Debt fish through the window

I'm a big fan of Tom Toles at the Washington Post, but someone is going to have to explain this one to me. The debt fish swimming through the window clarified what?

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A sucker rally or a new bull market?

It has been quite a month.

The newspapers were full of stories last week about how March was the best month for stock markets in six years and that the last four weeks were the best stretch for equities since either 1933 or 1938, depending upon the source.

The distinction is unimportant as investors have gotten the message - stocks are on a tear.
Broad indexes have risen between 20 and 30 percent over the last month and recent reports have shown a deceleration in the rate of decline for some economic indicators and tentative signs of a bottom for others, leading many to believe that the worst is now behind us.

The move up in equity markets since the early-March low has officially entered "bull market" territory after a flurry of government actions, pronouncements of profitability from Wall Street firms, and optimism that global leaders at the G20 meeting are taking steps to tackle the financial crisis. All of this has convinced more than a few investors and traders that this is the time to buy riskier assets with the potential for a greater return and stock prices have been bid higher.

The important question becomes, "Is this a sucker rally with lower lows ahead or is this an enduring new bull market?"

That is the question that some people have been asking over the last few weeks, however, with each passing day of stock market gains, fewer and fewer people seem to wonder about it, opting instead to go with the flow, to add to the momentum.

In my view, recent lows for U.S. stocks are likely to be retested again this year, probably making new lows in the process, and equity markets around the world will likely move down with them.

It really boils down to two factors - the U.S. economy and corporate earnings.

The question of decoupling - the idea that emerging markets can ignore recessions in developed economies such as the U.S., Europe, and Japan - will be addressed in a subsequent update as it is deserving of its own lengthy consideration. There is more and more promise that growth in China, Brazil, India, and elsewhere can continue despite continuing troubles in developed nations and this is a critical factor in anyone's investment approach.

For now, the discussion will be limited to the United States.

The U.S. Economy

As has been the case for most of this decade, the future of the U.S. economy is dependent on housing. While financial markets and commerce may be dependent on the banking system and credit flows, the U.S. economy is soundly based on consumer spending and consumer spending, today, is driven in large part by the value of peoples' homes. Until home prices stabilize, consumers will not reemerge in big numbers to borrow and spend and, despite all the recent government initiatives, home prices are going to continue to fall this year. There is simply too much inventory in the pipeline.

As noted last week when discussing the latest report on existing home sales, it is a straightforward predicament, "the red curve and the blue bars in the nearby chart must draw much closer to each other before the downward pressure on prices abates".
Despite what the NAR (National Association of Realtors) might say or what the talking heads on CNBC might offer, that is not likely to happen anytime soon as foreclosure rates continue to break records, more and more homeowners throwing in the towel, walking away from homes where they owe more than the homes are now worth. Banks continue to struggle with their growing inventory of properties and, importantly, the bulk of these bank owned properties have not yet been listed for sale.

In the most recent data from both the NAR and the S&P Case-Shiller Home Price Index, home price declines continue to accelerate, largely driven by distressed property sales which, in many areas, account for more than half of all sales.

The foreclosure market is the market in many areas and defaults are now increasing fastest among prime loans made to borrowers with strong credit. The next wave of mortgage defaults will be the Alt-A and Option ARM loans where borrowers bought property with little or no documentation of income or assets, often times making only minimum payments that did not even cover all the monthly interest due. In contrast to the subprime debacle in 2007 and 2008, many of the Alt-A and Option ARM loans were used to purchase higher priced homes, a good example of this being the area where my wife and are I moving to next month - Bend, Oregon.

This is an area that, for years, has been regarded as overpriced since buyers from Portland and Seattle bid up home values earlier in the decade when the second-home buying frenzy was in full swing. In Bend, during the first quarter, notices of default almost tripled from the level of a year ago. This is in contrast to other parts of the country where foreclosure rates have leveled out at historically high levels over the last year as many of the low-priced homes with subprime mortgages have already been repossessed. Real estate prices in New York City are now starting to tumble and defaults are moving up the socio-economic ladder.

Interestingly, the expected increase in distressed sales at higher prices may have a big impact on some of the median home price statistics to be reported this year. Remember that the median price is highly dependent on the "mix" of home sales and that the sale of more higher priced homes will push up the median price even if these sales occur at steep discounts to what was paid for the same house a year or two ago. This will likely be misinterpreted as a sign of recovery.

With loan modifications souring quickly as job losses mount, housing is in no position to begin a recovery this year. While new and existing home sales may make a bottom by year-end, prices will continue to tumble and, absent any wholesale move by the government to buy up tracts of houses and bulldoze them into the ground, the supply/demand picture will not normalize until prices are much lower, probably sometime in 2010, perhaps not until 2011. Clear signs of this stabilization in prices are a prerequisite for the economy to reach a bottom and we have yet to see that.

Corporate Earnings

Reports last week indicated delinquencies increased to record highs in almost all consumer loan categories as falling home prices have now combined with job losses to create a vicious cycle downward. This only adds to the distress in the consumer sector and while both retail sales and automobile sales have shown signs of stabilizing, they remain at very low levels. Simply stabilizing at these depressed levels is not enough to support an economic rebound.

Commercial real estate defaults are now beginning to appear in large numbers, delinquent loans increasing some 41 percent from $46 billion in the fourth quarter of last year to $65 billion in the first quarter of 2009. In Los Angeles alone there are now almost $8 billion in distressed properties, nearly triple the level of late last year, and Las Vegas recently saw a 54 percent increase to $6 billion.

All of this will weigh on equity markets in the weeks and months ahead as first quarter earnings are announced.

Based on the number of warnings that have been issued thus far, bottom lines for the first quarter are likely to be almost as bad as the abysmal results seen in the fourth quarter when operating earnings for the S&P 500 overall were in the red. Importantly, there may be some big improvements in the banking sector due to "mark-to-market" changes approved last week which allow "significant" judgment in valuing assets, including mortgage-backed securities.

Total operating earnings for the S&P500 are expected to be down almost 40 percent from a year ago but it is the outlook for the future that is more important for stock prices than last quarter's results.

It will be comments by company officials about business conditions and projections of future earnings that investors will look to in order to value their shares.

Since stock prices are "forward looking" - taking into account both estimated future earnings and the health of the economy from which those earnings derive - it will be the prospects for the economy later in the year that will most influence stock prices in the near-term.

