17 May 2010

Global systemic crisis – From « Eurozone coup d’Etat » to the tragic solitude of the United Kingdom, global geopolitical dislocation quickens

Just as anticipated by LEAP/E2020 in issues N°40 (December 2009) and N°42 (February 2010), spring 2010 really marks a tipping point of the global systemic crisis, characterized by a sudden expansion due to the intolerable size of public deficits (see issue N° 39, November 2009) and the inexistence of the recovery, so often announced (see issue N°37, September 2009). Besides, the dramatic social and political consequences of this development clearly reflect the beginning of the process of global geopolitical dislocation as anticipated in issue N°32 (February 2009). Finally, the Eurozone leaders’ recent decisions confirm LEAP/E2020’s anticipations, contrary to the dominant chatter of these last few months, of the fact that not only will the Euro not « explode » because of the Greek problem but, on the contrary, a strengthened Eurozone will emerge from this stage of the crisis (1). One could even consider that, since the Eurozone decision, a kind of « Eurozone coup d’Etat » supported by Sweden and Poland, to create a huge apparatus to protect the interests of the 26 EU member states (2), the geopolitical deal in Europe has changed radically. Because it runs contrary to the prejudices which fashion their vision of the world, several months will be needed by the majority of the media and players to accept that, behind the appearance of a purely European budgetary-financial decision, lies a geopolitical split with worldwide impact.

Current increases in national debt for the USA, United Kingdom, Euroland and Japan (in green: % of debt to GDP / in red: forecast debt increase for 2009 and 2010 / in yellow: comparative figures for Germany) - Source: European Commission, 2010
Eurozone coup d’Etat in Brussels: The EU founding states regain control

In this issue N°45, we analyse in detail the numerous consequences for Europeans and for the world from what could be called the Eurozone « coup d’Etat » within the EU. In the face of the worsening crisis, the sixteen have indeed taken control of the EU reins of power, creating new tools and instruments which leave no other choice for the other members but to follow or find themselves isolated. Ten out of the eleven other member states have decided to follow, such as the two most important of them, Sweden and Poland, who have chosen to actively participate in the apparatus put into place by the Eurozone (the other eight are currently either in the course of negotiating their Eurozone entry, like Estonia from 2011 (3), or receiving direct help from the Eurozone, like Lithuania, Hungary, Romania, for example…). It is a (r)evolution that our team has clearly anticipated for over three years and we had even stated recently that events would rapidly unfold in the Eurozone once the German regional elections and the British general election had taken place. However, we would never have thought that it would happen in just a few hours, neither with such boldness as to the amount (750 billion Euros, or one trillion USD) and the character (EU control taken by the Eurozone (4) and a leap ahead in terms of economic and financial integration).

The fact remains that without knowing it, and without having asked their opinion, 440 million Europeans have just joined a new country, Euroland, of which some already share the currency, the Euro, and of which all now share the indebtedness and the joint means to solve the serious problems posed in the context of the global systemic crisis. The budgetary and financial decisions taken during the Summit of the weekend of the 8th May in terms of a response to the European public debt crisis can be evaluated differently according to one’s analysis of the crisis and its causes. LEAP/E2020 will roll out its own analyses on the subject in this issue N°45 but, without doubt, a radical unraveling of European governance has just taken place: a collective continental governance has just brutally emerged, ironically 65 years after the end of the Second World War, moreover celebrated with a big display in Moscow the same day (5) as the holiday celebrating the creation of the European Coal and Steel Community, the common ancestor of the EU and Euroland. This simultaneity isn’t a coincidence (6) and marks an important step forward in global geopolitical dislocation and the reconstitution of new global balances. Under the pressure of events set off by the crisis, the Eurozone has thus undertaken to grasp its independence with regard to the Anglo-Saxon world still expressed via the financial markets. This 750 billion Euros and this new European governance (of the 26) constitutes, at the one and the same time, the putting in place of the fortifications against the next storms caused by draconian Western indebtedness, and which will affect the United Kingdom and then the United States (cf. issue N°44 causing disturbances of which the « Greek crisis » has only given a small preview.

The EMF will, in the long run, deprive the IMF of 50% of its major contributions: those of the Europeans

Concerning this, LEAP/E2020 reminds readers of a fact that the majority of the media has been oblivious of for many weeks. Contrary to the prevailing discussion, the IMF is first and foremost European money. In effect one out of three IMF Dollars is contributed by Europeans, compared to only one in six by the USA (their share has been cut in half in 50 years) and one of the consequences of the European decisions of these last few days is that it will not be the case for very much longer. Our team is convinced that, within three years at the latest, when it is time to formalize the integration of the intervention fund created on the 8th and 9th May 2010 into the European Monetary Fund, the EU will reduce its contribution to the IMF by a similar proportion. One could guess already that this reduction in the European contribution (UK excluded) will be in the order of 50% at least. That will allow the IMF to become more globally representative by automatically rebalancing the BRIC share and, in the same breath, requiring the USA to abandon its right of veto (7). But that will equally contribute to it becoming heavily marginalized since Asia has already created its own emergency intervention fund. It is an example which illustrates just how many of the European decisions of the beginning of May 2010 are full of wide sweeping geopolitical changes which will scale out in all of the coming years. In fact, it is unlikely that the majority of the decision makers involved in the « Eurozone coup d’Etat » have clearly understood the implications of their decisions. But no-one has ever said that history was largely made by those people who knew what they were doing.

Countries’ and markets’ IMF contributions (1948-2001) - Source: IMF / Danmarks National Bank - 2001
The United Kingdom: isolated in the face of an historic crisis

One of the simultaneous causes and consequences of this development is the complete marginalization of the United Kingdom. Its increasing weakness since the beginning of the crisis, along with that of its US sponsor, has created the possibility of a complete takeover, without concessions, of the march forward of the European project by the continental countries. This loss of influence reinforces, in return, Great Britain’s marginalization because British leaders are trapped in a denial of reality which they have made their people share as well. None of the British political parties, not even at this point the Liberal Democrats, even though showing greater clarity than the other political parties of the country, could consider reconsidering the decades of diatribe accusing Europe for all the ills and dressing-up the Euro for all the losses. Indeed, even if their leaders were aware of the folly of a strategy consisting of isolating Great Britain a little more day-by-day, even when the world crisis has moved up a gear, they will collide with this public Euroscepticism which they have fostered over the course of the past years. The irony of history was, once again, clearly shown during this historic weekend of the 8th/9th May 2010: in refusing to participate in the Eurozone’s joint defensive and protective measures, the British leaders have, de facto, refused to catch the last lifeline within their grasp (8). The European continent will now content itself with watching them try to find the 200 billion Euros which their country needs to balance this year’s budget (9). And if the leaders in London think that City speculators will have any qualms breaking the Pound sterling and selling Gilts, it is because they haven’t understood the basics of global finance (10), nor checked the nationalities of these same players (11). Between Wall Street, which will do anything to attract the world’s capital (one only needs to ask the Swiss market what it thinks of the war that world markets are currently delivering one another), Washington, which is knocking itself out to hover up all the world’s available savings, and a European continent which has, from now on, placed itself under the protection of a common currency and debt, the dice have been cast. At this stage, we are still in the drama, because the major English players have not yet realised that they are caught in a trap; a few weeks from now, we will move on to the British tragedy because, this summer, the whole country will have discovered the historic trap into which the country, on its own, has fallen.

So, at the moment when Euroland emerges in Brussels, the United Kingdom struggles with a hung parliament, compelling it to move on to the first coalition government since 1945 and which will take the country to a further election between now and the end of the year.

