Since 1913, the Fed has been in place to defend the dollar while fulfilling its dual mandate of stable prices and full employment. Despite its efforts the US dollar has basically lost 95 percent of its purchasing power over the past 96 years.

Paul and DeMint argue that Fed transparency is required to reveal “who the Fed is giving money to, what types of securities are being purchased and what backs those securities, [and] how much money is being paid for those securities”.

As it stands, the Freedom of Information Act is not sufficient for making these facts public. Even with it in place, media like Bloomberg and Fox News are forced to litigate in order to gain access to the kind of financial crisis-related information that should be readily at their disposal.

Currently, the only Fed supervision in place is the chairman’s twice-yearly appearance before Congress to explain his decisions. As Paul and DeMint explain, “the idea that this constitutes any sort of oversight is laughable.”

See the full coverage from the Wall Street Journal on how Americans deserve a transparent Fed.

Ron Paul Says Fed “Oversight is Laughable” originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Now let’s ask, where’s the world’s tungsten? Here’s a recent pie chart of world tungsten reserves.

In addition to its large reserve base (57%), China presently controls about 75% of the world’s output of tungsten. Characteristically, China’s national resource policy is to ensure that the long-term needs of its own industrial base are satisfied. In the past three years, the Chinese have begun to reduce export volumes, while at the same time diverting more and more tungsten output to domestic industry or to foreign companies that locate plants in China.

Does that sound familiar? It’s the same thing that the Chinese are doing with rare earths and other elements, like indium.

Here’s where things stand. According to the U.S. Geological Survey, China dominates world tungsten mining and primary processing. Tungsten availability to non-Chinese markets is tightening, and will doubtless continue to decline. Equally important, China is now becoming a major importer of tungsten concentrates and scrap materials.

Ongoing rapid growth in demand within China will ensure that competition for raw materials between Chinese and non-Chinese processors will continue and intensify. So it’s clear that there’s now an urgent need for increased tungsten output outside China.

China Owns the Heavy Stone originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

“Record numbers late on US loans,” says a headline in The Financial Times.

The story is easy to understand. People without jobs can’t make mortgage payments. So, payments are late on 1 of every 6 FHA mortgages. Mortgage defaults are at a 3-decade high. Of all mortgages, nearly one homeowner in 10 is running late in his payments.

As predicted in this space, problems in the housing finance sector are now shifting from sub-prime to prime mortgages. The subprime borrower had few resources. He washed up as soon as the crisis began. But now the prime borrower, who lost his job and is running out of options, is sinking too.

What’s the smart money doing?

The Dow is now up more than 50% from its March low…and has regained more than 50% of what it lost. Are the insiders taking advantage of this dip to get bigger stakes in their own companies? No… They’re selling 18 times as many shares as they’re buying. Go figure.

The insiders know that their businesses are not really in good shape. They’ve been able to maintain profit margins by cutting staff. But sales are down. And they don’t see where additional sales will come from.

Meanwhile, investors have been hallucinating about a real recovery. They’ve bid up the price of shares as though they expected a stunning period of growth. Generally, earnings have held steady…but stock prices have gone up.

This has brought a 10-point increase in the P/E ratio, to greater than 27.

What would justify such an ambitious P/E? Only growth. Where might growth come from? We don’t know. David Rosenberg says stocks are priced as if investors expected profits to double next year. But it usually takes profits 5 years to double. And then, only when they have a reason to double – such as higher sales and lower costs.

Don’t count on it, dear reader.

Real Recovery Hallucinations originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

However, the operation actually came by way of extracting many of the economy’s critical organs — jobs, the financial health of the nation, the integrity of the US dollar, and so forth — basically the ones necessary to keep it alive.

Recovery Attempt has Castrated the Economy originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

China is a country of hyperbole. There’s scarcely anything you can say about it that doesn’t end with ‘est.’ In some ways, it is the world’s oldest society. In other ways, it is its newest. It is the world’s richest – with more than $2 trillion in reserves. It is also the world’s poorest, with some 200 million people who get by on less than $5 per day. It faces the world’s biggest problems too.

Even in its calamities, China is second to none. People inside the Great Wall were about as rich as people outside it, man for man, until the 19th century. Then, China missed the industrial revolution. Nearby Japan missed it too, but quickly corrected its mistake. It kept the barbarians at arms length, but still managed to pick their pockets. The Chinese, on the other hand, played it cool. The barbarians had nothing to offer, they believed. They still think so. Said Xue Chen of the Shanghai Institute of International Studies, just last week: “The US has a lot to ask from China. On the other hand, the US has little to offer China.”