Conventional wisdom over the last fifty years or so is that, during recessions, stocks make a bottom at around the same time that monthly job losses peak and, in some cases during the second half of the 20th century, stocks put in their lows in advance of the worst of the labor market downturn.
If past is precedent and if the recent January decline in nonfarm payrolls of 741,000 turns out to be the peak for this cycle, then it is reasonable to believe that the March low in equity markets could be a lasting bottom.

However, if either of those are untrue - that this downturn will be different than previous recessions or that job losses have not yet reached their peak - then we are more likely to see new lows sometime later this year. In my view, that is the most likely scenario - one of those two conditions will not be met.

It wouldn't be the first time that stock market investors came too early to the party.

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The European banking system

From Tom Toles of the Washington Post:

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Not so stable value funds

With all the other things in the world for investors to worry about these days, whether or not stable value funds are appropriately names shouldn't be one of them, but according to this Wall Street Jounal report, apparently it is.

An unnerving new crack emerged in the $520 billion stable-value fund market as an offering for workers at Chrysler LLC dropped 11%, highlighting strains in yet another supposedly safe investment.
...
Stable-value funds, available only in tax-deferred savings plans such as 401(k)s, are designed to provide capital preservation and smooth, positive returns. But Chrysler Stable Value Fund B, offered to certain Chrysler employees and retirees through company savings plans, paid out only 89 cents on the dollar when the fund was liquidated earlier this year. Chrysler declined to say how much money was in the fund.
...
Investors have been pouring money into stable-value funds in recent months seeking shelter from the market storm. These funds generally invest in bonds and then use bank or insurance-company contracts to smooth results.

It shouldn't be too surprising that these funds are running into trouble, particularly since insurance companies are involved. Realistically, how else do you pay three or four percent in returns when the best you can do elsewhere is about half that amount?

Someone must be taking some big risks somewhere that are not being disclosed or it's just another Ponzie scheme - some combination of AIG accounting or Bernie Madoff investing.

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2009 will be like 1929?

Ruh-roh. Thomas Worsley, a 97-year old economist who worked in the Roosevelt administration, offers up some not-so-reassuring comparisons between now and then.

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Tuesday morning links

TOP STORIES
• Default Rate Surges to Highest Since Depression, Moody’s Says - Bloomberg
• IMF gold sale may push down prices below $800 - Commodity Online
• China's economy to bottom out in mid 2009; World Bank - CHINADaily
• Toxic debts could reach $4 trillion, IMF to warn - Times Online
• FDIC’s Insurance Commitments 34% Higher Than Reported - Option Armageddon
• Exclusive: Tearful Allen Stanford Expects Indictment in Two Weeks - ABC News
• Larry Summers, Tim Geithner and Wall Street's ownership of government - Salon
• Turning Japanese - Foreign Affairs

MARKETS/INVESTING
• Oil falls below $51 as rally loses steam - AP
• Goldman: IMF Gold Sales to Have ‘Limited Impact’ - Bloomberg
• SEC to mull 4 short-selling rules - CNN/Money
• High-tech layoffs climb in first quarter - MarketWatch
• “Getting, Keeping, Losing!” - Saut, Raymond James
• Resisting the Temptation to Buy Gold - Inner Workings

ECONOMY
• Optimism on U.S. economy up: poll - Reuters
• Soros says U.S. faces "lasting slowdown" - Reuters
• Recovery hopes begin to blossom - CNN/Money
• Economy Falling Years Behind Full Speed - NY Times
• Pensioners 'cannot afford to survive' - Telegraph

INTERNATIONAL
• Japan and Australia Take Steps to Revive Economy - NY Times
• U.K. Manufacturing Drops Most Since at Least 1968 - Bloomberg
• China to improve yuan cross-border payment system - CHINADaily
• Is the Almighty Dollar Doomed? - Time
• Strength or weakness? China’s dollar reserves - Setser, CFR
• Japan set for second economic bail-out - Telegraph
• Eurozone retail sales slump by 4% - BBC
• Russian Economy Contracts at Record Pace - Bloomberg

HOUSING
• Can she buy now and resell for a gain in five years? - Boston.com
• Are FHA loans the next housing time bomb? - CNN/Money
• Panic tears at the heart of the system, Warsh says - MarketWatch
• Loan modification subject to growing fraud - Signs on San Diego

FED/TREASURY/BANKING
• Key Libor Rates Ease; Central Bank Action Key - WSJ
• Mayo Gives Banks ‘Underweight’ Rating on Loan Losses - Bloomberg
• Fighting Recklessness with Recklessness - Hussman, Hussman Funds
• 5 central banks swap currencies - CNN/Money

INTERESTING
• Stanford: 'Clients lost no money' - BBC
• GM and Segway plan electric two-wheeler - AFP
• Gravity satellite feels the force - BBC

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Ruth visits Bernie in jail

Ruth Madoff visited Bernie Madoff in jail today and CNBC was there to capture the drama.

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The Swiss slide into deflation

Ambrose Evans Pritchard is alarmed at the prospect that the entire nation of Switzerland may soon be sucked into a giant black hole otherwise known as "deflation".

Swiss consumer prices fell 0.4pc in March (year-on-year). Swiss CPI will be minus 1pc at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late.

"This is something that we must prevent at all costs. The current situation is extraordinarily serious," said Philipp Hildebrand, a governor of the Swiss National Bank.

The SNB is not easily spooked. It is the world's benchmark bank, the keeper of the monetary flame. Yet even the SNB's hard men have thrown away the rule book, taking emergency action to force down the exchange rate of the Swiss franc.

Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit.

Hard men throwing away the rule book? Where do you go from there?

In the words of Dr. Peter Venkman, before you know it, dogs and cats will be living together, human sacrifice ... mass hysteria!

Apparently, the scourge has already hit mainland China.

It is remarkable that China's fall into deflation has attracted so little notice. China's CPI was minus 1.6pc in February. The country has built too many factories producing goods that the world cannot absorb. The temptation is to shunt this excess capacity abroad. A faction of the politburo is already itching to devalue the yuan.

Of course, Britain has already played the currency card. That is different. The pound's fall, though welcome, is a side-effect of the Bank of England efforts to stem the credit crunch. There has been no currency intervention.

Crucially, Britain has a current account deficit. Many countries toying with devaluation are exporters with surpluses – 15.4pc of GDP for Singapore, 8.4pc for Switzerland, and 6.1pc for China. If these countries refuse to let their imbalances correct, world demand must implode.

While I'll be the first to agree that times are perilous today, it seems silly to think that readings of minus one percent on consumer price indexes are going to make things any worse.

