On jobs, El-Erian said that ‘let’s not also forget the numbers outside these headlines…we should not lose sight that we have structural issues that are not being dealt with.’ Also, ‘my gut says we are likely to see [QE3], but the question is when and how big.’

On the jobs data:

‘It is a strong report. We should welcome in job creation of 243,000 and welcome unemployment rate of 8.3 per cent. But the qualifier, and it is an important one, is let’s not also forget the numbers outside of these headlines. I look at long-term unemployment, those that have been unemployed for 27 weeks or longer, that is stubbornly stuck at 5.5 million, and second, youth unemployment is stuck at 23 per cent.

‘We should welcome the headline numbers. They are really good, but we should not lose sight that we have structural issues that are not being dealt with. That’s going to be the question mark. Is this just a cyclical bounce or can this hand off into a secular bounce, which the economy needs?’

On Bill Gross saying it’s a risk-on trade:

‘It is a short-term risk-on trade. Markets are dominated these days by short-term trade for good reason. There are so many uncertainties about the global economy. People are not clear what Europe is going to look like, and whether you get the political response the American economy needs.

‘A lot of investors have lost long-term conviction and are now focusing on the very short term. It is a risk- n trade in the short term, and in the longer term we will have to deal with these issues confronting the global economy and therefore markets.’

On what the jobs report means for QE3:

‘So far, the Fed has been dismissing the short-term data…They have been looking beyond the cyclical bounce, and saying that secularly the economy is still weak. What does it mean for policies, don’t expect any change in the signal that they intend to keep interest rates float at 0 or at exceptionally low levels until the end of 2014. In terms of QE3, my gut says we are likely to see it, but the question is when and how big.

‘We need this handoff in two places in particular. First, hand off from short-term growth that is prompted by stimulus. We have massive liquidity pumped into the system. We have a savings rate that has come down from over six to four per cent. These are all short-term effects.

‘We need to hand off to a long-term engine of growth, and secondly, we have to remove uncertainties like Europe, the Middle East, and Iran. We need these two hand offs, and critically so far, it is a good cyclical story, but the structural and secular story remains worrisome.’

On whether America needs a payroll tax extension:

‘This economy does not have enough indigenous growth. First, the savings rate for households has come down to 4%. There’s a limit to how far down you can bring it. Second, the rest of the world is slowing.

‘Third, business investment is only going to happen if businesses are convinced that we have this sustainable bounce. Therefore, if the government takes away too much too quickly, we will lose momentum.’

On where the global economy is headed:

‘It is very balanced right now. It is what we have called here at Pimco the morphing into bimodal distributions – the two ends of the distribution of potential outcomes is high. I would look in the short term critically to Europe. The ECB has managed to press the pause button on the European crisis using a very powerful tool, the LTRO, and we have a second one coming up.

‘The question is can other European entities press the rewind button to bring the crisis back? That is the main issue to look at. Keep an eye also on small things – Portugal, the Greek PSI discussion, they can press play again. So, focus on the very short term on Europe, on the longer term, position for the reality that we are living in this bimodal world.’

Silver rose above $34 an ounce in Asian trading yesterday while gold is above $1,750 again. The bulls are talking about how long it takes to exceed the $48 and $1,923 highs set last year.

Dubai Souk

The talk of the Dubai Old Gold Souk is that silver will hit $58-60 an ounce by September (click here), though it is still hard to find anybody prepared to stick their neck out beyond $2,000 an ounce for gold, albeit possibly within a couple of months.

Global equities have rallied in thin trading on the back of economic data that is already history. When the statistics for January come out they will likely confirm a global slowdown in trade and exports. The eurozone crisis and particularly cold winter weather will see to that.

Market traders have also become bored stiff with the Greek debt crisis. However, it still threatens to drop another Lehman on to bullish complacency that flies in the face of the reality of a recession in Europe and slowdown in Asia.

Manufacturers now reporting increased output may find themselves with goods left in their yards this month, and anecdotal evidence of further redundancies suggests unemployment is still moving in the wrong direction.

Will stock markets soon be plunging from their current six-month highs? The notion of an economic recovery is surely an obvious illusion when we know that the world’s largest economic bloc is already in the midst of a double-dip recession.

Greek gifts

Boring as it is the interminable negotiations of the Greek crisis are not going well. They should have wrapped up almost a week ago. Never trust Greeks bearing gifts as the Trojans learnt to their cost.

That probably means the precious metal price surge is going to reverse alongside a re-run of the 2008 global financial crisis, unless the ECB can pump so much money into its banking system that a Greek default can be easily absorbed and then all that liquidity will push up gold and silver to even higher levels.

For precious metal investors this could be the annus mirabilis when everybody piles into hard assets because they are running scared from paper.

Of course we have the epic manipulation of the Fed to thank for this confusing scenario. It is artificially depressing bond yields to support the stock market, and yet that is not the whole story.