In the early 19th century, traders from Britain and America bought porcelain (china), silk and tea. Trouble was, they could find nothing to sell in exchange. The trade balance with China went negative, with China building up substantial monetary reserves (in silver). In 1830, a Chinese merchant, Hao Gua, who enjoyed a near monopoly on trade with the gweilos [foreign devils], was said to be one of the richest men in the world. Then, the English found something the Chinese would buy – opium. The fruit of the poppy was popular in many countries but, as usual, the Chinese over-did it. First, it was a favorite of the leisure classes. Then, it trickled down to ordinary workmen. Soon the coolies were neglecting their labors and China was in crisis. When the authorities tried to stop the drug trade, the English opened fire, humiliating the government and almost bankrupting it. People lost confidence in Manchu rule. By mid-century, nearly half the country was in open revolt. A Christian revolutionary had set up the “Heavenly Kingdom” in Nanjing. He raised armies and challenged the Qing Dynasty to battle. For a time, it looked like he might win.

In the north, meanwhile, infanticide of female babies had become common in Nien territory – a reaction to famine and scarcity. By mid-century, one out of four young men in the region couldn’t find a bride; “bare branches,” they were called. By 1855, these bare branches were ready to break. They armed themselves and organized. They drove out government forces and controlled a large part of the country before they were finally put down. Between natural calamities and war, some experts put the 19-century death toll at an unimaginable 200 million. And then came the 20th century! The Middle Kingdom staggered forward, from error to accident to catastrophe! From the Taiping insurrection to Mao Tsetung. Then, 30 years ago, Deng Tsaoping announced the new line: “To get rich is glorious,” he said. Suddenly, the Chinese began saving every penny. Building factories. Cutting prices. And beating the barbarians at their own game.

Again, they exaggerated. While Americans built too many shopping malls, the Chinese built too many factories. Then, in 2008-2009 came the “greatest collapse in world trade in history,” says Nobel-winning economist Paul Krugman. Americans – their biggest customers – rediscovered thrift. You might think China would realize it had too much capacity and back off. Instead, it rolled more steel. It built more factories and offices…entire cities.

If stimulus spending is a measure of stupidity, the Chinese are three times as dumb as Americans. Both governments respond to correction by doing more wrong than they did before. Loans in China are rising by about 40% of GDP annually. The money supply is soaring at nearly 30% a year. “We estimate that [fixed capital formation] accounted for 70% of China’s growth in 2008 and close to 90% of China’s first half of 2009 growth,” says a report from Pivot Capital.

It is just a matter of time until this capital spending bubble blows up. But China is full of bubbles. In another example of its central planning, it made the ancient practice of infanticide state policy. One couple/one child was the rule. Missing girls was the result. Then, when the boys grew up, they discovered that their brides were missing too. The working age population of China is collapsing. There were 7 workers to every old person in 1990. Now, there are barely 4. By 2035, there will be only 2. What happened to the workers? They are the missing children of the missing girls who then became missing mothers. And by 2040, 397 billion old people – more than the total populations of France, Germany, Italy, Japan and the UK combined – will be missing the support of those missing workers.

Where this leads, we don’t pretend to know. But bare branches bend…and then they break.

Regards,

Bill Bonner,
for The Daily Reckoning

P.S. Long suffering readers are reminded that we’ll be presenting an exclusive interview with dear friend and colleague, Dr. Marc Faber, in this space next Tuesday, November 24th at 2 PM. His views on China are creating quite the stir…

You probably already know Dr. Faber as editor of The Gloom, Boom and Doom Report. Put simply, he’s one of the finest contrarian economists working today. Below is a preview of the interview and instructions on how to make sure you can access it for free next Tuesday.

Bare Branches originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

As we reported earlier this month, Ron Paul’s popular proposal of HR 1207 was gutted by Mel Watt, a congressman firmly tucked in the pocket of the American banking industry. In typical political form, Paul and Congressman Alan Grayson took the language of the original “audit the Fed” bill, turned it into an amendment of a different bill about to come to vote and managed to get the thing approved yesterday by the House Financial Services Committee. Heh… not even an honest bill can get through without some sneaky politics.

Should it be passed by the full House and Senate, Paul’s people say the amendment:

• “Removes the blanket restrictions on GAO audits of the Fed
• Allows audit of every item on the Fed’s balance sheet, all credit facilities, all securities purchase programs, etc.
• Retains limited audit exemption on unreleased transcripts and minutes
• Sets 180-day time lag before details of Fed’s market actions may be released
• States that nothing in the amendment shall be construed as interference in or dictation of monetary policy by Congress or the GAO.”

Bravo.

