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7.29.14 - Markets Await Significant Economic Events

Gold prices end slightly lower on better-than-expected U.S. economic data. U.S. stocks end choppy session lower after a new round of sanctions were announced against Russia. Gold last traded at $1,298 an ounce. Silver at $20.58 an ounce.

The financial markets continue to hover in an uneasy holding pattern in anticipation of some significant economic events later this week.

The Federal Reserve will make a statement tomorrow at the end of its two-day policy meeting. U.S. non-farm payrolls and Gross Domestic Product figures also come out later this week.

But as the markets await these scheduled events, there is plenty to be concerned about in the interim; including a new source of worry.

Argentina admitted yesterday it may default on some of its debts, but they did their best to spin this debacle in an attempt to calm nerves.

In less than two days, some big hedge funds will be in a position to demand full payment on the Argentine bonds they are holdings. Ongoing negotiations have been fruitless.

This appears to be a repeat of what occurred some 13 years ago in 2001, when Buenos Aires stopped paying its more than $100-billion debt. That was the largest default in history. The previous episode came at a time when the world economy was arguably much healthier than it is today, but the Argentine default still contributed to the global bear market in stocks then and it is likely the fallout from the country's current financial problems will extend far beyond its shores.

Speaking of defaults, the US may be confronted with a default problem of its own, though this one bears no resemblance to Argentina's.

The US Treasury, which finances more than 90 percent of new student loans, is exploring ways to make repayment more affordable as defaults by almost 7 million Americans and other strapped borrowers restrain economic growth.

As higher-education debt swells to a record $1.2 trillion, it is difficult to ignore the parallels to the 2008-2009 mortgage crisis.

Later this week, the US government will release its Gross Domestic Product figure for the 2nd quarter. Many observers have been saying for some time that the number will be robust, predicting a sharp rebound from the 1st quarter's dismal decline. Others aren't so sure.

Economist Gary Shilling believes those who anticipate such a sharp rebound are setting themselves up for severe disappointment.

Shilling believes the predictions of 3% GDP growth are sadly wrong. He forecasts an anemic 1% GDP growth and doesn't rule out another negative quarter.

We often report on the views of economist Marc Faber, who has been saying for some time now that investors should exit the stock market and get into gold. Yesterday, Faber got very specific with his predictions.

He told a CNBC TV audience he expects stocks to drop 20 percent 30 percent by October.

Finally, there are two geopolitical developments worth mentioning as each has implications for the financial markets.

First of all, Israel is making it clear it has no intention of stopping its offensive against HAMAS in Gaza. In fact, the Israelis seem to be escalating their defiance of calls from the UN and the US to agree to a cease-fire.

Second, the outgoing head of America's Defense Intelligence Agency, Lt. Gen. Michael Flynn, says the US is no safer today, 13 years after 9/11, than it was in 2001.

Flynn says America is less safe today in large part because of the emergence of terrorist groups like the Islamic State, formerly know as the Islamic State of Iraq and the Levant. And far from being on the run, as President Obama claims, the ideology behind Al Qaeda and its allies is "exponentially growing."

Two thoughts come to mind on this issue:

1. America has spent trillions of dollars and fought major campaigns against enemies in Iraq and Afghanistan, yet we are less safe. That is disheartening to say the least.

2. If America is less safe and the enemy is getting stronger, that at least offers up the possibility that America could be struck again. History tells us that the economic and financial fallout from such an event would be profound, if not completely catastrophic.

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7.24.14 - Concerns Grow Over Economic Outlook

Gold prices end lower as investors continue their focus on equities. U.S. stocks slightly higher. Jobless claims lowest in more than 8 years. Gold last traded at $1,290 an ounce. Silver at $20.42 an ounce.

Two authoritative--and controversial--sources are expressing concerns about the economic outlook today.

The International Monetary Fund (IMF), lowered the growth forecast in its World Economic Outlook in an announcement this morning.

The IMF did so based on the sharp drop in U.S. first quarter GDP and less optimism about growth in several emerging markets. The potential of financial market overreaction to the expected Federal Reserve tightening is also a key downside risk, the IMF said.

The other source, former Fed Chairman Alan Greenspan, has also joined the chorus of those expressing concerns over the US economy.

