5 September 2008

Quotes of the month

by John Rubino

Gene Arensberg, Resource Investor
Everyone can look at the data and form their own conclusions. But when silver is in short physical supply, commanding injuriously high premiums and difficult to locate; when investors are piling into the silver ETF in droves, a 40% silver price plunge is not only not warranted, it smells.

It is difficult to imagine a legitimate reason that two U.S. banks could quickly and systematically amass a net short position on the COMEX which amounts to over a quarter of the entire action on that bourse. It will not be surprising at all if we learn that these two U.S. banks are taken to task by regulators for their actions. It will be even less surprising to learn that they have become the target of multi-billion dollar class action lawsuits by hungry lawyers representing silver investors everywhere.

Futures markets are supposed to answer the actual physical markets, not the other way around. In other words, futures markets are supposed to be a place where producers or large holders of a commodity can lay off price risk to speculators and thereby hedge against unforeseen adverse movements in the price of the commodity. Futures markets are definitely not supposed to be a place where a couple of well connected and well funded entities can bully the market with their own heavy handed trading.

If silver really was just taken down by a couple of very big U.S. banks to irrationally low levels, it won't be long before the laws of supply and demand reassert themselves. Got silver?

Frank Barbera, Gold Stock Technician
Even more to that point, we wonder at what point does an institution such as the Fed lose its credibility? At what point does an institution become irrelevant? The answer to that question is when events have taken on a life of their own, and when their words no longer have any real impact. We have fortunately not reached this point yet, but for all appearances seem to be heading in this direction at a rapid pace. The socialization of financial market bad debts has forced the Fed to act as the lender of last resort, placing its own balance sheet on the line for the ineptitudes which were sewn over so many years of the Greenspan Fed. How dare Mr. Greenspan comment on perils of the current collapse when he was the chief architect of the events now unfolding each and every week.

Bob Chapman, International Forecaster
Why should gold go down if the dollar goes up? If the dollar goes up substantially, that means the euro is going down substantially, so gold should be exploding in the Euro Zone. If anything, a weaker euro should be more supportive of gold than a weaker dollar as there are just as many euros out there as there are dollars now, and because the people of Europe are far more attuned to the uses and purposes of precious metals than are their US counterparts. We sure hope the people in the Euro Zone loaded up on precious metals, which are now skyrocketing in their currency as the euro has gone from 1.60 dollars to 1.50 dollars in rather rapid succession. All fiat currencies will continue to lose against gold, including the dollar, so it is time to load up on the bargains you have been so graciously gifted with by your evil government and the Wall Street fraudsters!!!

Another scheme that financial companies have employed during the crisis is to regularly reclassify assets from Level 2 to Level 3 and vice versa. Level 3 assets have no market so values have to be guessed. Level 2 assets are 'marked by model according to tangible data.' Ergo if you have a beneficial model you move assets from Level 3 to Level 2 to generate better marks and earnings.

Which leads us to JP Morgan - For most of the US financial crisis the media and pundits hailed JP Morgan as having a 'fortress-like balance sheet' even though it has over $80 trillion of derivatives. JP Morgan CEO Jamie Dimon has been portrayed as the Financial Wizard of Oz.

So for the past several months most investors and people assumed that JP Morgan somehow managed to avoid all the crappy paper and ancillary problems that plague the industry. One group that thought otherwise averred that the Bear Stearns bailout was engineered to help JP Morgan obfuscate its problems and borrow massively from the Fed without public concern.

But the revelation of a relatively miniscule $1.5B write-down has destroyed the illusion of JP Morgan's imperviousness to the financial mess. This has led analysts, investors and wise guys to re-examine JPM.

One disconcerting JPM fundamental is the amount of its Level 2 assets. An astute money manager alerted us that, "The market is obsessed with Level 3 assets levels but forgot to notice that of JPM's total $1.775 trillion in assets, $1.575 trillion are Level 2 or mark to model. The whole loan, MBS and Level 2 are what presents the real danger when the raters finally get there."

Gary Dorsch, Global Money Trends
Trading in foreign currencies is akin to judging a reverse beauty contest, and suddenly, the US-dollar's was looking a little less ugly than its peers.

Ambrose Evans-Prichard, Telegraph UK
My guess is that political protest will mark the next phase of this drama. Almost half a million people have lost their jobs in Spain alone over the last year. At some point, the feeling of national impotence in the face of monetary rule from Frankfurt will erupt into popular fury. The ECB will swallow its pride and opt for a weak euro policy, or face its own destruction.