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Who's to blame for the recession?

CNN takes a look at some recent polling numbers regarding the state of the economy, quantifying the "Obama bounce" and its political origins.

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Bubbles and depressions

In this commentary in today's Wall Street Journal, economists Steven Gjerstad and Vernon Smith offer a theory about why we could again be going from a bubble into a depression.

Over the years, there have been quite a few bubbles, but not all of them cause the sort of economy-wide damage that was seen in the 1930s or over the last year or so. Why?

Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge.

Most people forget that it wasn't just a stock market bubble in 1929 that led to America's last lost decade. There was an enormous housing and credit bubble in the mid-1920s during which Groucho Marx and others lost a good deal of money on Florida swampland.

As has been the case thoughout history, you can't get a really good bubble going until you get broad participation from the public - preferably lots of people at the lower end of the socio-economic scale levered up courtesy of a banking system that is gushing with easy money.

That pretty much described the situation in the 1920s and in the 2000s.

The entire piece is worth a look as they go through the recent history of financial bubbles in the U.S., a sequence that really accelerated about 20 years ago when you-know-who started sitting in the big chair at the Federal Reserve boardroom.

Interestingly, they touch on one of my all-time favorite subjects since this blog began a few years ago - how owners' equivalent rent duped the Fed.

During the 1976-79 and 1986-89 housing price bubbles, the effective federal-funds interest rate was rising while housing prices rose: The Federal Reserve, "leaning against the wind," helped mitigate the bubbles. In January 2001, however, after four years with average inflation-adjusted house price increases of 7.2% per year (about 6% above trend for the past 80 years), the Fed started to decrease the fed-funds rate. By December 2001, the rate had been reduced to its lowest level since 1962. In 2002 the average fed-funds rate was lower than in any year since the 1958 recession. In 2003 and 2004 the average fed-funds rates were lower than in any year since 1955 when the rate series began.

Monetary policy, mortgage finance, relaxed lending standards, and tax-free capital gains provided astonishing economic stimulus: Mortgage loan originations increased an average of 56% per year for three years -- from $1.05 trillion in 2000 to $3.95 trillion in 2003!

By the time the Federal Reserve began to slowly raise the fed-funds rate in May 2004, the Case-Shiller 20-city composite index had increased 15.4% during the previous 12 months. Yet the housing portion of the CPI for those same 12 months rose only 2.4%.How could this happen? In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.

With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since "owners' equivalent rent" is about 23% of the CPI). If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%.

Yes, "an important component of inflation remained outside the index" - that sort of thing almost always ends badly as noted here on many occasions before.

After years of writing on this subject, yours truly still comes out high in a simple Gooogle search on the phrase owners' equivalent rent - right there in second place, behind the Bureau of Labor Statistics with "How owners' equivalent rent duped the Fed" and then again in fifth place with the memorable "The complete and utter failure of owners' equivalent rent".

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William Black talks to Bill Moyers

William K. Black, formerly the chief regulator during the late-1980s savings and loan crisis, talks with Bill Moyers about the "calculated dishonesty" in the boardrooms and CEO offices at the largest mortgage companies and investment banks during the housing bubble.

Parts two and three are below.

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Monday morning links

TOP STORIES
• From Bubble to Depression? - WSJ
• US watchdog calls for bank executives to be sacked - Guardian
• How President Obama managed to unlock the G20 Summit - Telegraph
• IBM Talks to Acquire Sun for $7B Said to Have Collapsed - Bloomberg
• Credit Bubble Bulletin: Periphery Rising - Prudent Bear
• No gold import; India's March gold export at 9 tons - Commodity Online
• A Rich Education for Summers (After Harvard) - NY Times
• Don't Blame Greenspan - Forbes

MARKETS/INVESTING
• Oil rises above $53 as investors eye earnings - AP
• Spot gold falls 1 pct to $883.57/oz as stocks rise - Reuters
• Asian Stocks Rise on Bernanke Comments - Bloomberg
• A bear rally in bull's clothing? - MSN Money
• A bear's bear - Globe & Mail
• $1T hit to pensions could cost taxpayers - AP

ECONOMY
• Consumers fall behind on loans at record rate - AP
• 'Bailout psychology' destroying the economy - SF Gate
• There Will Be (Hyper)Inflation - Lew Rockwell
• Are you skimping too much? - MSN Money
• Recession erodes conveniences shoppers got used to - AP

INTERNATIONAL
• World trade fall hits Hong Kong shipping - BBC
• Brown Will Tell King, Turner to Implement G-20 Plan in Britain - Bloomberg
• Loonie Loses 3% as Traders See Carney Pushing Quantitative Ease - Bloomberg
• Swiss slide into deflation signals the next chapter of this global crisis - Telegraph
• HSBC Gets $17.7 Billion in Largest U.K. Rights Offer - Bloomberg
• Budget could bring tax rises as Alistair Darling counts cost of G20 - TimesOnline
• Beware talk of recovery as the world economy is not a picture of health - Telegraph
• The data deficit in real estate - Globe & Mail

HOUSING
• Foreclosure fallout crosses county lines - Chicago Tribune
• Historic drop for Manhattan housing market - Canada Free Press
• Former California Homeowners Lash Out at Builder - LA Times
• Jeremy Warner: This housing correction has a way to go yet - The Independent

FED/TREASURY/BANKING
• Estimated U.S. taxpayer cost for bailout jumps - Reuters
• Geithner encouraged but cautious on economy - MarketWatch
• Pictures From a Monetary Bubble - Jesse's Cafe
• Bernanke’s balance sheet - FT Alphaville

INTERESTING
• The End of Christian America - Newsweek
• Recessionism, but is it art? - FT Alphaville
• Down But Not Out at $464 Million a Year - Alternet

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Dick Morris on the New World Order

Dick Morris and Sean Hannity talk about conspiracy theories and the behind the scenes dealings at the recently concluded G20 meeting in London.

There's lots more here.

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Two views on gold from across the pond

There were two notable reports from across the Atlantic in recent days about the asset that has recently been pushed aside in favor of the blazing stock market, suddenly failing to attract new investors. By the looks of the steady inventory at the big ETFs, few recent gold investors have departed, but the stampede of new investors has slowed to a trickle.

