The U.S. stock indexes closed higher today. The stock index bulls still have the overall near-term technical advantage. Right now, price uptrends are still in place on the daily bar charts. The lack of volatility at higher price levels suggests prices can continue to trend higher during what history shows has been a seasonally bearish timeframe for the stock market. This week will be an extra important trading week for several reasons. The end of the month and end of the quarter occurs Wednesday. Also, the stock market is half- way through it’s historically rough period of September and October. On Friday the key U.S. jobs report is issued. How the markets end this week’s trading action on Friday could well set the tone for how they will trend during the month of October.

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The Federal Reserve was warned rountinely since 1999 about the practices inflating the subprime mortgagage bubble, but did nothing about it.

Washington Post: The visits had a ritual quality. Three times a year, a coalition of Chicago community groups met with the Federal Reserve and other banking regulators to warn about the growing prevalence of abusive mortgage lending.

They began to present research in 1999 showing that large banking companies including Wells Fargo and Citigroup had created subprime businesses wholly focused on making loans at high interest rates, largely in the black and Hispanic neighborhoods to the south and west of downtown Chicago.

The groups pleaded for regulators to act.

So part of this story is regulatory arbitrage. It was embarrassingly easy for these companies to create affiliates outside the regulatory lines.

That being said, it’s worth wondering what regulations the Fed might have taken had they listen to the “coalition of Chicago community groups.”

The advocates amassed evidence of abusive practices by lenders, such as Fleet Finance, an affiliate of a New England bank that eventually paid the state of Georgia $115 million to settle allegations that it charged thousands of lower-income black families usurious interest rates and punitive fees on home-equity loans. The National Community Reinvestment Coalition pressed the Fed to investigate allegations against other affiliates.

You have to ask yourself, what the National Community Reinvestment Coalition wanted the Fed to do. The prudent thing would have been to encourage the banks to lend much less in poor areas. But the NCRC almost certainly wasn’t looking for that — instead they were looking for more low-interest-rate lending, which wouldn’t have solved much.

Granted, there is some evidence that many potentially-prime borrowers were shepherded into subprime loans, with higher interest rates, but there’s little evidence that it was these high interest rates that caused the wave of defaults and foreclosures, which followed.

Bottom line, had the Fed listened to the NCRC, they almost certainly would have urged more lending at lower prices, rather than less lending, which is what would have been needed to prevent the bubble.

Zero Hedge has recently presented several declassified documents from the pre-1971 “Nixon Shock” days, that endorse the case for gold as a major historical factor in US monetary and foreign policy, as demonstrated by State Department and CIA disclosure. Gold’s special status in policy and administrative decision-making was a direct factor in Nixon’s choice to abolish the gold reserve at a time of an exploding budget deficit.

Yet what about the days after 1971, and specifically, how did that critical “behind the scenes” organization, the Federal Reserve, perceive and manipulate gold in the post Bretton-Woods world? Was gold, freed from its shackles to the dollar, once again merely a symbolic representation for money?

Zero Hedge presents the smoking gun that may provide responses to all the various open questions, courtesy of a declassified memorandum, written by none other than the then Fed Chairman, addressed to the president of the United States.

On June 3, 1975, Fed Chairman Arthur Burns, sent a “Memorandum For The President” to Gerald Ford, which among others CC:ed Secretary of State Henry Kissinger and future Fed Chairman Alan Greenspan, discussing gold, and specifically its fair value, a topic whose prominence, despite former president Nixon’s actions, had only managed to grow in the four short years since the abandonment of the gold standard in 1971. In a nutshell Burns’ entire argument revolves around the equivalency of gold and money, and furthermore points out that if the Fed does not control this core relationship, it would “easily frustrate our efforts to control world liquidity” but also “dangerously prejudge the shape of the future monetary system.” Furthermore, the memo goes on to highlight the extensive level of gold price manipulation by central banks even after the gold standard has been formally abolished. The problem with accounting for gold at fair market value: the risk of massive liquidity creation, which in those long-gone days of 1975 “could result in the addition of up to $150 billion to the nominal value of countries’ reserves.” One only wonders what would happen today if gold was allowed to attain its fair price status. And the threat, according to Burns: “liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, out efforts and those of other prudent nations to get inflation under reasonable control.” Aside from the gratuitous observation that even 34 years ago it was painfully obvious how “massive” liquidity could and would result in runaway inflation and the Fed actually cared about this potential danger, what highlights the hypocrisy of the Fed is that when it comes to drowning the world in excess pieces of paper, only the United States should have the right to do so.

Another notable observation is that despite a muted antagonism between the Fed and the US Treasury persisting for decades, the fuse is and always has been short, and the conflict can promptly hit a crescendo, with the Fed ultimately always getting the upper hand. In the case of the Burns memo, the Fed’s position was diametrically opposed to what the Treasury proposed was the proper approach. The result: full on assault by the Federal Reserve over the Treasury’s credibility and even then, more than three decades ago, a veiled threat by the Fed involving escalating problems if the recommendation of the Treasury was picked over that of the Fed. “Severe criticism on the part of prominent and influential financiers would inevitably follow if the Treasury’s present position prevailed.” It is not surprising that the Fed’s modus operandi has not changed one bit since 1975: it is our way or virtually assured destruction/embarrassment way.

Additionally, a curious tangent of the Burns memo is the fact that gold was explicitly used as an engine to enact political doctrine: “If the United States took a stand on the gold question that failed to satisfy the French in current international negotiations, would there be adverse economic or political consequences? I doubt it… If we do ever accede to French views on gold, we should at least use our bargaining leverage to achieve some major political advantage.” And while gold as a policy mechanism was unable to satisfy its role this time, one wonders on how many subsequent occasions was global democracy trampled over in order to placate the US Federal Reserve:

“I have consulted Henry Kissinger as to whether there is some political quid pro quo we might want to extract from the French in exchange for acceding to some part or all of their desired position on gold. But Henry tells me there is none at this time.”