What we are about to see is a race to the bottom by the world's major currencies as each tries to devalue against others in a beggar-thy-neighbor policy to shore up exports, or indeed simply because they have to cut rates frantically to stave off the consequences of debt-deleveraging and the risk of an outright Slump. When that happens - if it is not already happening - it will become clear that the both pillars of the global monetary system are unstable, infested with the dry rot of excess debt.

Gold bugs, you ain't seen nothing yet. Gold at $800 looks like a bargain in the new world currency disorder.

Bill Fleckenstein, Fleckenstein Capital
In any case, if we saw (as it appeared) heavy selling or short-selling in the futures market while demand for gold in the physical world was rising, that historically would be a very bullish development.

What does seem quite clear is that some portion of gold's weakness has been a function of the dollar's strength. The dollar's violent rally owes to folks' beliefs that the economy is improving in the U.S., that the Federal Reserve intends to raise interest rates and that the rest of the world economy is slowing down.

The rest of the world may in fact be slowing down. But our economy is not about to get better, and the Fed is not about to tighten rates. Just the thought of the Fed increasing rates is laughable.

Eric Janszen, iTulip
The current recession is more serious than all previous recessions since the early 1980s. This time inflation, unemployment, and a credit crunch are cutting into demand. Demand, in the economic sense, is the combined desire of consumers to spend and the availability of the cash they need to act on that desire. Recessions with declining demand tend to be self-reinforcing as falling demand leads to falling consumption leading businesses to reduce labor costs by laying off employees, leading to falling incomes and further reductions in demand.

Another unusual aspect of this recession is that traditional Keynesian techniques to stimulate demand by expanding credit through interest rates cuts is hobbled by a moribund housing market; housing has for decades been the primary mechanism for transmitting interest cuts to consumers by reducing a household's primary interest expense, their mortgage. The freed up money acts much like tax cut. Now, however, interest rates are rising, especially for those homeowners who took Greenspan's advice in 2005 and took out an adjustable rate mortgage when fixed rate mortgages were at 40 year lows, and tightening lending standards are cutting off home mortgage refinancing for millions.

Finally, a weak dollar since 2001 means "oil prices drive up the cost of everything that requires oil to grow, be dug up, blown, packed, scrubbed, crushed, shaken, warmed, cooled, pickled, packaged, processed, or moved - that is, everything on God's green earth including your own hair and the hot water you used to wash it this morning." The only way to reduce that impact short term is to use less oil. A recession will help, as long as the dollar doesn't fall faster than oil demand.

Jack Lifton, Resource Investor
As the 2008 political season nears its quadrennial crescendo and rock stars and war heroes are vying to be selected for the most militarily powerful job in the world it would seem that no one, certainly no politician, is willing to admit that America's world economic-leadership is eroding at an almost perceptible daily rate. Candidates, and office holders, remind us that each of the U.S. Navy's 12 carrier battle-groups is, by itself, more powerful than any other single nation's entire navy! Yet they fail to mention that we cannot build armoured ships or vehicles, small arms, artillery, armour piercing ammunition, missile guidance, night vision equipment, computers, displays, or, believe it or not, nuclear propulsion systems, or aircraft of any kind, civilian or military, without minor metals, such as the rare earths. Most of which we are now, 100%, dependent on nations unfriendly to America, which, notwithstanding their being unfriendly, already practice resource nationalism. Some of them, such as China, have already openly begun to restrict the export -- or utilization for items for export -- of key industrial minor metals, so as to reinforce their own self sufficiency in these materials.

Bob Moriarty, 321Gold
Homestake declined about 21% from the crash in late October 1929 through the end of that year, but through the entire decade of the 1930s Homestake was the highest gaining stock on the New York Stock Exchange. So, it's entirely possible the market could crash and gold stocks go up. At some point in time, people are going to recognize the precious metals stocks, not all metal stocks, are the safest place to be.

Doug Noland, Prudent Bear
It is not the nature of dislocated markets to let fundamentals get in the way of price movement. Markets, after all, live on fear and greed. Sinking energy prices and a short squeeze ignited U.S. stocks this week. And surging stock prices always entice the optimistic viewpoint, with many viewing runs in stocks and the dollar as confirmation that the worst of the financial and economic crisis is behind us. The bursting of the so-called Energy/Commodities Bubble is also viewed in positive light.

