by Jim Willie, CB. Editor, Hat Trick Letter | November 12, 2008
LIQUIDATION & USTBOND SUPPORT
The two main factors pushing up the USDollar have been liquidation of speculative trades funded by it, and redemption of credit derivatives paid in it. These are not signs of any inherent investment in the USEconomy itself, but rather its liquidation. Evidence abounds of severe deterioration within the United States, a collapse of confidence, a fall in business investment, ruin in retail demand, an avalanche of job loss, and a spread of corporate breakdown beyond the financial sector. Demands for nationalization have begun outside the financial sector in a wave certain to grow in strength and breadth. The USEconomy faces a risk of not so much recession, as DISINTEGRATION. The distribution channels within the United States are at risk from lack of credit and trust. The overseas shipping channels to the United States are at risk from refused letters of credit. These constitute arterial clots never seen before. Look for export trade also to be harmed soon, as the USDollar exchange rate is silly high, and foreign customers are damaged from export of US bond toxin.
LAST DEFENSE AGAINST USTBOND DEFAULT
The printing press is that last defense. Default can be averted, but only with extraordinary actions with clear impact on the USDollar itself, undermining USTreasury integrity at the same time. The huge funding needs in excess of $2.6 trillion cannot be even remotely met by conventional USTreasury Bond issuance. Auction failures from ridiculous under-bid conditions are next to come. Higher bond yield offered is an immediate result. The last resort to printing press usage will have an immediate and negative effect on the USDollar exchange rate. Theoretically the printing press can meet the demand, but in doing so, the risk is transferred to the USDollar from the USTBond. The two are inseparable. In fact, the USGovt-backed bond in the Treasury (which used to hold gold, now pure toxic debt) is the obverse of the USDollar. The backside risk is for the USTBond yield to rise from USDollar pressure, as foreigners sell. The USFed and Dept Treasury have fiercely resisted unbridled usage of the printing press, for fear of inflation consequences. Evidence abounds, revealed in the November Hat Trick Letter report, to reveal specifics on draining the mainstream USEconomy for the benefit of corrupt Wall Street bond redemption and general bailouts. Rob the US populace realm in order to subsidize aristocratic fraud and redemption. The unlimited risk from AIG, seen in credit derivatives, and from Fannie Mae, more hidden from interest rate swap risk, is next to be manifested in double barrel form. Already, AIG is back to the trough for the third time. Keeping a lid on credit derivative explosions has been a primary motive for bailout action in recent months. The Fannie Mae demand will be more like a gigantic intravenous supply, more hidden from view.
The pennant pause pattern in the long-term USTBond yield can be seen in the chart of the 10-yield for the Treasury Note. My expectation is for the yield to move out of the pattern to the upside. Foreigners are witnessing an artificially high USDollar at the same time as an artificially high USTreasury principal (from low bond yield), a bad combination. Auctions will thus be strained in coming weeks and months. Details on the USTreasury Bond risk and connected factors are in the Macro Economy report for the November Hat Trick Letter.
STEEP TREASURY YIELD CURVE
The gold price typically loves a steep yield curve. Banks do also, but they are struggling in a horrible manner with insolvency. A great consolidation phase is underway, described in past articles, and increasing in strength, where the Federal Reserve banks benefit. Evidence is ugly and stark, as the great majority of the initial Wall Street bailout tranche was not dispensed as bond purchase but rather of bank stock purchase of Federal Reserve primary dealers! Banks are not lending the USGovt funds from the bailouts, a violation of agreements, but then again, a Coup d’Etat took place recently as Wall Street installed a Czar named Henry who acts unilaterally. The short-term bond yield in the USTreasury complex is low, while the long-term bond yield is high. Profit margins will be aided in a pyrrhic victory for the banks, who are dead but still permitted to operate. They borrow short and lend long, so have a decent profit margin restored. Price inflation will be the phenomenon discussed in coming months, as officials attempt to turn on the switch and reflate the US financial and economic systems. The task is fraught with risk and challenge. The level of deterioration in the USEconomy is great, more than what the bankster megalomaniacs figure.
