Gold continued its rise, closing at 556.90 dollars an ounce on Friday, up 2.7% from $542.20 the Friday before. The dollar closed at 0.8236 euros on Friday, virtually unchanged from 0.8239 the week before. The euro, in turn, closed at 1.2142 compared to 1.2137 the week before. Gold in euros would be 458.66 euros an ounce up 2.7% from 446.73 at the previous week's close. Oil closed at 63.92 dollars an ounce, down 0.6% from $64.31 the week before. Oil in euros would be 52.64 euros a barrel, down 0.7% from 52.99 at the end of the previous week. The gold/oil ratio closed at 8.71, up 3.3% from 8.43 the Friday before. In the U.S. stock market, the Dow Jones Industrial Average closed at 10,959.87, virtually unchanged from 10,959.31 the week before. The NASDAQ closed at 2,317.04 up 0.5% from 2,305.62 at the close of the previous week. The yield on the ten-year U.S. Treasury note was 4.35 at Friday's close, down two basis points from 4.37 the week before.

Besides gold, everything in the numbers looks pretty normal. Gold, however, has risen 10% since Christmas. The economic crisis is here. So why is the stock market doing so well? Steven Lagavulin of the Deconsumption blog points out that the U.S. Federal Reserve Board has pumped more money into the system than they have since September 11, 2001:
Fed Flood

I've been watching this handy thumbnail graph of Federal open market actions for some time now and thought it might be of interest to pass along. It basically reflects the daily liquidity that's being created--measuring the power of the proverbial printing presses. And frankly, they've been kicked into high gear for the past couple weeks. I assumed this was just to give a quick boost to the stock market going into year's end, but I gotta tell ya.....yesterday's action was massive...I mean the kind of liquidity you wouldn't see unless there was real Fear at the Fed.

To give you some perspective you might eyeball the bottom black lines on this longer-term chart....and note that the last time we saw 60 billion was in the second week of Sept. 2001....
Michael Nystrom confronts the high stock price question and also concludes that it is due to the massive increase in the M3 money supply:
Is This Rally for Real? And Other Thoughts

by Michael Nystrom
Cambridge, MA
January 10, 2006

"The tape moves in mysterious ways, the multitude to deceive" - WD Gann

2006 - Year of the Bear

As most of you are aware, there are a number of bearish omens hanging over US economy and stock market for 2006. Here is the list, off the top of my head:

1. Rising short term interest rates

2. Inverted yield curve

3. Housing bubble slowdown / pop in the works (See this excellent article by Gary Schilling)

4. Massive slowdown and/or bankruptcy at GM and/or Ford on the horizon

5. Rising unemployment in home building, financial services, and manufacturing due to 3 & 4

6. Rising energy costs

7. Corresponding slowdown in consumerism due to 5 & 6

8. Stock market's four year / presidential cycle pointing down

9. Rising trade deficit

10. Rising budget deficit

11. Rising national debt

12. New Iranian oil bourse in the works to price oil in euros this spring

13. Falling dollar as a result of most of the above, but especially #12 14. New guy on the job at the Fed to deal with all of the above.

I won't belabor these points; I think we're all well aware of them. Anyone with eyes and a brain knows what they mean. All the evidence is lined up against the economy and the stock market.

But just when things are looking the most bearish, when we all expect the market to start the year off with a loud thud and keep on going, what does it do? It confounds everyone with new highs. So no matter how bearish one may be (and I am pretty bearish for 2006), there is one thing that bears cannot argue with right now, and that is new highs. And that is exactly what we've seen so far in the new year on all the major indices. The Dow is perched above 11,000 for the first time since 2001, just 8% away from a new all time high.

Gold likewise put in a new closing high today, over 550. A number of commentators have already pointed out that these gains have been accompanied by huge increases in M3. That money has to go somewhere, and it looks like for the time being it will continue to flow into stocks, gold, and other commodities. This means inflation as long as the Fed keeps pumping. But have you noticed that everything seems to deflate after they lay off the gas just a little bit?