John Dizard of the Financial Times notes that the current condition is just a temporary one:

We are, however, now being set up for the next run in the secular bull market in gold. It won’t feel that way for at least a few months, since the bid will dry up for the metal. Jewellery demand, which is still 70 per cent of the current demand, will continue to be weak. However bumbling the execution, the Treasury’s wall of money is hitting like a slow-motion tsunami.
...
When, though, does all this loose money lead to the inflation the goldbugs need for the next run? For the moment, it is hard to see that on the horizon in the US, since we were talking about the dollar price of gold. However, the Fed has now been reminded very forcefully by politicians and would-be future governors that it cannot withdraw monetary stimulus too quickly. So it will withdraw it too slowly.

Eugen Weinberg, a commodities markets analyst with Commerzbank, shares my short-term bearish, longer term bullish view on gold. “When inflation comes,” he says, “it will come in higher than expected, and persist for longer than expected, because the central banks will not react as they should.”

So enjoy the run in risk with some equities baskets, and buy your gold sometime in the summer.

The way prices have dropped over the last month or so, mustering just a short-lived rally after the Federal Reserve's announcement that it will print up another $1.25 trillion to heal the economy, you may not have to wait until summer.

Meanwhile, an anonymous economist at The Economist files this somewhat odd report, apparently written by someone who knows and cares little about the gold market, seemingly surprised by the notion that banks have become untrustworthy in the eyes of some.

The heyday for buying physical gold was in the early 1980s, when bullion reached its peak in real terms. Once again, business is picking up. According to the World Gold Council, retail demand for bullion in the fourth quarter of 2008 was almost five times what it was in the same period of 2007. Dealers report a surge in interest from those worried about the safety of banks or simply the lack of attractive alternatives to negligible deposit rates and volatile stockmarkets. Fanning such fears are those who argue that today’s financial crisis does not so much resemble the Depression of the 1930s as the hyperinflationary Weimar era of 1923.

Sandra Conway of ATS Bullion, which operates out of discreet offices in central London, says there was a big rush after the demise of Lehman Brothers in September. “People want something tangible in their hands as a safeguard,” she says. One ATS client saves up all his £2 coins ($2.90) until he has enough to buy a sovereign, a gold coin minted by the British government.
...
It may seem odd that people want the risk of keeping gold at home (or the cost of storing it at a bank), when they can invest in exchange-traded funds (ETFs) that track the gold price. But Ms Conway says that people are suspicious, in a real meltdown, of whether their claim on gold held in an ETF would be honoured.

It is kind of interesting to see how the gold commentary in the mainstream financial media has changed over the years. Writers at The Economist have been very dismissive of the yellow metal for years now, this being one of the few pieces to cross my computer screen where they were more curious than caustic.

ooo

This week's cartoon:

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Sunday morning links

TOP STORIES
• Summers earned over $7M from Wall Street firms - AP
• Goldbugs rest assured, inflation will return - Financial Times
• Job Loss to Continue After Unemployment Hits 25-Year High - Bloomberg
• Who Moved My Bonus? Executive Pay Makes a U-Turn - NY Times
• The Banker Who Said No - Forbes
• Rush for Platinum jewellery, Platinum ETFs - Commodity Online
• U.S. bank woes just the start, Whitney says - Globe & Mail
• Fannie, Freddie worker bonuses total $210M - AP

MARKETS/INVESTING
• Can the Market Sustain the March Rally? - Wash. Post
• No gold import; India's March gold export at 9 tons - Commodity Online
• Bulls face a challenging week - CNN/Money
• Earnings test is on the way, with banks in focus - MarketWatch
• Going for gold: How the world's mints are coining it - The Independent
• Executives' outlook will set the tone - LA Times

ECONOMY
• Preview: Trade Gap Probably Held at Six-Year Low - Bloomberg
• Recession outlasts even extended jobless benefits - AP
• Lucky to Have a Job? You're Still Allowed to Grouse. - Wash. Post
• Is the Economy Killing the 401(k)? - CNN/Money
• Tough times mean tight quarters - LA Times

INTERNATIONAL
• Australia’s Jobless to Get Mortgage Payment Waiver - Bloomberg
• Bankrupt Britain: 340 people go bust every day - TimesOnline
• This brave new world we live in needs leaders based in reality - Telegraph
• Base Metals: Why is China stockpiling Copper? - Commodity Online
• China finds way to raise stature in world finance at G20 - CHINADaily
• A Global Free-For-All? - NewsWeek
• I.M.F. May Have to Loosen Reins After G-20 Windfall - NY Times
• The G20 moves the world a step closer to a global currency - Telegraph

HOUSING
• New program may enable millions to refinance - LA Times
• Signs of life in California real estate - CNN/Money
• When Home Prices Hit Bottom - Fortune
• Mortgage aid often failed to curb defaults - LA Times

FED/TREASURY/BANKING
• Inflation vs. Deflation - Calculated Risk
• Fed seeks exit strategy - CNN/Money
• Fed Chief ‘Uncomfortable’ With Bailouts - NY Times
• Bernanke Easing Mortgage Rates - Bloomberg

INTERESTING
• Wanna be an extra? Join the (growing) crowd - LA Times
• A Rug Store Floored by the Economy - Wash. Post
• Spa day on a budget, L.A.-style - LA Times

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Summers received $5.2M from hedge fund

What a surprise ... the top adviser in the Obama Administration on all matters economic was handsomely paid by a hedge fund last year and a highly compensated speaker at the behest of Goldman Sachs. The details are in this WSJ report:

Top White House economic adviser Lawrence Summers received about $5.2 million over the past year in compensation from hedge fund D.E. Shaw, and also received hundreds of thousands of dollars in speaking fees from major financial institutions.

A financial disclosure form released by the White House Friday afternoon shows that Mr. Summers made frequent appearances before Wall Street firms including J.P. Morgan, Citigroup, Goldman Sachs and Lehman Brothers. He also received significant income from Harvard University and from investments, the form shows.

You can be sure that he'll be "lookin' out for the little guy" when he deliberates on important matters such as whether or not he thinks its a good idea to send another couple hundred billion dollars northeast from Washington to Wall Street.

It's natural to wonder if our new president is having any second thoughts about the team that he currently has in place - there's very little "change" likely to come about based on who's got their hands on the controls.

In total, Mr. Summers made a total of about 40 speaking appearances to financial sector firms and other places, with fees totaling about $2.77 million. Fees ranged from $10,000 for a Yale University speech to $135,000 for an appearance paid for by Goldman Sachs & Co.
The disclosure -- in a financial report that is required for federal office holders -- comes as Mr. Summers is involved in shaping the Obama administration's policy decisions on the financial meltdown as well as the broader recession. Among the many decisions the economic team has wrestled with has been whether to step up regulation of hedge funds, one of the most contentious subjects during a summit of world leaders this week. European nations pushed for tougher rules, while the Obama administration preferred a less stringent approach.