The British and their leaders in trouble, who are going to have to « think the unthinkable »

Whatever the supporters of the coalition now running the country may tell, LEAP/E2020 thinks it highly unlikely that this alliance will last more than a few months. The very different structure of the two parties involved (Conservatives and Liberal Democrats are divided on a number of issues), combined with unpopular decisions, is leading this team straight to internal crises for each party and, then, to a government collapse. The Conservatives will play this card because, unlike the Liberal Democrats, they have sufficient funds to « finance » a new electoral campaign between now and the end of the year (12). But the most dangerous underlying stumbling-block is intellectual: to avoid the tragedy which portends, the United Kingdom is going to have to « think the unthinkable », i.e. reconsider its basic beliefs on its insular outlook, its transatlantic « relationship », its relationship with a continent now on the road to complete integration, while, for centuries, it has thought of the continent as a disunion. However the problem set is simple: if the United Kingdom has always thought that its power depended on a divided European continent, then logically, considering current events, it must now admit that it is heading to a state of impotence... and draw the necessary conclusions, i.e. that it too should make a « quantum leap ». If Nick Clegg seems intellectually equipped to make such a leap, neither David Cameron’s Conservatives, nor the British leaders altogether, seem mature enough yet. In such a case, Great Britain, sadly, must take the « tragic » path (13).

In any case, this weekend of the 8th/9th May 2010 in Europe dips a number of its roots directly into the Second World War and its consequences (14). It is, besides, one of the features of the global systemic crisis as foretold by LEAP/E2020 in February 2006 in issue N°2: it brings to « an end the West as one has known it since 1945 ».

Another of these features is the take-off in the gold price (compared to the US Dollar especially), in the face of the growing distrust in all fiat currencies (see issue N°41, January 2010 (15)). Indeed, whilst all the world speak of the Euro/US Dollar exchange rate, the Dollar remains at its historically lowest levels compared to its major trade partners (see chart below), a sign of the US currency’s structural weakness. In the coming months, as GEAB anticipated, the Euro will climb back to its medium-term equilibrium level of above 1.45/€.

In this issue, before giving our recommendations on currencies, the stock exchange and gold, LEAP/E2020 will analyse in greater detail the US pseudo-recovery which internally is basically a vast focused news operation aimed at re-starting household spending (an impossible task now) and externally at avoiding panicking foreign investors (at best, several quarters can be gained). Thus the United States maintains that it will be able to escape brutal austerity treatment, like the other Western countries, whilst, in fact, the recovery is an « unrecovery » as Michael Panzner, with a touch of humour, called his excellent article of 04/27/2010, published in Seeking Alpha.investors (at best, several quarters can be gained). Thus the United States maintains that it will be able to escape brutal austerity treatment, like the other Western countries, whilst, in fact, the recovery is an « unrecovery » as Michael Panzner, with a touch of humour, called his excellent article of 04/27/2010, published in Seeking Alpha.

Charts and Data

Dysfunctional Markets

Dysfunctional Markets
by Doug Noland May 14, 2010

For the week, the S&P500 rallied 2.2% (up 1.8% y-t-d), and the Dow gained 2.3% (up 1.8%). The S&P 400 Mid-Caps jumped 4.3% (up 8.6%), and the small cap Russell 2000 recovered 6.3% (up 11.0%). The Morgan Stanley Cyclicals jumped 4.4% (up 7.0%), and the Transports gained 4.4% (up 9.5%). The Morgan Stanley Consumer index rose 1.8% (up 3.4%), and the Utilities gained 2.4% (down 3.9%). The Banks jumped 3.1% (up 24.7%), and the Broker/Dealers increased 1.5% (down 1.8%). The Nasdaq100 increased 3.1% (up 2.5%), and the Morgan Stanley High Tech index gained 2.1% (down 2.1%). The Semiconductors rose 2.1% (down 1.7%). The InteractiveWeek Internet index jumped 4.5% (up 4.1%). The Biotechs rallied 3.7%, increasing 2010 gains to 15.3%. With bullion jumping $22, the HUI gold index surged 7.9% (up 13.4%).

One-month Treasury bill rates ended the week at 14 bps and three-month bills closed at 14 bps. Two-year government yields declined 3 bps to 0.72%. Five-year T-note yields fell 3 bps to 2.10%. Ten-year yields increased 3 bps to 3.46%. Long bond yields rose 6 bps to 4.34%. Benchmark Fannie MBS yields declined 7 bps to 4.20%. The spread between 10-year Treasury and benchmark MBS yields narrowed 10 bps to 74 bps. Agency 10-yr debt spreads declined 3 bps to 44 bps. The implied yield on December 2010 eurodollar futures declined 4 bps to 0.855%. The 10-year dollar swap spread declined 1.25 to 3.5. The 30-year swap spread increased 2.25 to negative 18.5. Corporate bond spreads were mixed. An index of investment grade bond spreads narrowed 15 to 103 bps. An index of junk bond spreads widened 27 to 516 bps.

Debt issuance remained slow. Investment grade issuers included Enterprise Products $2.0bn, Morgan Stanley $1.75bn, Citigroup $1.5bn, CVS Caremark $1.0bn, Kinder Morgan $1.0bn, Burlington Northern $750 million, XCEL Energy $550 million, PNC Funding $500 million, Pearson Funding $350 million, Cigna $300 million, FPL Group $250 million, and San Diego G&E $250 million.

May 14 – Bloomberg (Shiyin Chen): “High-yield bond funds posted the largest outflows in five years and emerging-market equity funds had a second straight week of redemptions as Europe’s sovereign- debt crisis dented demand for riskier assets, EPFR Global said.”

Junk issuers included Mylan $1.25bn, MCE Finance $600 million, Omnicare $400 million, Wireco Worldgroup $275 million and Kratos $225 million.

I saw no converts issued.

International dollar debt sales included Inter-American Development Bank $1.0bn, Metinvest $500 million, Kazatomprom $500 million, and Renhe Commercial $300 million.

U.K. 10-year gilt yields declined 6 bps to 3.75%, while German bund yields rose 6 bps to 2.86%. Greek bond yields collapsed 470 bps to 7.70%, and 10-year Portuguese yields dropped 163 bps to 4.63%. The German DAX equities index rallied 6.0% (up 1.7% y-t-d). Japanese 10-year "JGB" yields rose 3 bps to 1.30%. The Nikkei 225 recovered 0.9% (down 0.8%). Emerging markets recovered some of last week's decline. For the week, Brazil's Bovespa equities index gained 0.9% (down 7.5%), and Mexico's Bolsa rose 1.0% (down 1.0%). Russia’s RTS equities index gained 4.8% (down 0.6%). India’s Sensex equities index gained 1.3% (down 2.7%). China’s Shanghai Exchange added 0.3% (down 17.7%). Brazil’s benchmark dollar bond yields dropped 17 bps to 4.83%, and Mexico's benchmark bond yields sank 43 bps to 4.78%.

Freddie Mac 30-year fixed mortgage rates dropped 7 bps last week to 4.93% (up 7bps y-o-y). Fifteen-year fixed rates fell 6 bps to 4.30% (down 22bps y-o-y). One-year ARMs declined 5 bps to 4.02% (down 69bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 15 bps to 5.63% (down 64bps y-o-y).

Federal Reserve Credit dipped $1.2bn last week to $2.310 TN. Fed Credit was up $90.3bn y-t-d (11.1% annualized) and $193.7bn, or 9.2%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 5/12) declined $11.8bn to $3.064 TN. "Custody holdings" have increased $108bn y-t-d (10.0% annualized), with a one-year rise of $380bn, or 14.2%.