At some point governments of advanced nations will say “enough” to the covert domination of their controlling bodies by the Federal Reserve, which through manipulation of its gold and money interests, effectively has control over not just the French, but every government which has a monetary basis to its respective economy and a relationship to the US “reserve” currency… Which means virtually every country in the world. The backlash, if and when it occurs, will be memorable.

Lastly, the memo presents a useful snapshot into the cloak-and-dagger, and highly nebulous world of CB negotiations and gold price manipulation:

“I have a secret understanding in writing with the Bundesbank that Germany will not buy gold, either from the market or from another government, at a price above the official price.”

So to all conspiracy theorists claiming that gold is being manipulated on a daily basis by the Federal Reserve: when it occurs over and over, and is so well documented, it is no longer a theory, it is merely sad. And the fact that the US government goes to great lengths to hide the illicit dealings of the Federal Reserve, which through its monetary tentacles, has prima facie control over not just US policy but also over sovereign governments, is an unprecedented failure in the checks and balances system that the founding fathers had planned when they created the United States of America. Yet saddest is that the United States no longer pursues strategic goals that are in the best interest of the majority of its citizens, but merely manipulates other, less powerful nations into a servile existence that only provides gain to a very limited subset of the American financial oligarchy. It is time for the Fed’s unprecedented control over affairs, both global and domestic, to end.

Full memo from Arthur Burns presented, compliments of Geoffrey Batt who collaborated in the creation of this post.

Fed Arthur Burns on Gold 6 3 1975

Courtesy of Phil’s Stock World

The number of unemployed people per job opening has climbed to 6:

Six is a lot, as you can see from the above chart.  6 means that if you get a job, 5 people absolutely will NOT be able to get a job because you just took the last one.  Notice Job Openings are still falling and people without jobs are still rising – this is not a good combination, despite how great you hear things are getting on TV.   In the first 6 months of this year, there are half as many manufacturing jobs available, 17% less Government Jobs, 21% less Professional Jobs and 21% less Educational Jobs.

Call me old-fashioned but I still think you need people to work in order to have a strong economy.  If we have 10% unemployment (the “official” number) and only 1 in 6 people COULD get jobs if they filled every single available opening tomorrow.  That still leaves us with 8.5% unemployment.  We are miles and miles away from creating jobs and that is very scary.

As I predicted in the Weekend Wrap-Up, Merkel won her election in Germany and the new “Pro-Business” coalition is making investors happy but Germany has some silly rule about balancing their budget so it will be a long time before you see the massive tax cuts that investors are salivating over.  Also, one would think people would sober up and short the Euro if their plan is to start running the German printing presses in a US-styled Spendocracy but no action in the currency markets so far.    I wrote some extensive commentary on the German situation in Member Chat so I won’t get into it again here.

This weekend, I also posed the questions “Are Fundamentals Making a Comeback,” or are we just resting before the next big push to 10,000?  We’ll be keeping a very close eye on our 5% rule levels next week, especially the retrace levels from the 20% run-ups since early July:

We can see from the chart that only the Nikkei has blown it’s retrace level but they have also never hit their 20% level.  All the other indexes have hit 20% up and the Hang Seng is in the most immediate danger of giving it back but the NYSE and Russell are playing it close to the bone while hitting the 2.5% line off Thursday’s close would put most of the indexes under the 20% mark so we are a small slip away from a very red chart.

The DAX should do well today as Merkel won her election (stability is good)

It’s going to be a race between those retrace levels turning red or the 20% up levels turning green but if they can’t get the Nikkei to join the party (and that’s a tough trick with the dollar down at 89 Yen) then it’s not likely the other indexes will be able to gain much momentum.  If oil fails $65, that sector has a long way to fall and metals and miners are also teetering on the verge of a correction so many, many things that can go wrong next week with lots of data on deck including Tuesday’s Case-Shiller Index and Consumer Confidence Survey ahead of the bell, our final Q2 GDP (-1%) on Wednesday with ADP Employment and the Chicago PMI.  Thursday is the very dangerous Personal Income and Spending along with Jobless Claims, ISM, Construction Spending, Pending Home Sales and Auto Sales.  Friday is our Non-Farm Payroll Report along with August Factory Orders – busy, busy…

We also have earnings from PBG, WAG, DRI, JBL, NKE, ZZ, WOR, STZ, BLUD, MU and Cramer’s TSCM, which will be interesting to me anyway….  So we’d better rest up, things are sure going to be interesting

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As Bloomberg reports, economists are now nearly unanimous that the “recession” is over. But I believe they are mistaken in calling it a recession. Since 2000, we have not had two recessions but a slowly developing depression, with rallies. The trend toward depression began in 2000, and it will not bottom for another five to eight years. The economy has been in weak expansion mode for most of this time (this is when commodities had their final runs), but the prosperity of 2000 remains a high-water mark, so the long term trend in the economy is down. Massive credit inflation through early 2008 hid this fact from most observers, because many economic statistics such as GDP were distorted into seemingly positive trends by the collapsing value of the dollar from 2001 to 2008. Certain ratios—see for example Figure 13, a graph of the employment rate—tell the true story. As you can see, it topped when the stock market did, rallied when the stock market did, and fell with it again. Notice that the mid-decade bounce fell well short of a new high, fitting the phony B-wave nature of the stock rally.

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