But just like Indian summer, in the back of our minds, we fear some dark, cold days might be around the corner. The new Paul/Grayson amendment is attached to Barney Frank’s HR 3996, what he calls the “Financial Stability Improvement Act of 2009.” That’s the “too big to fail” legislation we mentioned last month that would, among other things, allocate $200 billion to help the government to seize companies they feel have too much systemic risk.

And even if Paul’s amendment still becomes law — and if the evils in Barney Frank’s bill don’t manage to completely negate it — there’s no guarantee whatsoever that our government won’t find a way to screw it up. We’re all for lifting the Fed’s veil of secrecy, but as Sen. Jim DeMint put it, “If there’s anything worse than a secret Federal Reserve, it’s Congress controlling it.”

HR 1207 Dies, Yet “Audit the Fed” Lives On originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

So, when I arrived here this morning, I had one thing on the top of my list of things to do, and that was to find out what happened… Come on, I said to myself, it had to be more than the “risk on, risk off” stuff that’s been hanging over the markets like the Sword of Damocles! But, when you get right down to the nitty gritty, that’s all it was… For once again, there was some data, or story, or rumor, that spooked the markets into believing the global recovery isn’t going to happen, and the “risk off” came into play.

So what was it that spooked the markets… Well… The only thing I can find was the report yesterday about falling Housing Starts that Chris told you about… Did you know that about 14% of US homeowners were either delinquent on their mortgage or in some stage of foreclosure? That is the highest rate since the group started collecting the data in 1972!

But there was something else that was announced as the day went on, that I think probably spooked the markets more than anything else… And that is a key House panel approved two amendments to a sweeping financial-overhaul bill that would give federal watchdogs new authority to audit the Federal Reserve, and would establish a fund of as much as $200 billion to help dissolve large, troubled institutions. Rep. Ron Paul (R., Texas) offered the amendment seeking to subject the Fed to audits.

The House Financial Services Committee voted 41-28 to approve the amendments, wrapping up weeks of debate but postponing a final vote on the bill until after Thanksgiving.

OK… More deficit spending for sure, and I’m positive that this was “hung on this bill” to audit the Fed as the only way it would get through the gauntlet.

Why would this bill “spook the markets?” Ahhh grasshopper… To audit the cartel, is a step toward getting a peek behind the curtain, and that’s scary, folks… But it’s what is needed! And so I applaud the panel’s vote… (Too bad they had to hang that $200 billion deficit spending package onto this, but that’s how the dolts in DC work…)

So… When things get spooky, traders crawl back into the dollar’s corner… And when traders crawl back into the dollar’s corner, the currencies that have booked the best performances against the dollar, see their fortunes reversed the most… So… In this case, it’s the Aussie dollar (AUD), New Zealand dollar (NZD), Norwegian krone (NOK), and Brazilian real (BRL)… These three will most likely put a losing week into the books, which hasn’t happened very often during this rally that began in March. I say “most likely” because we’ve seen swings in these currencies that could easily wipe out these weekly losses in a NY minute! But with today’s data cupboard as empty as my stomach feels, right now… I doubt we’ll see any “swings” to bring these currencies to the positive side of the ledger this week!

The Weekly Initial Jobless Claims here in the US printed yesterday at 505,000, same as the week before… I heard one airhead TV commentator say that at 505,000, it shows that employment is on the mend… Ahem… Did you do the math? That’s over 2 million new jobless people per month!

Yes, I know it doesn’t net out the jobs that were created… I’m strictly talking about jobs that are lost on a weekly basis… You can’t in your wildest dreams think that we’re creating more than 2 million jobs a month during a depression!

So… That data wasn’t good for the “recovery campers”.

I was writing some notes for my latest video on Wednesday, and noted that Japanese yen (JPY), gets the best of “risk on, risk off” trading. For some strange reason – and yes, I’m well aware that Japan is the second largest economy in the world – Japanese yen is considered a “safe haven” when the “risk off” is in play… And when the “risk on” is in play, spanking the dollar, Japanese yen doesn’t sell-off!

Now… I’m not a HUGE fan of Japan, as their government deficit is tremendous in size, rivaling the doubled in size national debt of the United States. And I personally feel that the yen at 88 and change is bumping the ceiling… But, the markets can be irrational, right? And with yen, they are really irrational!

Hey! Did you see that there’s pressure on US Treasury Secretary Tim Geithner to resign? Personally, I don’t know that he’s done any worse than Hank Paulson… But then, is that what we’ve come to accept? Bad leadership? I’ve said this before, and I know it really gets under some people’s skin… But, besides the national deficit and the trade deficit, we have a leadership deficit… I’m talking about the lawmakers, the Fed Chairman, and Treasury Secretary… I guess the administration should be thrown in there, as well.