M2 (narrow) "money" supply was up $34.3bn to $8.504 TN (week of 5/3). Narrow "money" has declined $8.1bn y-t-d. Over the past year, M2 grew 1.4%. For the week, Currency added $0.8bn, and Demand & Checkable Deposits surged $40.7bn. Savings Deposits declined $4.0bn, and Small Denominated Deposits fell $5.0bn. Retail Money Fund assets added $1.9bn.

Total Money Market Fund assets (from Invest Co Inst) jumped $24.2bn to $2.878 TN, the first rise since February. In the first 19 weeks of the year, money fund assets have dropped $416bn, with a one-year decline of $912bn, or 24.1%.

Total Commercial Paper outstanding added $0.9bn last week to $1.103 TN. CP has declined 67$bn, or 15.7% annualized, year-to-date, and was down $195bn from a year ago (15%).

International reserve assets (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.297 TN y-o-y, or 19.4%, to a record $7.986 TN.
Global Credit Market Watch:

May 12 – Bloomberg (Tim Catts and Pierre Paulden): “Europe’s sovereign debt crisis is punishing corporate borrowers, with bond issuance tumbling as investors doubt a $1 trillion bailout plan will be enough to bolster confidence in government finances for the region. Borrowers worldwide have sold $15 billion of corporate debt this month, a 62% decline from the same period in April and 83% less than the average for the past year… The extra yield investors demand to own corporate debt instead of government bonds soared last week to the highest in more than four months… ‘This is a fix and not a resolution,’ said Jason Brady, a managing director at Thornburg Investment Management… ‘Investors have seen volatility and that makes it harder to get excited about longer-dated assets paying a fixed return.’”

May 11 – International Herald Tribune (Andrew E. Kramer): “As the financial markets try to absorb news of a rescue package for Greece and other teetering euro-zone countries, some bankers and economists see parallels to Russia’s meltdown in 1998. A decade ago Russia was walking in the same shoes as Greece is today, striving to restore confidence in government bonds by seeking a huge loan from the International Monetary Fund and other lenders. Then, as now, the debt crisis was roiling global financial markets. And big hopes were pinned on a bailout — one that in Russia’s case did not work. ‘Greece creates a remarkable sense of déjà vu,’ Roland Nash, the head of research for Renaissance Capital, an investment bank in Moscow, wrote…”

May 11 – Finanacial Times (David Oakley and Ralph Atkins): “Investors on Tuesday warned that the European Central Bank would have to introduce quantitative easing to stave off the worst crisis in the eurozone since it was launched 11 years ago. The ECB has resisted following the Bank of England and the US Federal Reserve in expanding the money supply by buying government bonds because it fears that it could stoke inflation. Although eurozone central banks bought eurozone government bonds this week for the first time as part of the international rescue plan, this is not QE as the ECB is funding this by selling German bunds or using commercial bank deposits.”

May 11- New York Times (Landon Thomas Jr. and Jack Ewing): “Like the giant financial bailout announced by the United States in 2008, the sweeping rescue package announced by Europe eased fears of a market collapse but left a big question: will it work long term? Stung by criticism that it was slow and weak, the European Union surpassed expectations in arranging a nearly $1 trillion financial commitment for its ailing members over the weekend and paved the way for the European Central Bank to begin purchases of European debt on Monday... The premium that investors had been demanding to buy Greek bonds plunged… And as details crystallized of the package’s main component — a promise by the European Union’s member states to back 440 billion euros, or $560 billion, in new loans to bail out European economies — the wisdom of solving a debt crisis by taking on more debt was challenged by some analysts. ‘Lending more money to already overborrowed governments does not solve their problems,’ Carl Weinberg, chief economist of High Frequency Economics…said…"

May 12 – Bloomberg (Tim Catts and Pierre Paulden): “Europe’s sovereign debt crisis is punishing corporate borrowers, with bond issuance tumbling as investors doubt a $1 trillion bailout plan will be enough to bolster confidence in government finances for the region. Borrowers worldwide have sold $15 billion of corporate debt this month, a 62% decline from the same period in April and 83% less than the average for the past year…”

May 14 – Wall Street Journal (Ianthe Jeanne Dugan): “Federal regulators and state officials are examining Wall Street's role in trading derivatives that essentially bet the municipal bonds they sold would go bust. The Securities and Exchange Commission has launched a preliminary inquiry into banks' trades of municipal credit-default swaps that allow investors to short-sell, or bet against, municipal bonds… The probe is exploring potential conflicts of interest by banks that sell municipal bonds and then poise themselves to profit if those bonds fail, these people said. A main thrust of their investigation is whether firms use their own money to bet against the bonds they sell and, if so, whether that activity is properly disclosed to bond buyers.”

May 14 – Bloomberg (Christine Harper): “Goldman Sachs… is ceasing proprietary trading in one type of structured debt… A group of traders who were focused on making bets on collateralized loan obligations with the New York-based firm’s own money are now handling trades for clients…”

May 12 – Bloomberg (Takahiko Hyuga and Finbarr Flynn): “Morgan Stanley Chief Executive Officer James Gorman denied allegations the U.S. bank misled investors about mortgage derivatives it sold them. The firm is being probed by U.S. prosecutors over whether the bank misled clients when it sold them collateralized debt obligations as its own traders bet that the value of the securities would drop… Wall Street firms are facing unprecedented scrutiny from lawmakers and prosecutors over whether they missold CDOs linked to the subprime mortgages that caused the credit crisis.”
Global Government Finance Bubble Watch:

May 12 – Bloomberg (Abigail Moses and John Glover): “The cost of saving the world from financial meltdown has been bloated by ‘hyperinflation’ since Long Term Capital Management LP’s rescue in 1998… rising price of bailouts since the $3.5 billion pledged to hedge fund LTCM after it was crushed by Russia’s default, and the almost $1 trillion committed to halt the European Union’s sovereign debt crisis this week. It cost just $29 billion to sooth markets in March 2008 when Bear Stearns Cos. was taken over, and $700 billion for the Federal Reserve to save the banking system with the Troubled Asset Relief Program in October that year. ‘We haven’t had any kind of normal inflation in the last decade, but we’ve had hyperinflation in writedowns and the magnitude of bailouts,’ said Jim Reid, head of fundamental strategy at Deutsche Bank… ‘You have to do more to get a similar effect every time.’”

May 12 – Bloomberg (David Mildenberg and Dawn Kopecki): “Four of the largest U.S. banks, including Citigroup Inc., racked up perfect quarters in their trading businesses between January and March, underscoring how government support and less competition is fueling Wall Street’s revival. Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., the first, second and fifth-biggest U.S. banks by assets, all said in regulatory filings that they had zero days of trading losses in the first quarter… ‘The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,’ said Christopher Whalen, managing director… Institutional Risk Analytics. ‘It’s a transfer from savers to banks.’
Currency Watch:

The dollar index jumped 2.1% this week to 86.249 (up 10.8% y-t-d). For the week on the upside, the South Korean won increased 2.2%, the Mexican peso 2.1%, the Brazilian real 2.0%, the South African rand 1.3%, the Canadian dollar 1.1%, and the Singapore dollar 0.6%. For the week on the downside, the euro declined 3.1%, the Danish krone 3.0%, the Swiss franc 2.2%, the British pound 1.8%, the Swedish krona 1.35, the New Zealand dollar 1.1%, the Japanese yen 0.9%, the Norwegian krone 0.3%, and the Australian dollar 0.2%.
Commodities Watch:

May 12 – Bloomberg (Stuart Wallace): “There has been a ‘significant’ surge in sales of gold coins and bars, particularly in Germany, Ross Norman, one of the founders of TheBullionDesk.com, said… ‘The last time we saw this level of grass-roots activity was in October 2008 when the economy was on the brink and the retail gold buying community effectively drained gold from the market,” the former bullion dealer said in the report.”