Rather than being a forecast, I prefer to call this a roadmap for 2006, and rather than discussing specific targets, I'm going to give a scenario of what might happen this year, in line with the Gann quote above. No one can tell with any certainty what is going to happen, especially in this volatile environment, so what I'm going to do is tell you a story. First I am going to lay out what I see happening now then give you my best guess and some perspective as to what might happen in the future. And like any good story, this one has a moral…

Nystrom's Scenario for 2006 1Q

From a long-term perspective, things look pretty dismal for 2006. Most mainstream analysts seem, if not bullish, certainly not bearish, while most internet commentators sense trouble ahead. Count me among the the second camp. In the short term however, we've got a little rally on our hands in the stock market. While I have no idea how long this current rally could last, it appears fairly clearly correlated with M3:

M-3 has been launched into outer space

M-3 has been launched into outer space, up another $56.3 billion last week, up $92.4 billion over the past two. This is some real horsepower. Over six weeks, the meaningless figure, ahem, is up $177.8 billion. These annualized growth rates are 28.7 percent, 23.6 percent, and 15.3 percent respectively.

I doubt the Fed is going to abruptly shut off the spigot, and this pace should be enough to keep the rally going at least through most of the first quarter. From a technical perspective, the SPX (futures) looks to have around 60 - 80 points of rally in it, the NDX around 150 points and the Dow around 600 - 800. Bull or bear I think we'd all like to see the old Dow make a good run at its all time high, if just for nostalgia's sake. It would be something exciting to cheer for in this dreary winter of 2006 - free and better than a movie. Of course if the Dow does beak to a new all time high, the psychological boost to the markets could be much greater, and prices might move much higher. But we will cross that bridge when and if we come to it.

What I would like to caution bears on is not to underestimate the possible extent of this rally. Think back to last year at this time and how just about everyone was bearish on the dollar. The Economist had a cover that showed pictures of paper airplanes made of dollars, crashing from the sky. Warren Buffet went short the dollar, and Bill Gates was quoted as saying, "the ole' dollar - its going down." (As if he knew.) But while the "fundamentals" said it should be in for a fall, instead it did the exact opposite. For the whole year. That's how markets go sometimes. As the old saying goes, "the market can stay irrational longer than investors can stay solvent." And so it is with the stock market as we start this new year. So I caution bears not to take this rally lightly. Prices are going up now. If you're a nimble trader, you can go with the flow (up), but if your a bear don't try shorting until you see clear signs of a top.

The Reason the Most "Conservative" Investors Get Caught Buying at the Top

I know that a lot of bears out there can't believe their eyes, can't believe that this market is still going up, not with the deteriorating economic picture, and not with that 14-point list up there. But the market has confounded just about everyone of late, because that is part of its job. So let's imagine that the market has a nice run over the next several months, and the conservative investors on the sidelines see others making money while they're missing out. Then those "conservative" investors will start to get a little antsy. Every day the market moves higher they'll get more uncomfortable. By the time they're finally convinced that the advance is real and they buy in, the top will be in and the rally will be over. The prime point for this to occur would be as the Dow approaches its all time high, looking like its going to bust right through it without looking back. The other prime point would be tomorrow morning.

Please note, all of this is pure speculation, but it is the best way I can imagine for a bear market rally to fool the maximum number of people. So if this first quarter rally does materialize, keep your eyes peeled for signs of economic weakness and recession. The factors on that list above are real, and barring some kind of miracle, they are not going away. The first quarter is when Iran's oil bourse comes online, it is not unprecedented for markets to peak in the spring. The Nasdaq's all time high came on March 10, 2000 as investors started to look ahead to first quarter earnings and decided they didn't like what they saw. Oil is rallying again, and whether it makes a new high or not, I think the damage has already been done to the economy -- we just haven't seen it yet. If oil makes new highs, then forget it - recession is practically inevitable. Changing of the Guard at the Fed

Greenspan's last meeting as Fed Chairman comes on January 28, and I suspect the huge increase in M3 has something to do with ensuring a smooth transition between himself and Bernanke. If you recall, Greenspan also flooded the pipeline just before Y2K. He is a cautious man. He wanted to make sure to stem any potential panics, so he did what any banker would do - throw money at the problem in the hopes that it would go away (and we all know what that did to the market). The changing of the guard at the Fed will likely go smoothly -- everyone will be on their best behavior -- and the markets will politely welcome in the new guy. At least for the first few days.

