier in today’s session, Sprott Physical Silver Trust (NYSE:PSLV) has traded at a premium to its net asset value. On Friday, that premium rose to 22%, according to Barron’s.

Last week, Sprott announced in an SEC filing that it was lifting restrictions on 26% of the fund’s total units that manager Eric Sprott and affiliates had held off the market. Those units are worth $10 each, Barron’s reported, and a Wall Street Journal column notes they can be sold at anytime, which could lead to some selling pressure in the Sprott Physical Silver Trust. While the fund currently trades at levels that are more than double $10, making the now unrestricted units all the more attractive for Sprott and its affiliates that hold those units, there are no guarantees those units will actually be sold in the near-term. Consider that Sprott himself recently called silver the “investment of the decade” and said the white metal could eventually trade to $100 an ounce. If that happens, the Sprott Physical Silver Trust would soar in value, in turn leading to an even better exit point for units purchased at just $10.

At the end of 2010, Sprott held stakes in silver miners such as First Majestic Silver (NYSE:AG), Silver Wheaton (NYSE:SLW), MAG Silver (AMEX:MVG) and gold miners Yamana Gold (NYSE:AUY) and Brigus Gold (AMEX:BRD).

Silver has stolen the spotlight among investors in recent days after surging nearly $50/oz.  Lost in all the commotion, however, are the wildly disparate rumors accompanying silver’s rally.  It’s hard to believe that it has been only a week since a widely circulated story concerning a large hedge fund which supposedly made a “gargantuan” bet against silver.  This story, which smacked of being planted by speculative interests, was circulated by some otherwise reputable financial publications.

As we’ve talked about in past commentaries, whenever extremely bearish news stories are circulated in the financial press it carries a contrarian implication in most cases.  In an established bull market like the one for silver, it’s dangerous to sell short based on a rumor since the major trend is up and a large buildup in short interest can create explosive rallies when everyone decides to short the market at the same time.  This is what apparently happened last week and temporarily today.

Here’s a quote from the story that appeared in the financial press last week:

“A gargantuan bet against silver values was placed into position [April 11] with the initiation of a one million-share-large put on the iShares Silver Trust (SLV) – at the $25 level by July. The bet constituted the largest single options trade on US exchanges and came as silver was touching the 31-year high watermark near $42 per ounce.   The (as yet) unidentified buyer of said puts is in effect counting on a 37% decline in silver prices by that timeframe and is perhaps reinforcing the UBS-originated opinion issued [April 11], that ‘it takes a brave investor to buy silver right now.’”

Assuming the above statement contains the truth, the fact that several financial news wires picked up on this and circulated it with a scary headline definitely helped generate a bearish bias in the silver market among inexperienced retail traders.  It also undoubtedly resulted in many of the bears losing their shirts. One writer for the popular Seeking Alpha web site called for a 20% correction in the silver price.  He based this forecast on the fact that the silver price was dramatically over-extended from the 200-day moving average.  The lesson here again is that’s extremely dangerous to short an established uptrend based on scanty technical evidence.  Unless there is an extremely compelling (and hopefully non-publicized) reason for doing so, the best policy is to refrain from selling short in a bull market.

Please note the increased volume spike ZLV and SLV of all time highs. This leads to suggest one yes, shorts had to cover on both ends which forced higher prices, but secondly the bears build an increased bear presence to temporarily trip the rally.

Click on links below to see prior discussions and calls on Silver. (NYSE:SLV)

Silver Hits New High Since 80′s

Short Squeeze in Silver & Gold Coming Feb. 2007

Triffin Dilemma

New Silver Margin Requirement

Food Inflation Wal-Mart

Gold and Silver: History and Stocks

Silver – Long Term Investment

October 8, 2008 on Silver and Gold

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China’s Economy To Overtake US By 2016

Monday, April 25th, 2011

The IMF -International Monetary Fund has set a date for the moment when America’s world dominance will end and the U.S. economy will be overtaken by that of China. According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now. I would be the next President elected to be marked down in history to be the last to preside over the world’s largest economy. Some analysts the last few years had projected China to overtake US by 2025, but according to the IMF it’s much sooner than later.

The IMF in its analysis looks beyond exchange rates to the true, real terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies. Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and is rising. Just 10 years ago, the U.S. economy was three times the size of China’s.

We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back. And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different. The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities.

This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.

China has a state-guided form of capitalism, and we have a much freer former of capitalism. These are two systems in collision. What we have seen, is a massive shift in capability/production from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages. China has essentially followed the Japanese model of export-oriented growth, producing first and foremost for the domestic American market.

If past history is any indicator of whats to come from the US world military presence, then we’re in for a repeat in history. Spain and Britain once where dominant forces with a large Navy presence. US  is currently dominating military presence by stationing troops around the world. We’re currently spending 20-30% of our GDP in military expenditures while our economy continues to shrink.

The U.S. Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. The interest rate on the 10-year Treasury bond is supposedly the “risk-free rate” on money. And so it has been for more than a century. No wonder so many have been buying gold. If the U.S. dollar ceases to be the world’s sole reserve currency, what will be? The euro would be fine if it acts like the old deutsche mark. If it’s just the Greek drachma in drag … not so much. Silver today just hit an all time high of $50 while hit $1516. What happens when China announces it will dump US Treasuries

The last time the world’s dominant hegemon lost its ability to run things singlehandedly was early in the past century. That’s when the U.S. and Germany surpassed Great Britain. It didn’t turn out well.

It provides a painful context for the budget wrangling taking place in Washington, D.C., right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power.

China has militantly kept their banks out of the global derivatives disaster that is just beginning to unfold, which gave them enough liquidity to implement almost immediately a massive domestic stimulation program that has – so far, at least – allowed them to maintain a respectable growth rate .. [for the moment].

The problem for China is if the US market to which they are still so structurally connected doesn’t pick up before the steam generated by their well-conceived and quickly-instituted domestic pick-up program runs out of gas. The lesson of Japan for China is not the dangers of letting the finance sector dominate the economy and society – that’s what the US should have, but still doesn’t seem to have, learned. The lesson of Japan for China is that an export-oriented economy is as dependent on the health of its main markets as a crackhead is on its dealer. Creating domestic demand big enough to sustain China’s massive industrial infrastructure is no easy task. It’s not by any means impossible, especially with such an intelligent leadership. But it will require a real willingness to consider not just a radical re-structuring of the Chinese economy, but the political changes that may come with it.

Facts from MarketWatch

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