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7.31.14 - Weak Economic News Causes Concern On Wall Street

Gold prices end lower on improving U.S. economic data. U.S. stocks fall on worries over Fed rate policy. Gold last traded at $1,281 an ounce. Silver at $20.41 an ounce.

The stock market is in trouble today due to a spate of negative economic news.

The Dow will finish the month of July with a loss after losing well over 200 points today, the last day of the month. The S&P 500 and the NASDAQ are both also sharply lower today.

There are a few reasons for stocks' swoon.

First, as we predicted would likely happen, Argentina defaulted on its debt payments. While the financial industry is trying to downplay this development, there is no denying it is bad news. Economic default is a serious matter.

Default is not a mere ‘technical’ condition, but rather a real and painful event that will hurt real people: these include all ordinary Argentine citizens, the exchange bondholders (who will not receive their interest) and the holdouts (who will not receive payment of the judgments they obtained in court). The full consequences of default are not predictable, but they won't be positive.

Argentina barely negotiated at all, offering only to agree to postpone the deadline for a settlement and offering the holdout bondholders the option to trade in their bonds at terms offered to those who participated in the restructurings in 2005 and 2010—the very terms the holdout investors have been fighting for years now.

This case may set a precedent with far-reaching global consequences. It proves that a handful of hedge funds may be able to impede the ability of countries around the world to borrow money or to renegotiate the terms of their loans if they fall into economic crisis. Considering how many nations in Africa, Latin America and elsewhere are under the control of corrupt regimes that would borrow funds and saddle their people with crippling debt, this is an alarming development.

Adding to the worry on Wall Street were two unexpectedly negative employment reports. After yesterday's surprisingly strong GDP report, the investment world had figured on a strong employment report. It wasn't to be. This feeds the fire of the skeptics who were dubious about the GDP report in the first place.

The number of Americans filing new claims for unemployment benefits rose last week.

Initial claims for state unemployment benefits increased 23,000 to a seasonally adjusted 302,000 for the week ended July 26, the Labor Department said today.

Worse than the report from the Labor Department was a private sector report from the firm Challenger, Gray & Christmas.

Their report indicated that U.S. employers planned to cut nearly 50,000 positions in July, meting out 50 percent more job cuts than in the prior month. The global outplacement firm said in its monthly layoff report that planned payroll reductions hit 46,887, the second highest level of the year. Included in the report were planned massive staff reductions from Microsoft and Hewlett-Packard; two of the bluest, blue-chip tech companies.

The final element contributing to the worry on Wall Street is focused on the banking sector. The Financial Times reported today that the banking industry is bracing for for the possibility of losing as much as $1 trillion in deposits if and when the Federal Reserve begins to raise interest rates.

In other news, Russia's assault on the US dollar continues apace. Yesterday the Russian central bank announced that, having been increasingly shunned by the west, it has discussed cooperation with Reserve Bank of India Executive Director Shrikant Padmanabhan. The punchline: India agreed to create a task group to work out a mechanism for using national currencies in settlements. And so another major bilateral arrangement is set up that completely bypasses the dollar.

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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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