There's lots more interesting financial data about the White House staff (and even more ties to Goldman Sachs) in the rest of this story that is in the free area of the WSJ.

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Phil Izzo and Kelly Evans on the jobs report

The Wall Street Journal does a nice job with their videos - easily embedded and with just a short commercial to endure before the content begins. It's also nice to see the people whose names appear in the bylines week after week - here's Phil and Kelly.

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Don't fear the IMF gold sales

Well, it looks like the IMF may finally unload that 403 tonnes of gold they've been talking about selling for the last couple years. It should raise a whopping $12 billion which, honestly, sounds like a drop in the bucket compared to the trillions that have been spent trying to fix the financial mess we are all in.

China may end up buying the whole thing. If I were them, I certainly would.
They've got about $2 trillion in U.S. dollar denominated assets about which they have become increasingly skeptical regarding its long-term value. Why not spend about half of one percent of their reserves on something that has intrinsic value?

It would be like having $1,000 and trying to decide if you should spend six dollars. That's about as close as you can get to a "no-brainer" in the world of central banking.

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Oz -- has spoken!

Former Fed chairman Alan Greenspan's recent Wall Street Journal op-ed will likely be looked back upon as the moment akin to when the Toto pulled back the curtain from behind a diminutive man who was still in the process of saying how great and powerful he is.

OZ'S VOICE: Do you presume to criticize the....

(Toto pulls back the curtain to reveal the Wizard at the controls of the throne apparatus)

OZ'S VOICE: ...Great Oz? You ungrateful creatures!
...
OZ'S VOICE: Oh - I - Pay no....

(Shooting past the Four at left to the Curtain in b.g. -- Dorothy goes over to it and starts to pull it aside --)

OZ'S VOICE: ...attention to that man behind the curtain. Go - before I lose my temper! The Great and Powerful --

(Dorothy pulls back the curtain to reveal the Wizard at the controls -- he reacts as he sees Dorothy -- Dorothy questions him -- the Wizard starts to speak into the microphone -- then turns weakly back to Dorothy -- CAMERA PULLS back slightly as the Lion, Scarecrow and Tin Man enter and stand behind Dorothy)

OZ'S VOICE: ... -- Oz -- has spoken!

The above excerpt is courtesy of the Wendy's Wizard of Oz script, just prior to when Dorothy says to the wizard, "You're a very bad man", much like the response to the former Fed chairman's recent opinion piece.

The latest example of the wizard being excoriated comes in this commentary by Susan Lee at Forbes who cites John Taylor's recent book about how government actions "caused, prolonged, and worsened the financial crisis" (seriously, that's right in the title of the book).

It's been quite a spectacle for those who have followed Alan Greenspan's career for decades. Gone is the financial rock star or even the statesman testifying before Congress in a measured baritone. Instead, over the past several months, Alan Greenspan has morphed into a totally new person.

The first incarnation was the shaken Greenspan who was stunned that greedy and reckless short-term behavior could overwhelm long-term, rational self-interest. That was rather amazing all by itself. But now, there's a newer Greenspan--a decidedly prickly and whiny one.

I'm talking about Greenspan's recent op-ed in The Wall Street Journal. A 1,500-word attempt to move blame for the financial crisis away from himself and onto ... China.

It was, writes Greenspan, Chinese growth that led to "an excess" of global savings. That growth kept long-term interest rates low, which fueled the housing bubble. As for himself, the lowly chairperson of the Fed, he says he was helpless. He only had control over short-term rates.

Why this recent incarnation as a self-pitying victim of historical forces? Most likely, it's because of John Taylor, a mild-mannered professor at Stanford and former colleague of Greenspan's at the Fed.

In his Getting Off Track, a nifty little book, Taylor exposes, as plain as day, the culprit behind the financial boom-bust: Greenspan. His weapon of choice is the "Taylor rule" (discovered by Taylor--but not named by him, as he modestly points out.) (The Taylor rule is a recommendation about how the Fed should set the short interest rate--suggesting the amount it should be changed given economic conditions.)
Here's Taylor's take. Short interest rates fell in 2001 in response to the dot-com bust. But--and here's the important moment--beginning in 2002, the Taylor rule indicated that Greenspan ought to have tightened. Indeed, from 2002 to 2005, rates ought to have climbed to a touch over 5% and then stayed there through 2006.

The whole piece is worth a look, particularly the part about how the housing bubble in its formative stages was clear to see in 2003. That is, back when something could have been done to prevent the current crisis, as opposed to the action that was taken at the time - offloading a good portion of mortgage securitization from the GSEs to Wall Street.

We all know how that worked out.

The wizard from the movie turns out to be a fairly nice and helpful man after he is exposed. Unfortunately, the same can't be said for the former Fed chairman.

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Payrolls down 663K, jobless rate up to 8.5%

The Labor Department reported a net job loss of 663,000 during the month of March and an increase in the unemployment rate from 8.1 percent to 8.5 percent.
In a break from previous monthly reports, downward revisions to prior data were limited to an 86,000 decline in the January payrolls, from -655,000 to -741,000, making January the worst month for job losses since October of 1949.

Adjusted for the size of the workforce, the January decline was the worst since 1974.

At 8.5 percent, the unemployment rate reached its highest level since 1983 as the total number of unemployed people rose to 13.2 million. If those working part-time for "economic reasons" and those too discouraged to continue looking for work are included, the unemployment rate would have been 15.6 percent in March, the highest since this data series began in 1994.

Job loss was widespread in March, only the stalwart education and health services category able to muster a modest net gain of 8,000 new jobs. Employment in manufacturing declined by 161,000, professional and business services payrolls fell 133,000, and construction lost 126,000 jobs. Temporary help declined by 72,000, an indication that employers are still slashing jobs aggressively.
Total job loss since the beginning of the current recession that began in late-2007 now stands at 5.1 million, a full 3.3 million of this decline coming in just the last five months.

Remember that employment is a lagging indicator. While the last recession ended in late-2001, net job loss continued for almost two more years, the "official" end to the recession following shortly after the worst of the monthly declines in nonfarm payrolls.

It remains to be seen whether or not the worst of the job losses in the current recession are already behind us.