Greenspan, 88, who was chairman of the U.S. central bank for more than 18 years, from 1987 to 2006, suffered a remarkable fall from grace after leaving office and has apologized for trusting big banks too much.

In an interview with MarketWatch today, Greenspan expressed worries that we are currently in an asset bubble and that all bubbles eventually "collapse."

There is also fresh evidence that one asset--real estate--may be in for trouble. New sales of single-family homes fell 8.1% in June. Revised figures for March, April and May also show the industry's spring performance was weaker than previously estimated, the Census Bureau reported Thursday.

Sales fell from May in every region of the country, led by a 20% decline in the Northeast.

The median price of homes sold last month was $273,500, down 3.2% from May.

While monthly figures can be volatile, more reliable quarterly averages show the new home market's weakness. Second-quarter sales were 6.4% below the pace in last year's second quarter.

Finally, we can now count one more US ally to the growing list of nations moving away from the dollar as an international medium of exchange: Turkey.

The Russian Ministry of Economic Development issued a press release stating that Turkey was quickly moving away from their reliance on the dollar as the global reserve currency, and is seeking increased trade with Russia in a mutually beneficial exchange of self-contained sovereign currencies.

Turkey has begun to move away from its U.S. alliance and has started seeking increased trade agreements with America's primary adversary, Russia. Already the eighth ranked trading partner for Russia, Turkey is proposing an even greater share of this pie and is willing to accede to Russia and China's agenda for a de-dollarized trade system that cuts out the reserve currency from most, or all, transactions.

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7.22.14 - Inflation Making A Comeback

Gold prices end lower as safe haven demand ebbs. U.S. stocks higher, boosted by better-than-expected inflation and housing reports. Gold last traded at $1,306 an ounce. Silver at $21.00 an ounce

There can hardly be any denying that inflation is making a comeback in the US economy. We received further confirmation of this with the latest Consumer Price Index report from the US Labor Department this morning.

The CPI increased by 0.3% in June, after climbing 0.4% in May.

Apologists are blaming the rise on gasoline prices, as if that should comfort Americans who have to drive every day. The gasoline index rose 3.3% in June.

Food prices rose 0.1% in June and core prices ticked up 0.1% as well.

As is so often the case, the devil is in the details. And the details when it comes to food prices are not particularly encouraging.

The prices of beef and bacon hit all-time highs in the United States in June. Ground chuck cost $3.91 per pound and bacon cost $6.11 per pound.

A decade ago, in June 2004, a pound of ground chuck cost $2.49, which means that the commodity has increased by 57 percent since then. Bacon has increased by 78.7 percent from the $3.42 it cost in June 2004 to the $6.11 it costs now.

The implications of higher inflation should not escape the attention of investors. Historically, higher inflation has resulted in higher gold prices, as gold serves as a hedge against high inflation. High inflation has also historically been quite unfavorable for stocks and bonds.

But inflation isn't the only concern confronting the financial markets.

Jeremy Grantham, co-founder and chief investment strategist of GMO, a Boston-based firm with $117 billion in assets under management, is warning investors that another horrific stock market crash is coming, and the next bust will be “unlike any other” we have seen.

Grantham pulls no punches when assigning responsibility for the coming financial carnage. In a recent interview with The New York Times, he calls Federal Reserve Chair Janet Yellen “ignorant” and says the Federal Reserve all but killed the economic recovery.

Grantham isn’t the only one worried about a market collapse.

“We have no right to be surprised by a severe and imminent stock market crash,” explains Mark Spitznagel, a hedge fund manager who is notorious for his hugely profitable billion-dollar bet on the 2008 crisis. “In fact, we must absolutely expect it."

In addition, respected fund manager Sebastian Lyon, who oversees the Personal Assets investment trust and the Trojan fund, is holding cash and gold until stock markets fall. One of Lyon's primary worries: increased government involvement and interference in the world economy and financial markets.

Lyon is not the only analyst who is turning his attention to gold.

Bank of America/Merrill Lynch, who started 2014 bearish on gold, is shifting its outlook. Its analysts believe the worst days for the precious metal may be over.

In a note to clients this week, metals strategist Michael Widmer notes how gold prices have stabilized this year thanks to steady physical demand from emerging markets — China and India absorbing mine and scrap supply — which has helped compensate for investor selling. In the future, he says, that balance will sway in gold’s favor.

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