Greenspan took over Chairmanship of the Fed on August 11, 1987. If memory serves me correctly, the market peaked around August 25th of that year, but waited a full two months before the big welcome party in the form of the October 1987 crash. Bernanke takes over February 1st, 2006, and his first meeting as Fed Chairman comes on March 28th, 2006. We're all expecting him to have a trial by fire, but who knows what will trigger it? Maybe he'll spook the market with his overly direct manner of speaking, in stark contrast to what Jim Grant called Greenspan's "central banker Esperanto." Or maybe he'll disappoint the market by continuing with the short term rate hikes in an attempt to live down his inflationist reputation. Whatever the case, by the time the market peaks, most people will be so intoxicated by the rising stock market that they won't notice the deteriorating economic conditions. Or if they do notice, they'll do what they always do - they'll ignore them and say that this time they don't matter. The market always climbs a wall of worry, but when prices diverge massively from underlying reality, the stage becomes set for a crash. Bernanke won't be the cause of it (if it happens), but if he doesn't fix it, he'll certainly get the blame for it!

The Credible Threat

Last night I reread the text of Bernanke's Fed speech on deflation (Deflation: Making Sure "It" Doesn't Happen Here). I remember the first time I heard his printing press remarks -- I was blown away. I didn't know who this guy was, other than that he was a new guy and that I thought the line about the printing press was an extremely irresponsible thing to be saying. I was sure that he would be fired, or at least reprimanded for his remarks, but look where he is now. Shows you how much I know.

This is what I gleaned from the speech last night: Bernanke tells a story, that if an alchemist invented a way to make gold in unlimited quantities, then released this news to the world and said he was going to start making and selling unlimited amounts of gold, the price drop immediately, before the Alchemist made or sold a single ounce. He goes on to compare the Fed to that alchemist. He talks about the printing press, then says, "By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services."

Then it struck me - this elimination of M3 in March is the credible threat.. Its a bluff. First they juice M3 like it is the end of the world (or 1999), and then they turn the lights out on the statistics. Since we're all in the dark, the only thing we can assume is that the Fed is monetizing debt like there is no tomorrow. But they really don't want to do that -- it is not good for their balance sheet -- so instead they engineer this bluff. Everyone believes it, and they (we) act accordingly, bidding up stocks and gold.

If you don't think the Fed is that clever, I encourage you to read Bernanke's speech. It is a long treatise on stimulating demand and causing inflation in the event that interest rates fall to zero. After reading the speech, you may find that they are beyond clever. They are insane!
Max Fraad Wolf adds to the usual catalog of bearish omens a couple more: Latin America standing up to neoliberalism and the end of pensions in the United States:
Sleeping dogs wake?

Wisdom holds that the 2005 miracle avoidance of long deferred bills will continue. The admitted fly in the ointment seems to be growing consensus that housing markets may not be able to furnish double digit growth in prices, cashout refinancing and home equity extraction. Fingers are crossed - assurances are made - that this will not have serious near term macro dampening effects.

My interest, however, is to call attention to facts so long ignored they have been forgotten. The quick and dirty summary is: coming pension problems and the economic impact of losing Latin America might merit mention and concern. If these are odd subjects, almost never discussed, therein rests their import.