CLASH DIRECTLY AHEAD, GOLD IMPLICATIONS
The major nations and camps are heading for a power clash of historic proportions. Certain nations have long memories for having been victimized by past imperial forces. Look for them to set a series of traps, with possible military confrontation. Analysis has begun of the extent of degradation and impotence of the US military machinery. Conflict resolution will not occur at the conference table alone. Brawls on the global landscape are assured. The G-20 Meeting will serve to be a sideshow, populated by clowns. To an absurd degree, the United States and England still maintain the grand illusion of being in control. They are not, since both are deep debtor nations and operating under failed banking systems. The major creditor nations will not permit a simple restart of Western nations, under the same rules. Big changes are coming. The gold and silver prices will soon enter a powerful stage of rising price, as in go through the roof. Defaults are likely at the COMEX, so watch the December contracts.
In the next couple months, all value will be called into question on the paper side. Alternatives to the USDollar as global reserve currency are soon to be discussed and even tested. Implications to global commerce are huge and all-encompassing. Gold and silver will emerge as the primary store of value, in undisputable manner. The new global masters, from the credit side and not from the debtor side, will not permit any confiscation of gold or silver to occur. Desperate attempts might be seen by the US/UK failed team, certain to reveal their impotence. Gold & silver will emerge from these smoldering ashes of bank ruins (seen clearly as unfolding) as survivors of stored value. The next round of economic decline will occur outside the financial sector, and serve as exclamation points for the need to find true value. VALUE IS ULTIMATELY FOUND IN GOLD & SILVER.
THE BIG ELEPHANT CARCASS
As a friend and contact has said to me, “The US financial system can be killed with a single well-placed shot, much like a shotgun to an elephant.” The US is so vulnerable, its true condition is indescribable. The USTreasury Bond represents an obelisk bubble specifically originating within the bond bubble that has broken in a general sense. It rises like a narrow tower above all the other deeply damaged bonds in a perversely structured credit market. All non-government bonds have suffered, while USTBonds have benefited. The high USTBond principal value and high USDollar exchange rate will encourage foreign bond holders to begin to “spend” their artificially high valued USTreasury Bond securities before events occur to greatly undermine their value. See for instance the Chinese announcement to spend $568 billion in a stimulus package. Although great news for the commodity and reflation trade, this cannot be seen as good news for the USTreasurys. They will lose a strong Chinese bid, or see outright selling. The Chinese plan calls for strong support of public housing, infrastructure, railways, and indirectly demand for commodities. Contrast theirs to US plans to support failed financial firms and deeply rooted corruption of marquee named financial firms, at the exclusion of mainstream businesses. Other nations will soon be forced to defend their own domestic currencies against an unreasonable decline in exchange rate, the result of the Black Hole in USTBonds. Currencies from nations ranging from Europe to Brazil to Russia will react by selling their USTBond reserves, and to use them for purposes consistent with why those reserves were accumulated in the first place.
GLOBAL USDOLLAR SWAP GAMBIT
A desperate attempt was made in recent weeks by the US Federal Reserve. They installed a USDollar Swap Facility, which essentially averts failure in the form of non-government bond defaults within the credit market and credit derivative markets, flooding the global financial system with USTBonds. As the US attempts to jumpstart a Reflation Initiative, the rest of the world will be pulled into the same policy, so the US power hungry but failed wizards believe. Foreigners will grow increasingly confused and defiant, offering central bank support but not showing up with any vigor for USTreasury auctions. This is a huge risk to avert USTreasury Bond default from the back door. As the globe is reluctantly coerced to follow the US lead in a reflation, the gold and silver prices are sure to respond. The clarity of the depth and scope of attempted reflation will be vividly clear when General Motors faces further bailouts. A GM failure would have more bond damage done than the Lehman Brothers failure, but with a million jobs vaporized from a mammoth vertical integration and broad fallout zone. Implications to the USDollar will be seen. In a sick sense, the extension of bailout and rescue will grow out of control, and usher in entrance to the Third World.
The transition of the new Obama Administration seems marked clearly by continuation of Wall Street and WashingtonDC insiders, not change. Expect all four major syndicates to remain in place. An analysis, a good start and by no means complete, since names are not yet final, of the Obama Cabinet is included in the November Hat Trick Letter report. Any Dept Treasury Secretary picked by Robert Rubin will continue the Wall Street stranglehold of USDollar and banking policy, not change. A vast revolving door is clear, payback for support during the long campaign for both donor support and media coverage. Never confuse change with transition.
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