JoetheInvestor's  Instablog

There are different interpretations to many expressions that you see in the media. An example of this is government spending. If someone asks you: "Do you agree with cuts in government spending?", how do you respond? This will depend on your interpretation. Some people think of government spending as spending on public welfare, health care and unemployment insurance benefits. Other people think of government spending as wasteful projects, bureaucracy and regulation. Did you know that government spending also means subsidies to corporations and defence spending? (1)(2)(3)(4) (5) (6)(7) It is also money used to pay interest on the national debt. (8)(9) All of these categories are government spending, but this is not discussed in the typical debate on balancing budgets or reducing costs.

This debate has been raging for the last few years as government budgets have become harder and harder to balance. When the word austerity came into being as a common expression, which government spending was being referred to? It appears as if expenditures had to do with pensions, wages, health benefits and public services. What about the other areas where money is being allocated? The government is involved in most industries, sometimes at multiple levels.

Why does this matter? People are being asked to cast an opinion on something without having all of the information. They are also being asked to make tough decisions without exploring all of the options. People are paying for all of this spending through taxes. Should spending be reduced on pensions instead of interest on the national debt or defence? These questions have no doubt been asked in the past, but these topics should be debated so that everyone involved can have the information to make proper decisions.

Sources:

1) http://www.fraserinstitute.org/publicationdisplay.aspx?id=12386&terms=Corporate+welfare++Milke

2) http://www.financialpost.com/opinion/story.html?id=7ba13b37-8cb8-4a7a-9601-da38e5c67698

3) http://www.filmsforaction.org/news/government_spends_more_on_corporate_welfare_subsidies_than_social_welfare_programs/

4) http://www.cato.org/publications/policy-analysis/corporate-welfare-state-how-federal-government-subsidizes-us-businesses

5) http://www.nytimes.com/interactive/2012/12/01/us/government-incentives.html?_r=0

6) http://www.globalresearch.ca/more-than-50-of-us-government-spending-goes-to-the-military/18852

7) http://www.globalissues.org/article/75/world-military-spending

8) https://en.wikipedia.org/wiki/Government_debt

9) http://www.usnews.com/news/articles/2012/11/19/how-the-nations-interest-spending-stacks-up

The theory of financial futures markets links a physical market (or commodity bought today), with the futures market (or commodity bought in the future) via the idea that the cost of something today will equate to the cost of that same thing tomorrow, plus the cost of financing the wait, paying dividends and storing and insuring the commodity. Since the quality and size of the commodity are the same over time, there is no physical deterioration to speak of when it comes to gold.

Is this link still valid? The gold futures market took a large drop and the best reason cited was that there were large institutions who were selling gold futures. (11) The reason why is not that clear. The economic and fundamental reasons had not changed, and in fact had gotten more compelling to buy gold. The economic numbers from the U.S. were weaker. (7)(8) Economic numbers from Asia were weaker and stimulus from Japan was higher. (9)(10) There was news of Cyprus selling its gold, but this amount is tiny compared to the rest of the world. The idea that other European countries may be forced to sell their gold may explain some of the drop, but it remains to be seen. (6)

Days after gold hit 2 year lows, physical demand got much stronger in Asia as well as Europe and the U.S. (4)(5) Physical demand had been climbing steadily as coin and bar sales have been robust in the last 6 months. (4)(5) The question is: Why is there such a dichotomy between physical prices and futures prices? How can futures prices drive so much of the gold price when the physical demand is consistently strong? If the futures market starts settling in cash instead of actual metal delivery - has this in fact created 2 markets, with a large disconnect between them? (1)(2)(3) This seems to be happening in the silver market as premiums on physical silver bullion are going up. A secondary set of prices is being generated for physical silver that is diverging from the futures price (1). Logic would lead you to believe that if physical demand has been strong for months, why is the gold price not strong for months as well? Futures prices can lag up to 9 months out versus the spot prices, so it may be a matter of time. What seems to be happening is that there are now two markets for gold and silver - the futures market and the physical market.

Sources:

1) http://www.kitco.com/ind/Hamlin/20130418.html

2) http://asiaetrading.com/smx-to-launch-cash-settled-gold-silver-and-copper-futures-contracts/

3) http://www.rts.ru/s725

4) http://www.prweb.com/releases/gold-coin-2013/american-eagle-gold-coin/prweb10505855.htm

5) http://online.wsj.com/article/SB10001424127887324493704578428332095974800.html

6) http://www.guardian.co.uk/business/2013/apr/12/gold-selloff-cyprus-eurozone-crisis

7) http://www.cnbc.com/id/100637164

8) http://www.bls.gov/bls/newsrels.htm#latest-releases

9) http://finance.yahoo.com/news/chinas-economic-growth-slows-first-quarter-021541443--finance.html

10) http://www.reuters.com/article/2013/04/04/us-japan-economy-boj-idUSBRE93216U20130404

11) http://www.zerohedge.com/contributed/2013-04-15/why-gold-crashing

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

There have been many hints over the last several months (3)(4) that the Quantitative Easing (QE) program may end in 2013. There have been repeated statements by Ben Bernanke that QE will end when the labour market substantially improves. (1) Yes, this statement can change at any time, but there are a number of reasons why QE will not end any time soon, in spite of what people are saying.

The first reason is the U.S. payroll tax. Since that has been enacted, the number of jobs has been declining (5). When people's wages are reduced, they spend less. You can't spend what you don't have, especially when there is no more credit available, and no hope of a future job.

The second reason is President Obama's latest budget. There are cuts to Medicaid and Social Security being contemplated. If no cuts arrive in this budget, there would be a sequester instead - which has the same effect.(2) If cuts occur anywhere, money would be taken away from people, and they would be forced to spend more on basic needs. The job market would suffer. These effects would come through in the next 3 to 6 months, and the employment numbers will get worse.

The third reason is that the participation rate is at a multiple year low. (1) This means that even if many new jobs are created, the influx of new job seekers will drive up the unemployment rate, making that number look a lot worse. More job seekers also create the semblance of more competition, which will drive down wages and benefits. There is simply a large pool of unemployed people, and until that pool is used up, the present malaise will continue and the job market will languish.

Unless Ben Bernanke changes his mind or his policy using the labour market as an indicator to end the QE program - it will likely go on much longer than expected. The longer it goes on, the longer the higher interest accumulated on the debt will necessitate further spending cuts, and the cycle continues. How much faith do you have in QE ending in 2013?

Sources:

1) http://www.bloomberg.com/news/2013-04-05/bernake-s-caution-on-jobs-vindicated-by-payrolls-slump.html

2) http://www.keyt.com/news/politics/Obama-to-reach-out-to-Republicans-in-budget/-/17989322/19630988/-/2kjh0f/-/index.html

3) http://www.bloomberg.com/news/2013-02-27/fed-s-fisher-calls-for-cuttting-qe-to-avoid-overkill-.html

4) http://www.cnbc.com/id/100352475

5) http://www.bls.gov/news.release/empsit.t10.htm

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.