The European Central Bank’s President, Trichet, and the Swiss National Bank’s Governor Roth, both spoke last night, and neither referred to the currencies in any way; but Trichet did add to the “risk off” mood of the markets by saying, “it is too early, as of today, to declare the crisis is over.” The People’s Bank of China’s Governor, Zhou, said that China was “passive on the direction of the dollar”… Hmmm… I have to wonder if he was truly speaking from the heart there, or just stating that to keep the dollar from falling into an abyss.

You know about the stock sell-off that I’ve been warning you about for a couple of months now, that could very well drag the currencies and commodities along for the ride? Well… I know that you all think that I’m playing the boy who cried wolf, here… But, recent trading days have me worried a bit about this taking baby steps right now.

My trader/chartist friend sent me a note and told me to watch the Aussie, for it is very close to its 9-month trend line support of 0.9093 (it’s currently at 0.9110), for should it close below that number it would signal (according to him!) a correction to 88-cents. Not a huge drop, but it’s not like these charts can pinpoint a level that a currency will turn around… Or maybe they can! I’m lost when it comes to charts… I look at them and unless they are as obvious as a man with a hatchet in his head (like the US dollar chart since 1971) then I could make a case for an asset that’s being charted to go either way!

That’s why charts are not “fundamentals”… Fundamentals are what put an asset into a trend, either weak or strong, and charts tell you what happened in that trend.

And then there was this… According to The Wall Street Journal, “Some of Goldman’s largest shareholders have urged the firm to reduce the size of its bonus pool, arguing that it should pass along more of its blockbuster earnings to investors. The investors hold tens of millions of shares in the Wall Street firm, which is on track to make the biggest employee payout in its 140-year history.”

Where have these “largest shareholders” been all these years? Why make a big deal about this now? Oh, that’s right! The government has made it look “dirty” to give bonuses.

Oh… And I heard that the Senate’s version of the Health Care Bill would cost $849 billion… Just keep spending money we don’t have, Congress… I’m reminded of a saying by Voltaire… “Common Sense is not so Common.”

To recap… The “risk off” wax is being applied by Mr. Myagi again this morning, as the non-dollar currencies, other than yen, have given back recent gains versus the dollar. The “audit the Fed” bill has been pushed through the gauntlet for a vote after Thanksgiving. The Aussie dollar is near its 9-month trend level, and shareholders want “some of the action”!

“Audit the Fed” Bill Moves Along originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Well, the government is trying to help… which is usually a bad sign. The Federal Housing Administration right now has an insurance reserve ratio of just 0.53 percent. Robert Toll of home builder Toll Brothers recently referred to the FHA as a “definite train wreck.”

The government is also supporting the housing market with the $8,000 first-time homebuyer tax credit. It’s been expanded to include previous homeowners and extended until March. Unfortunately, it’s an even bigger fiasco than Cash for Clunkers. Most homebuyers using the credit would have needed to purchase a home anyway, so each additional house sold through the program may just be costing the government about $43,000.

There are very few bright spots in housing, which Barron’s describes as getting a “disastrous batch of data”. The article also goes on to say…

“Even with housing affordability the highest in years from low mortgage rates and reduced home prices, there’s little reason to expect a revival in homebuilding as long as the inventory of unsold houses and foreclosures remain high, credit is tight and unemployment is in double digits.

“Perhaps that’s why the shares of the big public homebuilders, as represented by the SPDR S&P Homebuilders exchange-traded fund (XHB), topped out two months ago and have been moving sideways to lower since. That says more than economists’ misguided forecasts of rising housing starts.”

For more information on the real estate sector see the full coverage in this Barron’s article on how the housing recovery is built on sand.

Latest “Disastrous” Housing Data Shows Homebuilders are Hopeless originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Our Chairman, who art at Goldman
Blanfein be thy name
The rally’s come
God’s work be done
On earth as there’s no fear of correction
Give us our daily gains…

Poor Goldman Sachs. Everyone is on its case. Criticizing. Carping. Jealous. Envious.

So, today we rise in defense of the Wall Street giant. Yes, the Goldmen may be shysters. But they are honest shysters…

We pick up sword and shield, ready to fight for Goldman, after reading The Financial Times. The FT has devoted a whole page to Goldman bashing. It’s time someone stood up to say a kind word for the firm.

Besides, Lloyd Blankfein said he was sorry. That’s right. He announced that the firm regretted its role in the world financial crisis. And if that weren’t enough, he pledged half a billion dollars to helping small business through tough times.