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Friday morning links

TOP STORIES
• Jobless rate bolts to 8.5 percent, 663K jobs lost - AP
• Senate approves $3.53 trillion budget plan - MarketWatch
• G20 summit: Gordon Brown strikes historic $1 trillion deal - Telegraph
• World Leaders Pledge $1.1 Trillion to Tackle Crisis - NY Times
• The G20 has lost the plot - Telegraph
• Ill Prepared for Long-Term Health Care - BusinessWeek
• Geithner’s Non-Recourse Gift Keeps on Giving to Gross - Bloomberg
• FASB relaxes accounting rules for banks on assets - AP

MARKETS/INVESTING
• 'China ready to buy IMF gold with a telephone call' - Commodity Online
• Causes of the Oil Shock of 2007-08 - Econbrowser
• Consequences of the Oil Shock of 2007-08 - Econbrowser
• Everything You Ever Wanted To Know About Junior Gold Miners - HAI
• Buttonwood: Minsky's moment - The Economist
• Gold: Bullish on bullion - The Economist

ECONOMY
• Payrolls fall 663,000, jobless rate jumps to 8.5% - MarketWatch
• Where jobless benefits go furthest - MSN Money
• Factory orders increase first time in 7 months - MarketWatch
• The Misery Index: Jobless rates by metro area - MSN Money
• Home Equity Delinquencies Hit New Record High - Truth About Mortgage

INTERNATIONAL
• China positioning its currency for a run at world supremacy - LA Times
• G-20 Shapes New World Order With Lesser Role for U.S. - Bloomberg
• G20 trebles IMF funding to $750bn to help poorer countries - Telegraph
• ECB Faces Day of Reckoning as Debate on New Tools Nears End - Bloomberg
• China’s Dollar Trap - Krugman, NY Times
• Spanish banks: The mess in La Mancha - The Economist
• IMF Makes Comeback as It Wields $1 Trillion for Rescue - Bloomberg
• Japan: The incredible shrinking economy - The Economist

HOUSING
• Loan modifications rise; many don't pare payments - AP
• Case-Shiller: Is it Really THAT Bad? - Zillow.com
• Home builders, California Realtors offer layoff insurance - LA Land
• Sixth of homebuyer tax break gone in a month - O.C. Register

FED/TREASURY/BANKING
• Bernanke Easing Mortgage Rates for Consumers - Bloomberg
• Senate OKs measure calling on Fed to name firms - AP
• 'Chronic Disorganization' Cited in Efforts to Fix Crisis - Wash. Post
• 5 banks repay $353M in bailout funds - AP

INTERESTING
• Feds: Value of Madoff mansion has dropped nearly $2M - AP
• Mayor Ray Nagin Facing Foreclosure on Townhouse - Zillow.com
• W.Va. retiree, 70, aces consecutive holes - AP

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AIG is to a black hole as...

From the Tom Toles collection at the Washington Post:

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Implode-O-Meter ordered to give up sources

Implode Explode Heavy Industries (IEHE), the folks who have brought the world the popular Mortgage Lender Implode-O-Meter, has been ordered to give up the names of their sources who supplied information about The Mortgage Specialists Inc. in a frightening example of how First Amendment rights can be easily trampled. The details are in this press release:

New Hampshire Judge Orders ML-Implode To Divulge Identities of Anonymous Posters

March 31, 2009 - For Immediate Release

LAS VEGAS - A New Hampshire Superior Court Judge has ordered Implode-Explode Heavy Industries, Inc., the owner of the popular mortgage industry crash site Mortgage Lender Implode-O-Meter (ml-implode.com) to give up the identities of persons who provided information to the site about The Mortgage Specialists, Inc. of Plaistow New Hampshire.

Rockingham County Judge Kenneth R. McHugh also ordered that the allegedly "secret" and "defamatory" content about The Mortgage Specialists would have to stay down permanently.

The information consists of an anonymous posting on the ML-Implode forum about The Mortgage Specialists and the publishing of the company's 2007 "Loan Chart" sent in by an informant and placed online by the Implode-O-Meter staff.

Lots more below:

The Mortgage Specialists alleged in their complaint the forum posts were defamatory, and the 2007 Loan Chart detailing financial statistics was secret. ML-Implode immediately and voluntarily removed the information to assuage MoSpec's concerns, despite its continuing assertion that it still had the right to post them. However The Mortgage Specialists persisted in demanding the submitters' identities and a promise to permanently keep the information offline. ML-implode refused. The Mortgage Specialists filed suit on November 12, 2008, signed by company President Michael Gill.

Judge McHugh stated in his order that since the Mortgage Specialists did not hold the Implode-O-Meter culpable or ask for monetary damages, their request to divulge the identities of the persons in question was "reasonable." The Judge further stated:

The maintenance of a free press does not give a publisher the right to protect the identity of someone who has provided it with unauthorized or defamatory information."

Judge McHugh's order was issued without a full hearing on the merits of The Mortgage Specialists' claims. Specifically, plaintiffs had not yet established that any of the postings were defamatory or that the Loan Chart information posted was in fact confidential, as ML-Implode's challenges were limited to whether the New Hampshire court had jurisdiction over ML-Implode and whether the plaintiff's requested relief would violate the First Amendment.

Judge McHugh earlier ordered that New Hampshire venue was appropriate, despite the arguments that neither ML-Implode nor IEHI specifically did any business in or had any personnel or facilities in the state of New Hampshire. Such a decision theoretically construes the long-arm statute to cover any web site or web publishing outfit in the U.S., as long as it is viewed from New Hampshire. The Order therefore implies there can be no reasonable expectation of anonymity for any online posting where a New Hampshire-based party might consider the presented information defamatory or secret.

The order issued injunctive relief despite ML-Implode’s argument that Mortgage Specialists had not met the requisite test under New Hampshire law. Specifically, the petitioner did not establish that it had a valid claim for defamation based upon the postings, or that it had any claim at all against ML-Implode -- ostensibly a requirement to compel ML-Implode to disclose sources or commenters, or not to publish. Although ML-Implode argued these points, the Court failed to address them in the order, or to explain its own reasoning in ordering injunctive relief.

Judge McHugh acknowledged in his order that the ML-Implode voluntarily took down the contentious items (the forum posts and the 2007 Loan Chart), but wrote that the web site nevertheless acted in a "knee-jerk" fashion by not giving in to The Mortgage Specialists' demand to know the identities of the contributors.