Yet if the key dynamic is instead a Bursting Leveraged Speculating Community Bubble, entirely different dynamics are now in play. Enormous short positions have built up, the vast majority as part of "market neutral," "quant" and myriad risk hedging strategies. If today's dislocation develops into a significant unwind of these positions, the market immediately then becomes vulnerable to a disorderly "melt-up" followed almost inevitably by a sharp reversal and disorderly decline. The unwind of bearish speculations and hedges would be a most problematic market development, unleashing a final bout of speculative excess and disorder that would set the stage for a major market crisis.

It is now clear that many within the leveraged speculating community have suffered huge losses over the past few weeks. For a "community" that was already suffering a difficult year, blowups in the popular energy, commodities and short dollar trades were a decisive backbreaker. Huge rallies in heavily shorted stocks and sectors have added further pain. One can now expect major redemptions at quarter and year-ends, a dynamic that likely ensures recent near-chaotic market conditions become the norm for awhile.

Jim Puplava, Financial Sense
The US Mint has suspended the production of US Eagles. I was told by one dealer this morning, checking with him, they're telling people delivery dates for silver Eagles won't be till January, February of next year. One dealer I was talking to said that they can't even get the plates - so what they were doing is they were ordering thousand ounce bars and they were melting the bars down to make one ounce coins because most people are buying either silver rounds - and I was told delivery dates right now are two months out. So this is August, probably late October. That's how scarce it is. So, the other thing is get your physical metals because there is a gross discrepancy and divergence between trying to drive down the paper market price of silver. One dealer told me in July his sales were up four fold last year; and this month alone, his sales are up eight fold. One dealer was telling me today that he had never seen anything like this in his lifetime. On this Friday I just bought a ton of silver and I've been told it's going to take two months to take delivery on that ton. And if the price goes lower, I'll buy another ton. I've got a couple of dealers who store my bullion for me until it's shipped overseas.

James Quinn, Wharton School, University of Pennsylvania
We have outsourced our savings to the emerging economies, along with our manufacturing jobs. The Chinese are saving the money we've paid them for flat screen TVs and the Middle Eastern countries are saving the money we've paid them for oil. You need savings in order to increase investment. The emerging markets are making the vast majority of the investments in the world. While the U.S. endlessly debates drilling and construction of nuclear plants (none built in U.S. since 1987) and oil refineries (none built in U.S. since 1977), China brought four oil refineries online in 2008 and plans to build 30 nuclear reactors in the next twelve years. The Asian Century has begun, but the U.S. has tried to keep up by using debt. It will not work. If anything, this has accelerated the shift of power to Asia.

Nouriel Roubini, RGE Monitor
Barron's: Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead?

Roubini: We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up. The taxpayer's bill is going to be huge. I estimate this financial crisis will lead to credit losses of at least $1 trillion and most likely closer to $2 trillion. When I made this analysis in February everybody thought I was a lunatic. But a few weeks later the International Monetary Fund came out with an estimate of $945 billion, Goldman Sachs (GS) estimated $1.1 trillion and UBS (UBS) $1 trillion. Hedge-fund manager John Paulson recently estimated the losses would be $1.3 trillion, and late last month Bridgewater Associates came up with an estimate of $1.6 trillion. So, at this point $1 trillion isn't a ceiling, it's a floor. And the banks, as I've said, have written down only about $300 billion of subprime debt. I think $2 trillion is too high, but the number will definitely be huge.

Franklin Sanders, Money Changer
Either this is the greatest silver and gold buying opportunity of all time, or the end of a bull market.

But it is NOT the end of a bull market. Time alone argues that. A bull market runs 10 - 20 years, and this one has run only 7, since 2001. Those who think silver & gold have fallen into the "bursting of the commodity bubble" completely misunderstand what drives them in the first place. Silver & gold are not commodities; they are money. When investors pile into silver & gold, it's not any commodity bubble forcing them there, but monetary demand. They aren't buying metals because they think all the Indian ladies are going to be wearing two nose rings instead of one this season, or that the American bourgeoisie will suddenly begin stockpiling sterling silver forks again.

They are buying metals because -- listen to this, get it straight once & forever -- they distrust fiat central bank currencies (or if you prefer, national currencies). The dollar is trash, the yen is trash, the euro is trash; all are equally insolvent, equally unbacked by anything expect a politician's or central banker's promise, which is not nearly as good as that of any madame at any bordello anywhere.

The dollar is rising? So, why? Did it become better, acquire more gold backing, solve its chronic balance of payments deficit last night? Come on. Did the euro get worse overnight? The yen? How much worse could it get? You are seeing competitive devaluations, all very much worked out collegially in advance by central bankers. Fundamentally meaningless.