May 10 – Financial Times (Jack Farchy): “Silk ties and handkerchiefs are forecast to rise in price after the cost of silk jumped to its highest level in at least 15 years as rapid industrialisation in China, the world’s largest supplier, robs the sector of valuable farmland. The price of silk cocoons… has doubled since the start of 2009…”

The CRB index declined another 1.1% (down 8.8% y-t-d). The Goldman Sachs Commodities Index (GSCI) slipped 0.4% (down 4.4% y-t-d). Spot Gold jumped 1.8% to $1,230 (up 12.1% y-t-d). Silver surged 4.6% to $19.30 (up 14.6% y-t-d). June Crude sank $3.18 to $71.93 (down 9.4% y-t-d). June Gasoline 0.6% (up 4% y-t-d), and June Natural Gas jumped 7.7% (down 22% y-t-d). July Copper declined 0.8% (down 7% y-t-d). May Wheat sank 7.3% (down 14% y-t-d), and May Corn declined 2.2% (down 14% y-t-d).
China Bubble Watch:

May 11 – Wall Street Journal Asia: “The direction of China’s economy is set. The question troubling investors is whether policy makers have set their course, too. With consumer-price inflation rising to 2.8% in April, real interest rates have moved farther into negative territory… More inflation is in the pipeline. The producer-price index rose 6.8% year-to-year in April, up from 5.9% in March. Higher manufacturing costs should eventually feed through to consumers. The latest housing-market data adds to fears of overheating, with prices up 12.8% year-to-year across 70 of China's larger cities. New bank lending was up, too, with $113.3 billion more loans pumped into the economy in April -- back to around the average monthly level during 2009's credit bonanza. Against this backdrop, Beijing's tightening measures to date are inadequate.”

May 13 – Bloomberg (Peter Woodifield): “China is set to overtake Japan as the largest Asia-Pacific commercial real estate market next year following a surge in values, according to property adviser DTZ Holdings Plc.”
India Watch:

May 13 – Bloomberg (Unni Krishnan): “India’s food inflation rate climbed… An index measuring wholesale prices of agriculture products… rose 16.44% in the week ended May 1 from a year earlier…”

May 12 – Bloomberg (Kartik Goyal): “India’s industrial production grew more than 10% for a sixth straight month, adding to inflation pressures even as Europe’s debt crisis threatens to undermine the global economic recovery.
Asia Bubble Watch:

May 12 – Bloomberg (David Yong): “Asian interest-rate swaps show traders are betting central banks will be less aggressive in raising borrowing costs because of the European Union’s sovereign-debt crisis. ‘The euro crisis has hurt market confidence and liquidity,’ Matthew Huang, an interest-rate strategist… at Barclays Capital Plc, said… ‘If liquidity freezes up, Asian policy makers will likely choose to leave monetary conditions looser for longer.’”

May 10 – Wall Street Journal Asia (Alex Frangos): “The European bailout plan could be too much medicine for an overheating Asia. Before the Greece crisis intensified last week, policy makers in China and elsewhere in Asia said too much growth and an abundance of capital inflows were pushing real-estate and other asset prices dangerously high. While Asian markets welcomed the 750 billion euro ($955 billion) bailout plan, economists and analysts warned that the rescue package could end up bringing even more capital to Asian markets… Loose monetary policy in Europe and the U.S. has already helped to inflate assets prices in Asia, especially for emerging-market bonds and real estate.”

May 12 – Bloomberg (Eunkyung Seo): “South Korea’s unemployment rate declined in April for a third straight month… The jobless rate fell to 3.7% from 3.8% in March… ‘Jobs market conditions are improving on the economic recovery,’ Lee Sang Jae, an economist at Hyundai Securities... said… ‘But there remains some weakness, supporting policy makers’ views that the economy isn’t strong enough to endure higher borrowing costs.’”

May 13 – Bloomberg (Shamim Adam and Manirajan Ramasamy): “Malaysia’s economy grew at the fastest pace in at least 10 years last quarter… Gross domestic product increased 10.1% in the three months ended March 31 from a year earlier…”
Latin America Bubble Watch:

May 12 – Bloomberg (Jens Erik Gould): “Mexico’s industrial production rose the most in almost four years in March on surging demand for exports to the U.S. Output climbed 7.6% from a year earlier…”

May 12 – Bloomberg (Fabiola Moura and Drew Benson): “Argentine Economy Minister Amado Boudou said last week’s jump in bond yields may prompt the government to shelve plans to sell as much as $1 billion of bonds, its first international offer since defaulting in 2001.”
Unbalanced Global Economy Watch:

May 10 – Bloomberg (Bob Willis and Thomas R. Keene): “The fallout from the European debt crisis raises the risk of a ‘double dip’ recession for the global economy, said Stephen Roach, chairman of Morgan Stanley Asia Ltd. ‘When you have a vulnerable post-crisis economic recovery and crises reverberating in the aftermath of that, you have some very serious risks to the global business cycle,’ Roach said… ‘This concept of the global double dip which no one wants to talk about… is alive and well.’”

May 12 – Bloomberg (Svenja O’Donnell): “U.K. unemployment climbed to a 16- year high in the first quarter, underlining the fragility of the recovery as Conservative David Cameron begins his premiership.”

May 12 – Bloomberg (Simone Meier): “Europe’s economy expanded at a faster pace than economists forecast in the first quarter as a global recovery boosted exports… Gross domestic product in the 16 euro nations rose 0.2% from the fourth quarter…”

May 12 – Bloomberg (Christian Vits): “Germany’s economy unexpectedly grew in the first three months of the year as rising exports and company investment outweighed the effects of the cold winter. Gross domestic product… rose 0.2%..."

May 12 – Bloomberg (Maria Levitov): “Russia faces a ‘massive’ capital influx as investors look for alternatives to Europe’s crisis- ridden debt markets, said Mikhail Dmitriev, president of the Center for Strategic Development. That’s putting pressure on Russian policy makers to implement capital controls soon to stem the flows and avoid ruble volatility, Dmitriev, whose think tank conducts research for the government, said in an interview… ‘The government is unarmed against the distortions that may result from massive capital inflows,’ said Dmitriev, who is also a former First Deputy Economy Minister. ‘Russia’s balance of payments and internal macroeconomic stability would undoubtedly be at risk.’”

May 14 – Bloomberg (Paul Abelsky): “Russia’s economy expanded for the first time since 2008… Gross domestic product rose an annual 2.9% in the first quarter after contracting 3.8% in the last three months of 2009…”

May 13 – Bloomberg (Jacob Greber): “Australia’s job growth accelerated in April, propelled by full-time employment… The unemployment rate held at 5.4%.”