The decision is being appealed to the New Hampshire Supreme Court. If the order stands, a flood of similar lawsuits filed by corporations against “whistleblower” and consumer advocacy web sites could appear across the country.

The Implode-O-Meter's founder Aaron Krowne continues to defend the site's decision to keep the submitters' identities anonymous, stating:

We do not dispute that in some cases defamatory or secret information may need to be taken down, and that the identities of those who have provided such sensitive information may need to be revealed to the court. However, such moves should not be taken lightly given the sanctity of the First Amendment.

We are disappointed and distressed by this Order because it creates a “chilling effect” whereby grassroots media sites will be greatly hindered in providing fora for critiquing and challenging corporate interests. This is all the more problematic given that it has not been shown that the underlying material was either defamatory or secret. As a result, if the order stands, we will no longer be able to operate, as we will no longer be able to risk allowing any third-party information to be placed online, which is the core function of our forum.

ML-Implode is considered by many to be the first dedicated whistleblower of the subprime crisis and credit crunch, as profiled in a July 8th, 2008 New York Times article. It is commonly cited by major news networks and financial publications regarding the economic crisis.

In 2008 The Mortgage Specialists was accused by Massachusetts and New Hampshire State banking officials of more than 60 mortgage-related violations, including forging signatures and destroying documents. Massachusetts banking officials also have accused the company of unfair and deceptive business practices. The Mortgage Specialists consented to a Massachusetts Banking Department Cease & Desist without admitting to any culpability and agreed to pay a $300,000 fine. They were also ordered to cease further originations and place all remaining loan applications with other providers, effectively shuttering the business' operations pending resolution of the state's concerns. New Hampshire imposed a fine of $300,000 against The Mortgage Specialists, with an additional $50,000 each against Michael Gill and Lisa Tracy individually, and an additional fine of $25,000 for failure to consult the National Do Not Call List.

ML-Implode's report on these developments was based on facts as reported by authoritative sources, including the states of Massachusetts and New Hampshire.

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A new way to look at plunging home prices

This San Francisco Chronicle report on the most recent update to the Case-Shiller Home Price Indices presents an interesting new way to look at home price declines in the 20 cities the index tracks. The bigger the blue bubble below, the bigger the housing bubble in 2005.
Well, actually, that's not completely true, areas like Detroit and, to a lesser extent, Cleveland and Dallas, are getting a housing bust without ever having had much of a bubble...

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One in ten Americans receives food stamps?

Wow, where do you go from here? Fifteen percent?

The Associated Press reports that more than 32 million Americans now sheepishly pull food stamps out of their purse or wallet in the checkout line and the bad news is that things are likely to get worse from here.

Given that labor markets are a lagging indicator, likely to get much worse before any net job creation begins, the number of food stamp recipients may go much higher this year.

Food stamps are the major U.S. antihunger program and help poor people buy groceries. The average benefit was $112.82 per person in January.

The January figure marks the third time in five months that enrollment set a record.

"A weakened economy means that many more individuals are turning to SNAP/Food Stamps," said the Food Research and Action Center, an antihunger group, using the acronym for the renamed food stamp program, Supplemental Nutrition Assistance Program.

Well, if the government can't do anything about the underlying causes of families not being able to put food on the table, at least they have a new "snappy" acronym.

Tomorrow's labor report is likely to provide a pretty good indication of whether they'll have to add another shift for the food stamp printing presses. If economic reports so far this week are any indication - new highs for weekly jobless claims and new lows for the ADP employment report - they might want to start placing some help wanted ads.

Food stamp enrollment rose in all but four of the 50 states during January, said Agriculture Department figures. Vermont, Alaska and South Dakota had increases of more than 5 percent. Texas had the largest enrollment, 2.984 million, down 65,000, followed by California at 2.545 million, up 43,000, and New York with 2.211 million, up 37,000.
Food stamp benefits get a temporary 13 percent increase, beginning with this month, under the economic stimulus law signed by President Barack Obama. The increase equals $80 a month for a household of four.

If those statistics and my math are both correct, benefits for a family of four go from a little over $600 a month to almost $700 a month.

You can actually buy a lot of groceries for that amount of money, particularly the high-calorie, processed variety.

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Dollar-gold relationship back to normal?

After a brief period in February and March when the trade weighted dollar and the price of gold marched in near-lockstep, the two seem to be reverting to either their typical inverse correlation or, hopefully, the natural relationship between the two, no relationship at all.
Today's market action so far is a good example of what was seen in recent months - the U.S. dollar index is down about one percent and the yellow metal is down two or three times that amount as investors embrace risky assets again.

Bank of America shares are up 10 percent! It looks like happy days are here again!

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Thursday morning links

TOP STORIES
• G20 summit: leaders on brink of $1 trillion rescue deal - Telegraph
• China pushes for bigger role in reshaping the world economy - LA Times
• U.S. Urges GM to Consider Bankruptcy - Wash. Post
• Defaults Rise as Worst Is Yet to Come for Commercial Property - Bloomberg
• G20 Summit: an easy guide to judge its success or failure - Telegraph
• Wall Street Swaps Zegna for Denim, Tool Belts - Bloomberg
• Don't blame capitalism for this mess - CNN/Money
• CDOs Becoming ‘Unmanageable’ as Trading Costs Surge - Bloomberg

MARKETS/INVESTING
• Gold Dropsas Rising Stocks Curb Haven Demand - Bloomberg
• Oil jumps to above $51 on stock market gains - AP
• Stocks, Commodities Gain on Economy - Bloomberg
• India rides old gold wave - Commodity Online
• G20 to regulate big hedge funds: draft communique - Reuters
• India’s silver imports follow gold, fall by 50% - Commodity Online

ECONOMY
• Initial jobless claims rise to highest level since 1982 - MarketWatch
• U.S. seen facing danger of 2nd recession next year - Reuters
• Delinquency rate on consumer loans rises to record 3.22% - MarketWatch
• U.S. auto sales plunge but bottom seen near - AP
• Manufacturing index rises more than expected - CNN/Money

INTERNATIONAL
• China to Boost Yuan Swaps, Payments on Dollar Concern - Bloomberg
• G20 leaders agree to fight protectionism, begin plenary session - CHINADaily
• European Central Bank cuts key rate to new low - MarketWatch
• UK house prices rise for first time in 16 months - TimesOnline
• Safety Nets Not Enough to Allay Fears in Europe - NY Times
• G20 To Call For Doubling of IMF Budget: UK - CNBC
• China speaks and the world finally listens - Globe & Mail
• China Vies to Be World’s Leader in Electric Cars - NY Times