As we slide into what could be the 6th year without real median income growth, under funded pension plans, rising co-pays and decelerating housing gains are likely to coincide with rising interest rates and high energy prices, a combination sure to squeeze debt laden family budgets. Precious little attention has been paid to the earnings footprint of new pension and health care cost accounting. New accounting rules set to take effect will require firms to move discussion of pension costs from ignored footnotes to the general content of financial statements and filings. This will add a powerful incentive for many to follow the leads of IBM, Motorola, Verizon, airlines, autos, auto parts and the foiled NYC MTA to off-load present and future pension costs. Stop and ponder what this means and you will see why markets should be paying a lot closer attention to these developments. Pensions are massive buyers of equities and fixed income products. If they shrink and more dollars are turned over to negative savings rate America, what will follow? If there is no slack in pressured household budgets, and retirement security looms large, how smooth will the pension offload sailing be? These pressures are unfolding as baby boomers move into retirement cash out mode and US indexes lag foreign competitors. Anyway this shakes out, pensions are a huge issue likely to grab headlines and cause turmoil in 2006 and well beyond.

At some point the string of massive and costly foreign policy missteps of the last five years will be discovered by our ever prescient, wise and forward looking friends in the financial markets. Chief among the nasty little items that will occur to folks when they decide to look around again will be that US influence, prestige and potency in Latin America has plummeted to previously unthinkable lows. From Argentina and Bolivia to Uruguay, those associated with and friendly toward Washington have been dropping like flies. Our loss of influence and access have neither gone unnoticed nor, unexploited by foriegn rivals. China's freshly inked contract with Bolivia offers an example of a global reshuffling that is proceeding briskly while America sleeps and congratulates herself over imaginary victories. I believe that losing a continent matters. Others will too when they get around to discovering it. I fear a too little, too late and heavy handed response is likely to materialize. If the past offers guidance, it will further worsen the situation.

A significant part of the way we squeezed out 2004 and 2005 was through a combination of perception management and inter-temporal shifting. Perception management entails prima facia rejection of bad news and exaggerated embrace of the positive. Inter-temporal shifting is defined by shifting costs into the future and consumption into the present. Both are overdue to hit the wall.
Perception management is exemplified by the rising dollar proving stability and desirability of US assets. This is done in neglect of an approaching $800 billion current account deficit, distortion created by one time repatriations of foreign held multinational cash under a now expired tax provision and the increasingly uncomfortable fact that US equity market returns are lower than other region's returns. Not to worry, all good things are fundamentally based and eternally true. Bad news is hype and ephemeral. Our inter-temporal shifting is actually growth and wisdom; future costs are exaggerated and fleeting. The time transfer I refer to is the new national past time, forget baseball. We accomplish this stunning economic achievement through credit markets and the break down of time honored lending standards and credit constraint. Debt trades more today for less tomorrow. We live in a national economy that is swapping ever more today's consumption for ever less tomorrow's wealth. This defines our relations with the rest of the world and has been accelerating for years. The inter-temporal sleeping dog will wake and 2006 promises several kicks to slumbering canine. Korea and China have recently signaled discomfort with the hundreds of billions in our future wealth and earnings they have taken on to facilitate massive American consumption of their exports. The prospects of some recovery in Japan and Germany suggest to all that there may be other places to park capital.

Households live on transferring today's shortfalls into the future with rising debt. They trade growing future streams of repayment to spend today. Expansive houses, shiny new cars, high end appliances, Swiss Watches and flat screen TVs have been amassed against pledges of future income. We will gladly pay you Tuesday 2010 for a Toyota today. This is perception management and time transformation of earning and payment par excellence! Surety of future income to cover rising debt service is peaking amid historically low and rising interest rates, falling retirement income security, stagnant real median earnings and rapidly shifting global economic realities.

Just like everyone else, I don't know how much further beyond prudence this can stretch. Unlike a lot of folks I don't believe sleeping dogs lie forever still. When they do stir to life, expect much bite and little bark.
Charley Reese gave us a little common sense on Latin America last week:
Latin America is beginning to turn left, and you can't blame it. So-called globalization is nothing more than financial colonialism. Big capital comes in, exploits the people's labor, loots the country of its resources and leaves nothing behind except the bribes it paid the country's leaders to sell out their own people.