May 13 – Bloomberg (Tracy Withers): “New Zealand’s manufacturing industry expanded at the fastest pace in more than five years in April amid rising production and orders.”
U.S. Bubble Economy Watch:

May 12 – Bloomberg (Shobhana Chandra): “The trade deficit in the U.S. widened in March to the highest level in more than a year as imports climbed faster than exports, adding to evidence of the global recovery from the worst recession in the post-World War II era. The gap grew 2.5% to $40.4 billion…”

May 13 – Bloomberg (Ryan J. Donmoyer): “White House budget director Peter Orszag predicted Congress would approve higher taxes on managers of private equity firms, real estate funds and other investment partnerships in the coming weeks. Orszag, speaking yesterday…”

May 10 – Bloomberg (Terrence Dopp): “New Jersey’s Democratic lawmakers plan to introduce legislation to resurrect an income-tax surcharge on residents who earn $1 million a year or more…”
Derivatives Watch:

May 11 – Bloomberg (Phil Mattingly): “The Federal Deposit Insurance Corp. advanced a proposal aimed at overhauling part of the $4 trillion asset-backed securities market and introduced a rule that would require the biggest U.S. banks to submit ‘funeral plans’ to handle their possible collapse… ‘Now is the time to put some prudent controls in place to make sure we don’t get into some of the problems we saw in the past,’ Bair said…
Real Estate Watch:

May 13 – Bloomberg Dan Levy): “U.S. home repossessions rose to a record level in April while foreclosure filings dropped in a sign mortgage lenders are working off a backlog of seized properties, according to RealtyTrac… ‘Right now it appears that the banks are focusing on processing the loans already in foreclosure, and slowing down the initiation of new foreclosure proceedings as a way of managing inventory levels,’ Rick Sharga, RealtyTrac’s executive vice president, said… A record 92,432 bank repossessions were reported in April, up 45% from a year earlier…”
Central Bank Watch:

May 13 – DPA: “The European Central Bank (ECB) on Thursday defended its decision to intervene in European bond markets, rejecting claims that this threatened the bank’s independence. ‘These measures are designed not to affect the monetary policy stance,’ the ECB wrote in its monthly report of its decision to buy debt from troubled eurozone members. ECB chief economist Juergen Stark said this was a ‘temporary emergency measure,’ to which there was no alternative after the euro currency had come under attack. Stark said the bank was not responding to political pressures… ‘The credibility of the ECB does not just hinge on the question whether or not we buy government securities, but whether we fulfill our central task, which is ensuring price stability,’ Stark said. The economist said there was no doubt that ‘an attack’ on individual eurozone countries was being carried out by "anonymous market sources.’”

May 10 – Bloomberg (Mayumi Otsuma): “Central banks from the U.S., Japan and Europe will participate in temporary U.S. dollar swap agreements amid heightened tension in global financial markets, the Bank of Japan said. ‘In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe’ the central banks of Canada, England and Switzerland will also participate in the re- establishment of currency swaps that were implemented during the financial crisis, the BOJ said… ‘These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers.’ Central banks ‘will continue to work together closely as needed to address pressures in funding markets’ the BOJ said.”

May 10 – Bloomberg (Saburo Funabiki): “The Bank of Japan said it would pump 2 trillion yen ($21.7bn) into the financial system for a second day to help reassure markets after the Greek fiscal crisis set off a slump in stocks worldwide.”
GSE Watch:

May 10 – Bloomberg (Nick Timiraos): “Fannie Mae asked the U.S. government for an additional $8.4 billion in aid after posting an $11.5 billion net loss for the first quarter, the latest sign that the bailout of the mortgage investor and its main rival, Freddie Mac, is likely to be the most expensive legacy of the U.S. housing-market bust… The company has now racked up losses of nearly $145 billion, or nearly double its profits for the previous 35 years.”
Fiscal Watch:

May 13 – Bloomberg (Vincent Del Giudice): “The U.S. posted its largest April budget deficit on record as receipts declined in a month that typically sees an increase in individual income tax payments. The excess of spending over revenue rose to $82.7 billion last month compared with a $20.9 billion gap in April 2009… April marked a record 19th straight monthly shortfall… Deterioration in the government’s balance sheet in coming years raises the risk of higher interest rates even as an improving economy helps lift tax receipts. ‘With the recovery in place, we should be seeing higher revenue and lower outlays, not the other way around,’ said Win Thin, senior currency strategist at Brown Brothers Harriman… The government’s April budget deficit compares with a median forecast of $57.9 billion… The last time the U.S. had back-to-back April deficits was 1963-1964… For the fiscal year that began in October, the budget deficit totaled $799.7 billion compared with $802.3 billion during the same period last year.”

May 12 – Associated Press: “President Obama’s new health-care law could potentially add at least $115 billion more to government health care spending over the next 10 years, if Congress approves all the additional spending called for in the legislation, congressional budget referees said… That would push the 10-year cost of the overhaul above $1 trillion…”
California Watch:

May 11 – Bloomberg (Michael B. Marois and William Selway): “California Governor Arnold Schwarzenegger will seek ‘terrible cuts’ to eliminate an $18.6 billion budget deficit facing the most-populous U.S. state through June 2011… California’s revenue in April, when income-tax payments are due, trailed the governor’s estimates by $3.6 billion, or 26%.”

May 14 – Bloomberg (Michael B. Marois and William Selway): “California Governor Arnold Schwarzenegger proposed a new round of budget cuts, including eliminating the state’s main welfare program for families, to close a $19.1 billion budget deficit for the year starting July 1. The $83.4 billion plan calls for $12.4 billion in spending reductions, $3.4 billion in additional federal aid and $3.4 billion in fund shifts, fees and assessments…”
Speculator Watch:

May 14 – Bloomberg (Jody Shenn and Michael J. Moore): “In June 2006, a year before the subprime mortgage market collapsed, Morgan Stanley created a cluster of investments doomed to fail even if default rates stayed low -- then bet against its concoction. Known as the Baldwin deals, the $167 million of synthetic collateralized debt obligations had an unusual feature… Rather than curtailing their bets on mortgage bonds as the underlying home loans paid down, the CDOs kept wagering as if the risk hadn’t changed. That left Baldwin investors facing losses on a modest rise in U.S. housing foreclosures, while Morgan Stanley was positioned to gain. ‘I can’t imagine anybody would take that bet knowingly,’ said Thomas Adams, a former executive at bond insurers Ambac Financial Group Inc. and FGIC Corp… ‘You’re overriding the natural process of risk-mitigation.’”

May 12 – Bloomberg (Tomoko Yamazaki and Komaki Ito): “Japanese hedge funds, the world’s worst performers last year, returned 6.7% in the first four months of 2010, the best year-to-April return in six years, according to Eurekahedge Pte.”

Dysfunctional Markets:

It scrolled by quickly Wednesday afternoon on my Bloomberg screen: a one-line headline quoting ECB Executive Board member Jose Manuel Gonzalez-Paramo: “Central Banks Can’t Work if Markets Dysfunctional.” My efforts to located Mr. Gonzalez-Paramo’s full comments on the issue were unsuccessful; we’ll have to assume the context. I do believe strongly that many things these days can’t work because global markets are hopelessly dysfunctional.

I was never a big fan of the simplistic analytical fixation on the so-called “shadow banking system.” Key components of this “system” – i.e. the Wall Street securities firms, ABS, CDOs, SIVs, private-label MBS, etc. – have been reined in. This would imply a more stable financial backdrop, which is nowhere to been seen. I am similarly not a subscriber to a “new normal” thesis. Again, the focus seems to detract from today’s key issues. I have posited a “Newest Abnormal” thesis – that the long process of market distortions and economic imbalances has actually accelerated. Things go from bad to only worse. Things may look somewhat different, but there’s nothing new.

From my analytical perspective, the heart of the problem lies with this dysfunctional dynamic between global marketable debt and derivatives, policy-induced distortions, and unfettered speculative finance. Unique in history, we continue to operate with a global financial “system” functioning without limits to either the quantity or quality of new Credit created. There’s way too much Credit backed by little more than government assurances or perceptions of government insurance. And never before has an enormous global “leveraged speculating community” so dominated the markets for debt instruments and, in the process, so relied on faith in the efficacy of government market interventions. It’s global wildcat banking in its purest ever form.