In his apology, Blankfein mentioned that he thought Goldman was doing “God’s work.” That is what prompted humorists to make up the “Lloyd’s Prayer,” we have republished above. On the surface of it, it does seem absurd. If any group of people ever worshipped Mammon, it is the bunch that works at Goldman. Money is what makes that mare run; no one doubts it.

In 2008, the average compensation of the average Goldman employee averaged $364,000 – or more than 6 times the earnings of the average American who was not employed by Goldman. Naturally, the widespread publication of this fact caused a surge of envy. Now comes news that the average Goldman man expects to make about twice as much this year – or about $765,000. As you can imagine, this did nothing to soothe the jealous spirits. Instead, it inflamed them.

And now, everyone has Goldman in his sights. Newspaper editorials kvetch and moan. Union-organized yahoos demonstrate in front of Goldman’s offices. Cartoons make fun of Blankfein. Commentators say the Goldman crew is greedy. Rolling Stone magazine described Goldman as a “vampire squid.” Saturday Night Live mocked the company. Stand up comics stock up on Goldman jokes. Even priests criticize the firm’s claim to be doing ‘God’s work.’

The regulators cannot be far behind. It is illegal to trade on “inside information.” So, when a company targets the shares of a rival, and passes its buy orders through a Wall Street firm, the traders are forbidden from trading the shares on their own account. They cannot profit from ‘front running’ shares, based information not yet available to the public.

Goldman clearly profits from front running. But it does it by aggregating information from clients rather than using the inside information from a single client. This gives them a “market color,” rather than precise trading targets. In other words, if you have a client who sets out to acquire Acme Cement Company, you can’t buy up the shares yourself in anticipation of the rise in the share prices. That information is “protected, inside information.” But suppose you have two clients, each of whom targets a cement firm? You quickly get a “market color,” don’t you? You put two and two together. If they’re both after cement makers, probably, the whole cement sector will go up. You buy cement makers, though not those that your clients are buying.

This aggregated inside information gives Goldman a big advantage. So do its close contacts with the feds. Goldman has its former operatives in key posts throughout the government. It knows what the government is doing; it has a fair idea of what the government will do next. In trading US government securities, the biggest business in the financial world, this “insider” knowledge is no doubt a handy thing to have. It doesn’t hurt either that the Fed is making money available to Goldman at practically no cost. Nor, that the Fed is buying its mortgage backed securities – perhaps even ones that would be hard to unload on the private market.

These contacts and sources of ‘insider’ information are what George Soros has called the “hidden gifts” that Goldman enjoys…and that contribute mightily to its success.

But so what? As far as we know, Goldman holds no gun to any counterparty’s head. Nor does it lie…unless you call saying things that aren’t true “lying.” Goldman merely says the same falsehoods as the rest of the financial industry…the things people want to hear…which almost everyone believes anyway. And is there anything wrong with taking money from the US government? Doesn’t every retiree do so? Doesn’t every larcenous Congressman and every conniving contractor and every shiftless welfare addict aim to do the same thing? Isn’t the whole idea of government to take from someone and give to someone else? Then, why not to those who are most able to claim it? The swift…the strong…the smart…the Goldmans!

No, dear reader, we cannot criticize Goldman. Instead, we admire it. Goldman took advantage of the financial boom by selling debt and derivatives all over the world. Now, it takes advantage of the ‘recovery,’ by trading on its client information. And who can blame it for wanting to do business with the richest and dumbest client of all, the US government?

In God’s plan, at least as we see it, the lowly are raised up. The rich…the proud…and the foolish are brought down. God deals with the meek on his own. Goldman helps him bring the boom down on the others.

Until tomorrow,

Bill Bonner
The Daily Reckoning

In Defense of Goldman originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Deep down, it pains me to part from GE. This is an iconic old American firm, now grown into a world technology powerhouse (no pun intended). I honestly LOVE the GE business divisions that deal with ‘real’ things, like jet engines and locomotives and power generators and windmills and subsea equipment. I get misty-eyed thinking of all the wonderful GE people who work in those metal-bending divisions, toiling at their workbenches and making the world a better place.

Then there’s GE management, which apparently has not learned its lessons from the world monetary crash of the past couple years. The money side of GE still has too much bad commercial paper. A lot of borrowers owe GE more than they’ll ever repay. And GE owes a lot of lenders more than the company can afford. There’s a looming crash in commercial real estate, and it’s set to kick in during the winter of 2010. It’ll shred GE’s capital position and rip a big hole in the bottom line.

I’ve often asked whether the GE industrial side can earn profits for the company faster than GE Capital can lose money. I’m not going to wait around to find out.

Get Rid of General Electric originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.