Foreign support

Foreign buyers do presently see dollar-denominated assets as something of a safe haven and are prepared to tolerate historically low returns on bonds for that percieved safety, or for that matter take a risk on US equities.

However, sooner or maybe later this conundrum has to be resolved. The stock market will not carry on rising indefinitely if a recession threatens to thump corporate profits hard. Those selling equities would then buy bonds and push the yield still lower.

Or is that what will happen? If you look at Spain and Italy you have pretty low stock markets with very high bond yields. Bond holders demand and get high yields because there is a rising risk of default as debt levels are so high.

Could the United States go the same way in a recession with stocks on the floor and bond prices decimated by very high yields? That tipping point in bonds could come very suddenly if history is any guide, and stocks would actually be the better investment in that scenario.

Or look at the United Arab Emirates. Majid Al Futtaim is about to issue bonds with a 5.8 per cent coupon, very low for a UAE private sector company, while at the same time the local stock markets are trading close to seven-year lows.

So both the UAE stock markets and bond markets are consistent in pointing to recessionary business conditions. Strange that really because business revived quite strongly in 2012, and both stocks and yields ought to be rising.

Let us stick to the US conundrum first. Transport data for January suggests the bond market is telling the correct story and that the US stock market is topping out for 2012.

Eurozone disaster

That is consistent with the horror stories from the eurozone about the return of the world’s largest economic bloc to recession in the fourth quarter. It is consistent with a Greek default and second global financial crisis.

And it would be consistent with UAE stock and bond markets indicating a renewed downturn in business activity this year.

Could it be that US stock market optimists are simply wrong and the bond market is correctly judging the future? Perhaps. But if so the US bond market is also in mortal danger and is no safe haven.

The ArabianMoney investment newsletter (click here) is advising its subscribers how to buy silver, gold, oil, even real estate to achieve maximum capital returns. These are hard assets, not paper like currency, stocks or bonds.

The readership numbers are staggering but what do they mean? Can Facebook turn its hundreds of millions of casual users into hard advertising dollars? And if they can, why not do so before the IPO? Why the rush now?

Google paradigm

Google sold a technology company that had monopolized the advertising power of the Internet. It’s profits just had to grow with the Net. Only now that Google clone companies are supplying the adverts for websites like ArabianMoney is the giant beginnning to lose its grip.

AOL was an Internet service provider with a very large subscriber base that managed to convince the executives of Time Warner to buy it in the largest takeover in US history at the top of the dot-com bubble, bigger even than the Facebook IPO.

It proved to be a complete turkey and worth far less than the $165 billion paid in January 2000. Time Warner shareholders took a huge hit though the AOL brand still exists, just about.

The simple truth about Facebook is that it generates nothing like sufficient profits to justify its valuation, and never will. It is being sold at the top of a mountain of hyperbole to maximize an IPO price, albeit with the hope that more stock can stil be shifted for a higher price later on.

However, that is not why ArabianMoney would suggest caution is called for in this IPO. Our view is that the Nasdaq itself is well over due for a correction given the recessionary outlook for the global economy. Think a mini dot-com crash.

Dot-com bubble mark 2?

Is that not obvious in the way that the dot-com bubble looked about to burst in January 2000? You don’t buy a trip on a small boat with a storm approaching.

It is remarkable to us how financial bubbles continue to emerge throughout history, a triumph of hope and stupidity over experience. In Facebook you have a sociological phenomenon yes, an opportunity for investors to make money it is not.

The Facebook valuation is an obvious bubble. A year ago we commented that Facebook was worth more than the entire silver market (click here) and the valuation has doubled since then.

How serious can such a compact be when Greece and Portugal are signatories? Greece has never met a budget target in all its years in the European Union and Portuguese bond yields of 17.4 per cent yesterday suggest that it is the next Greece.

No deal

Indeed the main outcome of the summit was a failure to agee on how to plug Greece’s widening budget deficit. Finance ministers have pledged to deliver a plan by the end of the week so that Greece can receive aid to meet a 14.5 billion euro bond payment on March 20 and escape default.

Germany has apparently backed away from suggestions that a European Commissioner should oversee the Greek government. But the wider worry is now the contagion from Greece that is already happening, particularly in Portugal.

Portuguese 10-year bonds hit 17.4 per cent yesterday and two-year bonds 21 per cent, rates completely inconsistent with these instruments ever being repaid and pricing in 70 per cent plus default risk.

The claim by prime minister Pedro Passos Coelho that the debt is ‘perfectly sustainable’ is utter nonsense. Italian bond yields are back up above six per cent.

The next summit is from 1-2nd of March and will tackle the issue of raising the ceiling on the 500 billion European Stability Mechanism, unless of course the Greeks can throw another spanner in the works with a default and disorderly exit from the euro.

The unthinkable

That is still very much on the cards. It will do a lot more than give the Portuguese debt problems. It will destabilize the whole global financial system with the triggering of CDS insurance around the world.

