Monday, March 7, 2011


Crude's Ramp Benefits Gold

From my perch, the rise in the price of crude is the best friend to gold investors.

Oil at $105 a barrel is deflationary, and if energy prices continue to stay elevated, it argues in favor of more monetary easing, more currency debasement and higher gold prices.

Morgan Stanley Cancels Oil Trades With Libya

Reuters is saying that Morgan Stanley is cancelling oil trades with Libya.

Gadhafi Seeks Safe Passage?

I am hearing rumors that crude moved lower today (from its highs) based on rumors that Gadhafi has turned to the rebel National Transitional Council to gain a safe passage out of Libya.

I have no clue if there is any accuracy to this story.

A Two-Headed Economy

"Now, by two-headed Janus, nature hath framed strange fellows in her time."

-- William Shakespeare, The Merchant of Venice (Act I, Scene I)

In Roman mythology, Janus is the god of beginnings and endings. He is depicted as having two heads, facing opposite directions. So it is with the two-headed U.S. economy.

While corporations are flush with cash, are running a near-six-decade peak in operating margins and are within two quarters of eclipsing the previous peak in corporate profits, the economic crisis of 2007-2009 still haunts the average American.

Nevertheless, the schism between the haves (large corporations) and the have-nots (the middle class) -- what I have described as the screwflation of the middle class -- continues to widen and, in the fullness of time, could jeopardize the economic expansion.

According to the Bureau of Labor Statistics, 16% of the labor force, or over 25 million Americans, are out of work (14 million unemployed and 11 million underemployed). Mega trends of globalization, technological advances and the growing presence of temporary hirings as a permanent feature of the workplace form the basis of a secular rise in structural unemployment. Further depressing job creation is the fact that there are few growth engines to replace residential real estate, a sector that was such a prominent contributor to GDP and labor in the last cycle.

The plight of the middle class, both in a relative and absolute sense, seems to have deteriorated further as Friday's jobs report disclosed that the average workweek declined by 0.1 hours and there was no change in average hourly earnings. The employment participation, back down to 27 year lows, casts a long shadow on the domestic economy, which, despite normal population growth, currently employs only the same number of people as in 2003. Meanwhile, the cost of necessities (most notably of an energy kind) continues an uninterrupted rise, serving to obviously pressure not only the unemployed but the average Joe that has a job.

Most bulls object to this negative analysis, citing a likely pickup in hiring that will be the natural consequence of an expanding domestic economy, rising profits and buoyed confidence in the future. They fully recognize the ultimate cost of policy and absence of budget constraint but view the due bills (of higher inflation and interest rates) as too far in the future to be concerned with, particularly given the confidence held regarding 2011 profit growth.

Since the generational low, those bullish investors have correctly dismissed numerous other concerns:

* rising instability in the Middle East and the resulting sharp increase in energy prices;

* a rapid rise in food and other input prices;

* the historical ramifications of higher silver and gold prices (read: currency debasement, higher inflation);

* fiscal imbalances (and the austerity that ensues) at the local and state levels;

* an apparent unwillingness of either political party to address the federal budget deficit;

* a eurozone that has only temporarily deferred its sovereign debt problems;

* a still-moribund housing market plagued by a large shadow inventory of unsold homes.

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