These days, entities all over the world issue enormous quantities of tradable debt instruments. This debt, in large part, is purchased by sophisticated market operators earning unimaginable compensation for achieving “above market” returns. When market psychology is bullish, there is essentially unlimited demand for marketable debt – a significant portion acquired through the use of leverage. And as long as demand for new marketable securities remains robust, underlying positive fundamentals appear to support a high market valuation for this debt (irrespective of the quantity issued) - and the party lives on. But Katy bar the door whenever the crowd moves to cut exposure – either through liquidating positions or acquiring market “insurance.”

Eurozone policymakers look foolish these days for not having reined in profligate Greek borrowing and spending. To many, the ECB looks foolish for Sunday’s decision to purchase in the open market debt issued by Greece, Portugal, Spain and other troubled European countries. Others believe the ECB was foolish for not having had initiated a Federal Reserve-style monetization plan long before the debt crisis spiraled out of control. I sympathize with the ECB. Dysfunctional global markets placed them in a winless situation. Greek 10-year bond yields were below 5% for much of 2009. The market was happy to accommodate profligacy - until it wasn’t. If only well-functioning global markets disciplined borrowers rather than emboldening them.

The sea change in global finance gained unstoppable momentum in the early nineties. The Greenspan Federal Reserve nurtured marketable debt as a mechanism to help overcome severe banking system impairment. There was no stopping the historic boom in market-based Credit once unleashed. The problem was clear by the time of the 1994 bond and mortgage securities dislocation. But it was politically and monetarily expedient to allow GSE Credit (with its implicit government guarantee) to evolve into a mechanism for stabilizing the Credit system and spurring economic expansion.

The rapidly escalating scope of the problem was illuminated with the collapse of LTCM. Yet, the Greenspan Fed supported this new financial infrastructure with only more powerful words and deeds. Pegging short term interest rates and aggressively intervening to rectify market tumult incited unprecedented leveraged speculation throughout the Credit system. Dr. Bernanke’s 2002 “helicopter money” and “government printing press” speeches sealed the fate of runaway Bubbles in both marketable debt and leveraged speculation.

Especially during the Bubble years 2004 through 2007, massive U.S. current account deficits worked to unleash U.S. Credit Bubble dynamics upon the entire world. The more Bubbles became ingrained in the financial architecture the deeper market perceptions became that policymakers wouldn’t tolerate a bust. Worse yet, policymakers resorted to using the debt markets and the market’s propensity for leveraged speculation as mechanisms for increasingly aggressive monetary reflation.

Global policymakers and Credit markets have been fueling Bubbles and accommodating profligacy for years now. It would have taken a concerted effort by global central bankers to rein things in. The Greenspan/Bernanke Federal Reserve would have had no part of it. Quite the contrary. It was fundamental to Greenspan/Bernanke doctrine to deal with market and economic fragility through the aggressive reflation of system Credit. This doctrine of inflationism was instrumental in nurturing Credit and speculation excesses that worked over time to increasingly distort the pricing of finance, the quantity of Credit created, and the allocation of real and financial resources. The ECB’s big mistake was not to have forcefully fought the Fed.

We’re now two years into the greatest expansion of global government debt in the history of mankind. Manic-depressive debt markets have now pulled the rug out from under Greece and periphery Europe, but in the process have further accommodated profligate government borrowings here at home. It is frightening to think of how distorted the Treasury market has become - and how things might play out down the road.

My bearish thesis on our markets and economy is based upon the view that the financial fuel for our recovery has been unsound, unstable and unsustainable. This “Monetary Process” is now in jeopardy. The Global Government Finance Bubble, which lunged into its terminal phase of excess with the collapse of the Wall Street/mortgage finance Bubble, has been pierced. Greece’s debt crisis marks a momentous inflection point. And, yes, some government markets – certainly including Treasuries – are benefiting from Greek and periphery European debt woes. Yet key Bubble dynamics percolate under the surface.

I have argued that the Global Government Finance Bubble has been the biggest and most precarious Bubble yet. The incredible scope of global sovereign debt expansion over the past couple years has been rather obvious. Less apparent are related distortions - to the pricing and allocation of finance throughout international markets - based specifically upon the market's perception that politicians and central bankers would act aggressively and successfully to forestall future crises. This policy-induced market distortion fostered an incredible bout of risk-taking – especially considering the fundamental backdrop – and a resulting massive flood of finance out to the risk markets. This perception has been blown to smithereens in Europe and has quickly become vulnerable everywhere.

Global markets in sovereign Credit default swap (CDS) protection have flourished on the assumption that policymakers would thwart any debt crisis. In the post-Greek debacle era, writing insurance against a government default is no longer free money. New realities have profoundly changed the risk and reward profiles of operating in this key market - and I’ll assume some profoundly less attractive marketplace liquidity dynamics going forward. And a faltering market for sovereign debt insurance significantly changes the risk profile of owning the underlying sovereign debt. To be sure, changing perceptions in the market for government debt work to corrode market confidence in the capacity of policymakers to stem financial and economic crises generally. This implies a major adjustment in the markets’ perception of risk in various markets, including corporate, municipal and mortgage instruments.

But I’m getting somewhat ahead of myself. Thus far, dislocation in Greek debt has fed powerful contagion effects throughout European debt and CDS. This has forced a major market reassessment of the relative stability of the euro currency, which has unleashed bloody havoc throughout the currency and “carry trade” arena. Currency and “carry trade” tumult has forced market reassessment as to near-term prospects for both the dollar (upward) and global growth (downward). This has caused trading liquidation and de-leveraging havoc in the enormous global “reflation trade” and in risk markets more generally. And there’s nothing like liquidation and forced de-leveraging to really bring out the animal spirits for those seeking to make nice speculative profits from others’ misfortune.

The dollar and Treasuries have benefited. This has supported the bullish view that the unfolding crisis is largely a European issue. It has also helped dampen the impact to our markets from changing global perceptions with respect to the capacity of policymakers to stem crises. Here in the U.S., Credit spreads and risk premiums (corporates, MBS, municipals, etc.) have widened some. Yet faith still runs deep that Washington won’t allow a crisis. This confidence must hold for sufficiently loose U.S. finance to continue to support our fragile recovery.

The confluence of global financial crisis and intense financial sector scrutiny here at home will at some point prove confidence in Washington overly optimistic. For now, when it comes to pricing risk and disciplining profligate borrowers, our debt markets remain dysfunctional.
This has caused liquidation and de-leveraging havoc in the enormous global “reflation trade” and in risk markets more generally. And there’s nothing like liquidation and forced de-leveraging to really bring out the animal spirits for those seeking to make nice speculative profits from others’ misfortune.

The dollar and Treasuries have benefited. This has supported the bullish view that the unfolding crisis is largely a European issue. It has also helped dampen the impact to our markets from changing global perceptions with respect to the capacity of policymakers to stem crises. Here in the U.S., Credit spreads and risk premiums (corporates, MBS, municipals, etc.) have widened some. Yet faith still runs deep that Washington won’t allow a crisis. This confidence must hold for sufficiently loose U.S. finance to continue to support our fragile recovery.

The confluence of global financial crisis and intense financial sector scrutiny here at home will at some point prove confidence in Washington overly optimistic. For now, when it comes to pricing risk and disciplining profligate borrowers, our debt markets remain dysfunctional.