That's really what globalization is — all of the heifer dust spread about it by lickspittle journalists and professors notwithstanding. The same process is going on in the United States. The robber barons are back, and their morals haven't changed, only their tactics.
More important than debt, the housing bubble, pensions or Latin America, though, is the looming attack on Iran. The consequences of such an action go far beyond any sort of financial numbers. The world economy, to the extent it survives at all, will be based on rationing, the black market, and day-to-day scraping by, no matter what economic class you belong to now.

George Ure is worried, too:
The Melt Down Ahead

To see what's coming, you only need to read a few stories, in the right order, and think through the picture being painted. Because it's a weekend, bear with me for a few minutes, and let me walk you through the highlights, ok? -- More than a few of us who have been buying gold since the Manufacturers Resource War broke out (with 9/11/2001) have been expecting gold to begin making its "big move". With prices surging past 24-year highs on Friday, this very well could be it. If it is, our inclination is to wait until the Dow and the Price of Gold (POG) are even, then we'll figure out where to deploy both of our dollars next. I have to agree with one poster over at LeMetropole Cafe who noted that the surge in prices was not directly attributable to Iran tensions. He noted if that was the case, we would have seen oil spike up in a similar meaningful way. It hasn't, so he figures, something else is at work. What's really going on, as best I can judge, is that the Fed has partially lost control of the money supply (which is why they will stop their weekly confessionals of M-3 in March of this year - it will be too scary for "regular people" to stomach by then. This week's report shows that M-3 has increased by 7.84% compared with year ago levels. It's really worse: The November to December change in M-3 pencils out to an 11.5% annual rate. In simplest terms, the money supply is going nonlinear now. That's why gold is up. You might be asking what is so frightening about that - we've had bouts of inflation before, so no big deal. Well, not quite. You see in the same period, the amount of M-1 (basically cash in the system) has actually decreased by about 2-10th's of one percent in the same period!. In other words we have deflation and inflation simultaneously in the money figures. The divergences are staggering. You've got less paper money in hand, yet easy credit - so the purchasing power of cash goes up and the consumers are forced more and more into debt to make ends meet. It doesn't take a rocket surgeon to figure out that this condition in the economy can't go on forever. Thus, later this weekend, when the new web bot run (future forecasting techniques of based on linguistic shifts on the internet which seem to precede major social/psychological turnings points, such as 9/11, the anthrax attack, and others) we expect that a very large unexpected event will seen happening between now and April 1st. Why? Because its clear to the international banksters that their game is falling apart and they need an "event" of some kind in order to maintain their cover and remain in functional control of the country through their shadow government proxies. Care to take a guess what that will be? Let me help you...

Leading to Iran

One of our brilliant sources makes a very sage observation: Don't be surprised by war with Iran around the time of the dark moon this month. His reasoning? Well, this bright fellow looks at Navy ship reports, a few selected posts, and notices how many small landing craft and small carriers are out of port at the moment. Then he catches that some jet jockeys have rotated out of country for duty. To his way of thinking, this is a tip off - or a none-too-subtle hint to Iran that the US is not kidding around on the uranium enrichment issue. Still, Iran seems to be sticking by its guns on this and says there is no basis for other countries to restrict what it does on its own soil, whether we like it or not. Still, it all potentially leads to a regional conflict, which could easily go "theater nukes" which means the genie is out of the bottle and there's no bets at that point. But isn't that what the Powers that Be are after? The demand destruction and continued concentration of wealth in the hands of the few? Of course! A move against Iran, and I hope not in response to another false flag terrorist event, would keep the public's mind off the bankers and will provide a mechanism for the spinsters to blame economic duress on indigenous people and the Muslim faith which are fighting for what they see as control of their natural resource base and against Western/corporate exploitation. The greed of the money changers and usurers would be shielded from public scorn by opening of an Iran front, especially if there was an "event" and thus their continuance in power would be assured. That's why the Texas Cell Phone story from Friday is so important - we can almost see something coming. (Along with ID to buy a cell phone, for sure!) Simple, huh? Now be a good citizen and run out and charge something on that 21% credit card, would yah? You've got 20-minutes yet before you're due back in the squirrel cage to line the corporate thieves pockets.