What is NOT meaningless is that the Great Alternative Currencies, silver & gold, have long been advancing against ALL national currencies. All markets swing like pendulums, too far one way, then too far the other. Silver & gold prices became overbought -- a lot of people short dollars were long silver & gold. The dollar rallied, oil & commodities fell, sucking down silver & gold money. Look at the numbers. Even with gold down to $787.50 today, that's only a 21.5% correction, while always more volatile silver is down 37.4%. Friends, these are normal, not outlandish, corrections. Sober up.

Julian D. W. Phillips, Gold Forecaster
The huge gap between the value of gold and the value of money must narrow. Whether it is through the rise in the value of gold and silver or through the fall of the value of money dictates the future of the financial system. Either way, gold and silver will prove to be the safe-haven it has been since money was part of man's world. And the second half of this year is likely to be as dramatic as the first half but with a golden or silver sheen to it.

Steve Saville, Speculative Investor
Many people will be asking the question: why is the US$ rallying when its fundamentals are so terrible? From our perspective, however, a more reasonable question is: why has it taken so long for the US$ to rally against the euro given that the US$ is extremely under-valued relative to the euro and the euro's fundamentals are just as bad?

The answer, we think, is that the currency market has believed that the US Federal Reserve would be as 'easy' as it needed to be to help the banking system through its crisis, while the ECB would continue to focus on minimizing currency depreciation. We think the market was/is right to believe that the Fed will do whatever it takes to maintain the solvency of the major banks, but traders now appear to be coming around to the view that the ECB will also be loosening the monetary reins. Take away the interest-rate 'prop' and the euro suddenly becomes free to fall under the weight of its own over-valuation.

Mike Shedlock, Mish's Global Economic Trend Analysis
It's NEVER "practical" for the Fed, the SEC, Banks, CEOs in general, the FDIC, Congress, the Treasury Department, or the President to tell the truth. This is what it all boils down to: Somehow it's never "practical" to stop a drunken credit-financed orgy, yet when the party ends, it's never "practical" to discuss the consequences. In this case, the credit orgy lasted so long, and there were so many players, that the most important truth right now that needs open, honest discussion is that the entire US Banking System Is Insolvent.

Government stupidity is the most liquid of all assets, spreading everywhere at the slightest provocation. Look for more of it and you won't be disappointed.

James Turk, Freemarket Gold and Money Report
The time-bomb is ticking. The federal government is liquid because as its consolidated accounts state, it has "the power to print additional currency." And print it will for one simple reason. The federal government is insolvent. Its debt obligations far exceed its financial capacity to repay those debts without debasing the dollar. Eventually it will take one ounce of gold or so to buy the Dow Jones Industrial Average. At that time I will recommend selling gold and buying the DJIA to ride the next cycle. But the DJIA still has to lose about 90% of its price in terms of gold for that to happen.

Christopher Whalen, Institutional Risk Analyst
We're not sure who's going to win the presidency in November, but we are very sure that the safety and soundness of the nation's banking system is going to be an issue in this election - perhaps as prominent an issue as energy prices. Indeed, we think that the president-elect will be forced to meet with President George Bush and both men will ask the Congress to move on providing funding and new legal authority to backstop the FDIC. In the near-term Uncle Sam is going to be forced to get even more involved to head off a catastrophic contraction in the availability of credit to the private economy.

Jim Willie, Hat Trick Letter
The US banks are fast approaching the early warning season in early to middle September. They are required (Wall Street firms excluded) to come forward and provide guidance on their earnings, their balance sheet damage (called impairment, since sounds better), and their profits (nonexistent, as in extinct). Wall Street firms have almost no stock or bond issuance, no private equity packaging, so business is largely dominated by management of their demise, along with management of their propaganda messages that seem shrill lately. The US banks will in my estimation announce bigger Q3 losses than Q2. Their BS-stories continue since they are actively seeking cash to shore up balance sheets. Their mortgage related losses will be ongoing, but now those losses will be joined by prime mortgage losses, commercial loan losses, car loan losses, credit card losses, and more. The USGovt can claim the economy is in good shape, that exports are booming, but a grand disconnect has occurred. Something like 460 thousand jobs have been lost this year, and most job gains are on paper, from the Birth Death Model nonsense. More paper deception, this of the labor market. Consumers might spend less if they were keenly aware of US-based unemployment running over 14%. The steep decline in USGovt tax receipts testifies to a recession. Most statistics testify to recession, like the Leading Economic Indicators. Reverse gear for the USEconomy is bad news for the USDollar. And all the horrendous disasters coming from Fannie Mae and Freddie Mac acid pits cannot be good.

John Rubino

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