HOUSING
• Housing bust hits Manhattan - CNN/Money
• Low mortgage rates continue to attract refinancers - USA Today
• Area sales of new homes continue to plummet - Sacramento Bee
• S.F., U.S. home prices in free fall - SF Gate

FED/TREASURY/BANKING
• Treasuries Fall as G-20 Seeks to Counter World Slump - Bloomberg
• How Long Will the Chinese Let the U.S. Bluff? - Seeking Alpha
• FDR Economist Says Obama Should Put Stimulus First - Bloomberg
• Fed Purchases $6 Billion of Three, Four-Year Treasury Notes - Bloomberg

INTERESTING
• Costco to close home stores due to slowdown - Reuters
• Funeral cost-cutting boosts cremations - CNN/Money
• 9 patients made nearly 2,700 ER visits in Texas - AP

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The devalued Prime Minister

This clip is probably making the rounds at the G20 meeting this week.

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Punish the savers - April Fools' Day edition

One of the things that has always bothered me about this brave new world of serial asset bubbles, where freakishly low interest rates are simultaneously the cure for the bubble that just burst and the fuel for the bubble about to inflate, is that a nation in dire need of savings unnecessarily punishes its savers.

Up until the current decade, with few exceptions such as in 1992-1993 when the Fed's short term lending rate dropped to just three percent, you could pretty much count on getting at least five or six percent interest at just about any bank.

Well, not any more.

Rates for certificates of deposit are now at once unthinkable levels as shown above according to Bankrate.com and there is a disturbing new trend in recent years where the banks paying the highest interest rates seem to go belly-up shortly after you open an account.

GMAC is the latest example of this, offering over two percent for a savings account and closer to three percent on one-year CDs when most banks pay only a fraction of that amount. You may even be able to see this for yourself as ads for their products are likely to have popped up above and/or to the right as a result of this little rant.

In something of a cruel April Fools' joke today, part of a long-standing routine during the first couple days of the month to update Quicken personal finance records with monthly interest earned as reported by the bank, these lower interest rates are hard to ignore.

Unfortunately, in preparation for the possible purchase of a house this year (now put off for at least another year) a bunch of our CDs have recently expired and where you used to be able to get over four percent, you can't even get two percent now.

It really is disgusting.

While it doesn't impose a hardship on us (it's more an annoyance than anything else), the worst part about this development is that you've got senior citizens out there who, during just about any other period in American history could be assured of getting a decent return on their savings, are now getting the short end of the stick - first from Greenspan and now from Bernanke.

For as long as I can remember from being a kid, you could always get five or six percent on a safe and sound investment at the local bank - no risk, no big upside, just a steady stream of interest payments for letting them use your money.

A half million dollars should be able to generate at least $25,000 or $30,000 a year in absolutely risk free income, an idea that was once at the very heart of the U.S. banking system.

Today, you'd be lucky to get $10,000 a year from that same pile of savings. That's probably not even enough to cover routine medical expenses for your typical retired couple.

There is something seriously wrong with a savings-short American financial system that, since about 2002, has punished its savers.

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AIG bailout exceeds value of Fort Knox gold

At the end of this Fox Business News video with Chris Powell, Secretary/Treasurer of the Gold Anti-Trust Action Committee (GATA), it is learned that, if indeed all the gold in Fort Knox is still there, it is worth less than all the bailout money already paid to AIG.

That, in itself, is a weighty argument for the yellow metal being undervalued at today's prices, perhaps by a quite considerable margin. The current GATA media blitz is related to their recent Freedom of Information Act request to see if they can get someone to audit the contents of Fort Knox, besides the Treasury Department, that is.

This report in the TimeOnline provides many of the details:

Is there any gold inside Fort Knox, the world's most secure vault?

It is said to be the most impregnable vault on Earth: built out of granite, sealed behind a 22-tonne door, located on a US military base and watched over day and night by army units with tanks, heavy artillery and Apache helicopter gunships at their disposal.

Since its construction in 1937 the treasures locked inside Fort Knox have included the US Declaration of Independence, the Gettysburg Address, three volumes of the Gutenberg Bible and Magna Carta.

For several prominent investors and at least one senior US congressman it is not the security of the facility in Kentucky that is a cause of concern: it is the matter of how much gold remains stored there - and who owns it.

They are worried that no independent auditors appear to have had access to the reported $137 billion (£96 billion) stockpile of brick-shaped gold bars in Fort Knox since the era of President Eisenhower. After the risky trading activities at supposedly safe institutions such as AIG they want to be reassured that the gold reserves are still the exclusive property of the US and have not been used to fund risky transactions.

In other words, they want to be certain that the bullion has not been rendered as valueless as if a real-life Goldfinger had stolen it.

“It has been several decades since the gold in Fort Knox was independently audited or properly accounted for,” said Ron Paul, the Texas Congressman and former Republican presidential candidate, in an e-mail interview with The Times. “The American people deserve to know the truth.”

Mr Paul has so far attracted 21 co-sponsors for a Bill to conduct an independent audit of the Federal Reserve System - including its claims to Fort Knox gold - but an organisation named the Gold Anti-Trust Action Committee (GATA) is taking a different approach.

It has hired the Virginia law firm William J.Olson, PC, to test President Obama's promise to bring “an unprecedented level of openness” to the Government and next month it will file several Freedom of Information requests for a full disclosure of US gold ownership and trading activities.

“We're taking the President at his word,” said Chris Powell, of GATA. “If you go online you can find out how to build a nuclear weapon but you won't find any detailed records on central gold reserves.”

A month after President Nixon resigned over the Watergate affair Congress demanded to inspect the contents of Fort Knox but the trip to Kentucky was dismissed by critics as a photo opportunity. Three years earlier Mr Nixon brought an end to the gold standard when France and Switzerland demanded to redeem their dollar holdings for gold amid the soaring cost of the Vietnam War.

Many gold investors suspect that the US has periodically attempted to flood the market with Fort Knox gold to keep prices low and the dollar high - perhaps through international swap agreements with other central banks - but facts remain scarce and the US Treasury denies that any such meddling has gone on for at least the past decade.

Interestingly, in what may have been a fascinating editorial discussion, the Times saw fit to include a number of other conspiracy theories at the end of the report.

They seemingly come out of nowhere at the end, right after they mention that the Treasury Department says the gold holdings are audited every year, but that no independent auditors are allowed access.

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