Observers seem to forget how the Lehman tragedy gradually loomed on the horizon in 2007-8 and then turned into a disaster with nobody willing to prevent it.

Private sector debt holders can refuse to bailout Greece just as they decided against saving Lehman.

Then again international banks may prefer to call in the CDS insurance on their loans and leave the global banking system to pick up the tab. One can only imagine the arm twisting behind closed doors on this.

EU summit

EU leaders meet for yet another summit tonight in Brussels. It also appears that austerity measures now being demanded as a condition for the latest bailout package are proving just too much. A German proposal that a European Commissioner should approve fiscal policy would undermine ‘national identity and dignity’ said finance minister Evangelos Venizelos.

Too bad nobody considered that when they were stealing all the money from Europe in the first place. Greek membership of the European Union has been a long tale of obtaining money under false pretences to put it kindly.

But in the end it will likely be Greece that loses patience with the eurozone leaders and defaults on its huge debts, finally taking all the money it has borrowed without the means to repay it. Some might unkindly suggest that there was never any such intention in the first place. Greece has a long history as a serial defaulter.

The question then is whether the ECB president Mario Draghi has done enough to soften the blow of a Greek default with his stealth-QE expansion of credit to eurozone banks that started at the end of last year with $645 billion in new credit and may rise to almost $2 trillion this year.

Tim Congdon of International Monetary Research dubs this the ‘Draghi bazooka’ that will increase eurozone M3 money supply growth to five per cent by the middle of this year. But absorbing the Greek default – or if we are lucky a lesser orderly refinancing of the Greek debt with huge bank write-offs all the same – is going to need this cushion and more.

Money printing again

We also have to worry about the unintended consequences of money printing like this. There will be commodity price inflation and a whole new series of economic problems to handle with winners and losers this time around, not the saving of the whole system like in 2009. Good news for gold, silver and oil investors but nobody else.

The bankruptcy of Spanair, the Spanish regional airline last Friday may be a sign of the fall-out that is coming in the eurozone. Credit shrank by $120 billion in the eurozone in December, already worse than at anytime after the collapse of Lehman in October 2008 or the Great Depression of the 1930s.

A eurozone recession is baked in the cake. It is only a matter of how bad it gets.

It was a shame that there seemed to be such a limited Arab participation at Davos because the geopolitics of oil are likely to be a defining feature of the year ahead as well of course as the never ending eurozone crisis.

The organisers of the World Economic Forum might like to note that we get much better weather in Dubai at this time of year. The next issue of the ArabianMoney subscription-only newsletter is out tomorrow with more advice on investment opportunities for 2012, including silver, oil and Dubai real estate (click here).

This is the last video from Davos that we will be publishing this year and also about the most sobering. Rogoff is the co-author with Carmen Reinhart of the seminal book ‘This Time is Different’ that systematically reviewed all the major financial crises of human history and found that they seldom are different.

Self-delusion and over-optimism about the future are human character traits and the fundamental reasons why we are all doomed to repeat the errors of the past.

Worse than expected US new homes and GDP data explained the immediate fall. But the euphoria of the New Year seems to have largely evaporated on Wall Street.

Fed handout

For investors news that the Fed is to keep interest rates low for the next three years ought to be a cue to buy equities that have much higher dividends. Why then did they sit on their hands last week?

The headwinds blowing from Europe and Iran are to blame. Iran has threatened to stop selling oil to Europe as soon as this week in response to an embargo scheduled for July.

At the same time the Greek debt crisis is entering a final lose-lose phase. Banks are being required to make 80 per cent write-offs against privately held debt or trigger CDS insurance covering the full amount. Either is a huge and costly credit event.

The UK and eurozone are also about to enter a double-dip recession that started in Q4. Only a massive cash injection from the ECB before Christmas has prevented a meltdown in the regional banking sector with inter-bank lending still largely frozen up.

Safe haven?

The US stock market is benefiting as a comparative safe haven. But share volumes are very low and not at all consistent with a rising market. This lack of volume, momentum and high prices has led veteran market analyst Jo Granville to conclude that the Dow will fall 4,000 points this year (click here).

In the Gulf States the Dubai Financial Market gained more than five per cent last week and the Saudi Tadawul is also up 1.3 per cent in the past four days. Investors do not appear concerned about the local contagion from the European stand-off with Iran.

Stocks in the UAE in particular are rallying from very low levels, however, and confidence is extremely fragile. Bad news from the eurozone would quickly reverse the impact of good news from the Fed.

Facebook filing for its IPO next week will probably prove to be the classic top of the market event. Everybody wants it to happen even though the market direction is changing underneath them.

She admitted to being not ‘terribly positive’ about the outlook, and spoke with Maryam Nemazee and John Fraher on Bloomberg Television’s ‘The Pulse’ from the World Economic Forum’s annual meeting in Davos, Switzerland.