13 May 2010

Shock Events & Gold Breakout

One of the few certainties expressed on this blog has been that Gold and Silver are epic investments. I'd say that panned out and will continue to pan out.

by Jim Willie, CB. Editor, Hat Trick Letter | May 12, 2010

The events of the last 12 to 18 months have been as shocking as they have been instrumental in reshaping the global financial structures. In fact, the events have pointed out the fracture of the global monetary system and banking systems. The steady stream of events is accelerating in scope and intensity. The fractures are finally being recognized. The key to understanding the continuation of disruptive and chaotic events is the realization that nothing has been fixed, no remedy put in place, no reform agreed upon, no liquidation of impaired bank assets completed, and no work toward a more stable system. Instead, the old system has been subjected to a patchwork of futile efforts and initiatives that speak more of bilking the system, redeeming impaired assets, and channeling funds to those most responsible for the fractures. Instead of seeking solutions, the banking and political leaders revert to what has been their shelf of failed tools, since they know nothing else, stuck in the Keynesian box, painted into the 0% rate corner. The costs are horrific when solutions are not pursued. The beneficiary is gold, since all wayward policy costs money, which must be created, worsening the debasement. Gold rises with new money creation gone amok. $Trillion rescue packages have become the norm, in a cavalcade of debased currencies. Historical highs come for gold and silver, with gold fighting the political battles, but silver riding through the gates with high speed and raised dust. Central banks own no silver, and industry consumes silver.

The system cannot repair itself because those in charge at the helm making decisions caused the fractures and protect their power base. They live and operate within a system that no longer functions effectively. Reform would involve bankruptcy for the elite in charge. Remedy would involve liquidation of the balance sheets for the elite in charge. True crackdown would involves prosecution and jail time for the elite in charge. Changing of the guard would involve lost power for the elite in charge. Independent audits would involve revelations and disclosures of criminal fraud on a widespread basis. So the system lumbers along, broken. Nowhere has the brokenness gone more unaddressed than under-water mortgages for 22% of the American public. True remedy and crackdown would involve a mushroom of criminal allegations from bond fraud, revelation of duplicate usage for mortgage payment revenue streams, lost property titles, and counterfeit fraud. That is a major reason why Fannie Mae was nationalized, to keep the fraud under the roof of the greatest criminal organization on earth, operating under the United States Government, where the corruption, theft, and fraud can be protected by the numerous agencies. The global response has been and will continue to be a flight into gold, finally recognized as a zero risk safe haven. The global decline in trust for government debt is the death knell for the major currencies, the monetary system, and the central bank franchise system. It is also the harbinger for $2000 gold and $50 silver.

Review briefly the scattering of powerful events in just the last 12 to 18 months. History is being made before our eyes. The franchise system of central banks and paper fiat currency has failed before our eyes, but with no specific recognition. The flood of new money creation testifies to both failure and desperation. New debt within the USEconomy no longer produces positive economic activity. The events are so diverse that any competent analyst must conclude that the global financial system has broken in irretrievable, irrevocable, irreversible manner. If the following diverse topics of disruption, breakdown, malfunction, denunciation, incompetence, compromise, corruption, and contagion do not wake people out of their slumber, nothing will. If investors do not take action amidst the plethora of warning signals, they deserve to be gobbled up and ruined. Before long, personal self-defense activity will be declared improper, illegal, and even possibly terrorist in nature. Please pardon the brevity of each topic, but too many exist, and building an argument for each would require at least 2 to 3 pages. These topics of breakdown, failure, corruption, and contagion are covered every month in the Hat Trick Letter. Skim to the end to review the gold market summary, where new highs are being registered in almost every single currency on earth. The topics covered in brevity are the same ones covered in careful treatment for the last 12 to 18 months. The array of topics arranged in sequence serves to highlight the shocking events and the historically unprecedented desperation in response, all of which has led to a powerful gold rally based on respect, integrity, and standalone value.


Last May 2009, the Saudis with Russians and Chinese at their sides announced the eventual end to payments for crude oil to be honored in USDollars. The concept was endorsed by Japan and Germany, whose counselors from Berlin might be far more integral in reshaping the global landscape than the US-UK aging power merchants are willing to concede. The disrespect shown the USDollar has turned to revolt, seen in G-7 Meetings. In fact, the G-7 has morphed into a country club meeting for former power brokers. The new G-20 Meeting is the forum of substance, where the Chinese, Russians, Indians, and Brazilians can have a voice and no longer sit in the hallways while decisions are made. The USDollar is on the butt end of a Global Paradigm Shift with extreme force. The beleaguered buck will limp along until alternatives in the planning stage are launched. That is soon, really soon, like before 2011 is too far along. Gold will compete well with both the USDollar and any newly launched currency alternative.


The absorption of Fannie Mae and American Intl Group into the USGovt conglomerate of bureaucracy, fraud, waste, confusion, protection, syndicate wings, off-shore accounts, and printing press operations was an urgent step. It placed the corrupted mortgage finance structures and credit derivative framework under the USGovt aegis, where the syndicate agencies can provide both proper attention and protection from prosecution. The Black Holes will cost the USGovt a few trillion$, my forecast made in 2007 and 2008. Shifting ownership of securities and putting them under official stewardship has effectively eliminated the potential for lawsuits by investors foreign and domestic. Fannie Mae is the nexus of numerous criminal fraud rings whose total value is north of $3 trillion. It is the vast sewage pit replete with slush funds, where obscure accounts reside never to face scrutiny, used to balance the accounting without prying eyes. Gold will be viewed as the clean alternative to paper, especially the toilet paper mixed in sewage treatment plant vats.


Nowhere is the brokenness more evident than in the insolvent big banks. Not a one is solvent, all vampires in search of tangible assets, willing to trade worthless stock shares for assets. Lending is a thing of the past. Their loan loss reserves have vanished, as reserves are tucked away from the lending circles in the US Federal Reserve. Insolvent banks engage in minimal lending, since approval is inhibited by the lack of working capital. The banks are loaded down by an endless raft of foreclosed properties, kept from the market, not on the market. Speaking of insolvent, the USFed itself is in wretched shape. A mere 5% decline in their mortgage assets translates to a negative balance sheet. A more likely 40% decline in mortgage assets, in closer tie to reality, translates to hundreds of billion$ in negative balance sheet. This agency, this august USFed is supposed to lift the US financial structure from its underwater grave? Methinks not!


On April 1st of 2009, the Financial Accounting Standards Board endorsed corrupt accounting of impaired assets. Banks were permitted to place any value they wanted, with clumsy laughable minimal justification. Enter the basis of the great US stock rally. What a joke! Shock waves like on May 6th will likely become the norm. Bond shock waves are in vogue. Without proper accounting, valuation exercises in US financial arenas becomes a farce, joke, travesty.


The QE1 was welcomed. Vast new money printing for the purpose of meeting federal deficits, rescuing big banks, and providing vast slush funds was deemed necessary. The end of QE1 was heralded but a lie. Perhaps it was proclaimed at an end so that QE2 can be launched amidst fresh needs. The QE2 seems to be launched in Europe with a grand US conduit. In March, USFed Chairman Bernanke lied through his teeth to the USCongress about how Quantitative Easing had come to an end, that USTreasurys were not being monetized. In late April, Bernanke admitted his lie to the same US Congressional committee. Remove QE and the entire system grinds to a halt, then collapses under the weight of debt. Claims of QE removal serve as deceptive political clapptrapp, pure diversion from the reality. The QE is as crucial as the right leg. Uncle Sam cannot negotiate the mine field while skipping and hopping on one leg.


You gotta love the denials that the USTreasury Bond complex is a bubble. Its needs have grown enough to demand a significant slice of the entire global savings. Actually, the global savers have lost their appetite for further USTBond buys. As a bubble, it is fed by accelerating sources of funds, mostly nowadays from printing press creation of money. The near 0% interest rate is a dead end with no reversal, since higher borrowing costs would bring about a cave-in for the USTBond bubble. The USTreasury Bond bubble is the sentinel signal for the gold market to release, find global acceptance as true safe haven, and find proper value over $2000 per ounce. A supposed safe haven can NEVER be a bubble. In fact, as the USGovt adopts one broken child after another like Fannie Mae and AIG, the US$-based obligations extend beyond federal debt to cover mortgage wreckage and credit derivative fires. To call USTreasurys a safe haven is like calling Al Capone a savior, calling Lloyd Blankfein a crusader for God, calling Alan Greenspan the architect of prosperity, or calling Franklin Roosevelt a friend to gold investors.


Banks are falling victim to death experiences at an accelerated rate. The bank failure rate grew in mid-2008. The rate grew again in mid-2009. In 2010, already the rate has accelerated again. Bank failures are picking up speed rapidly. The FDIC insurance fund is deep in the red. The bank fees were levied at 13-fold increases last year. Even advanced bank fees have been exhausted by the FDIC. Soon the FDIC will need more billion$ in funds. A new wrinkle is that commercial mortgages are killing banks, at a time when many assets are revealed as being held on balance sheets at double their true value. See the recent bank failures and consistent over-valued assets in liquidation. The problem is systematic and endemic.


Despite claims of a stabilizing housing market, the mortgage delinquencies and enormous inventory of bank owned homes is not being relieved. Fannie Mae reports still rising mortgage delinquencies. Prime Option ARMs are showing delinquency rates that rival the subprimes. Commercial mortgages are also showing delinquency rates that rival the subprimes. The newest wrinkle is Strategic Defaults, where people just stop paying their mortgages, an active decision, often by people with high RICO credit scores. Many are demanding the banks to produce their legitimate property title. Many are sick & tired of bank welfare, with Wall Street taking the lion's share of aid. Some suspect vast bond fraud. Civil disobedience a la Henry David Thoreau has entered the equation. With each new delinquency comes a default and more inventory. The entire USEconomic growth spurt in the 2002 to 2005 timeframe was founded on a housing bubble that was washed away. No new bubbles can be found of practical usage, only the USTreasury Bond bubble acting like a powerful black hole to inhibit capital formation.


In the last few weeks, the metals markets are abuzz over the revelations by Andrew Maguire that the London silver market is rigged from JPMorgan trading desks. Price suppression has come from naked shorting, otherwise known as selling silver contracts without collateral, without benefit of metal. The paper Ponzi scheme of the London Bullion Market Assn and the COMEX is slowly being unmasked. The concentrated short positions have no economic justification, and represent over a year of global mine output. The GATA organization is being vindicated, soon to be granted great respect. Without the outsized naked short position in silver, all completely illegal, all totally protected by the USGovt and its obedient regulators, the silver price would be north of $50 per ounce. The same rigged market exists in gold. Without the outsized naked short position in gold, the gold price would be north of $2000 per ounce. That is where both are heading.


The Big Four banks in the United States had better grow accustomed to legal charges and lawsuits. For several years, they sold toxic assets, misrepresented asset sales, have engaged in naked shorting of metals, have sold bogus derivative products, have laundered counterfeit bonds of various types, have paid in collusion for debt ratings, have engaged in insider trading schemes, and much more. My sources tell of powerful Chinese interests and indirect agents putting tremendous pressure on the USGovt to enforce the law and enforce the regulations, which would effectively release clogged markets and force prosecution. They are ultimately USTreasury Bond creditors and Gold investors. They are angry. Watch the prosecutions and civil lawsuits continue like an endless parade. Watch for exposés and sting operations also.


The common practice of off-balance sheet usage is rampant. Various devices for temporary account ledger items are under fire. Banks place unsold home foreclosure inventory often off the balance sheet. Bigger banks place wrecked mortgage assets off the balance sheet. Loser credit derivatives and other derivatives routinely are placed off the balance sheet. The USTreasury funds its own USTBond purchases from agencies in the Caribbean, again off the balance sheet. The entire Enron operation, from its Harvard hatchery, its Citigroup funding, and its JPMorgan special purpose vehicles, was an off-shore enterprise also. Proper disclosure involves proper valuation. False accounting prevents the disclosure process. The motive is simple. The big banks are insolvent and do not wish to disclose their insolvency. Lending as a result suffers.


Imagine a nation whose central bank is part of a foreign owned syndicate, with full control of the monetary management, full control of channels to their favorite bank entities, full control of destinations for funds. The USFed is a paid consultant for the USCongress which refuses to disclose its gold inventory, refuses to disclose its currency management, refuses to disclose its disbursement of TARP Funds, refuses to disclose its monetization of USTreasurys and USAgency Mortgage Bonds, refuses to disclose its Wall Street fund swaps, and desperately conceals its money laundering for CIA narcotics funds that enter the Wall Street system. Demands for a USFed audit coincided with a May 6th freakish stock plunge, resulting in watered down language for power to audit the USFed itself. The new bill at least is a foot in the door. Let's hope it is size 22 like Shaquille O'Neal.


After the 2008 fiscal year USGovt deficit was announced in the $1.5 trillion range, shock was felt. The American public was told of a lower $1.3 trillion estimated deficit for 2009. It also ended up in the $1.5 trillion range. Expect the 2010 deficit to again be at least $1.5 trillion. Federal revenue receipts are still trending down for both individual and corporate tax sources. Another stimulus bill is soon to be entered, unless the nonsensical story of a recovery is actually embraced and believed. Funding of the Fannie Mae and AIG black holes is costly. And never overlook the endless wars and defense (offense) programs. Their budgets are sacred, never debated, and always endorsed without delay. The end result is a continued flood of USTreasury creation, at a time when refunding rollovers are required. Gold competes with this travesty, competes successfully, seen as a carnival sideshow moved to center stage. Record debt issuance occurs each month.


The details of USTreasury official auctions have become a subject of open debate. Irregularities among direct and indirect bidders has attracted attention, bad attention. Simple calculations reveal how USTBond purchases by known sources account for less than half of USTBonds auctioned off, the difference made up by pure monetization in the typical secretive centers like the Caribbean bank centers. The Treasury Investment Capital (TIC) Reports continue to reveal a decline in most nations for USTreasury holdings, yet even more USTBonds are sent into the market. The monetization is the only answer to explain vast anomalies.


A new phenomenon, documented, explained, even with visual aids, was given in the May Macro Economic Report out last week. The monetary base is accelerating upwards at a mindboggling rate. The broad money supply in usage is actually falling, due to reduced lending and loan approval. The money velocity has fallen dangerously low, like to levels seen in the teeth of vicious recessions. Thus the monetary inflation, Bernanke's reason for being, has not been successful. The relationship between broad money supply and declining labor market is well known, tracked expertly by John Williams and his Shadow Govt Statistics staff. The conclusion is to expect a nasty recession to continue, to reappear, depending on your perspective and level of denial. Money is being thrust into the system, but it is not being put to work, as capital formation is non-existent. Think of a big car burning its engine, revving up wildly, but going very slowly down the road. Blown pistons and gaskets litter the roadway.


The Exchange Traded Funds are a system for Wall Street to control prices for key items. The natural gas ETFund has had little bearing on the natural gas price. The silver ETFund (SLV) inventory has diverged from the silver metal price, the lost correlation as testimony to corrupted management. The lazy investors prefer to own an ETFund out of unwillingness to research or manage the asset, preferring to open the door to corrupt management by Wall Street firms, the same ones who corrupted the mortgage bond market, the muni bond market, the oil market, and the entire stock market. The most corrupt of all ETFunds are the Street Tracks SPDR (GLD) gold fund, the Barclays (SLV) silver fund, and the Goldman Sachs (GDX) gold mining fund. Each of these funds serves an important role in the price fixing, price manipulation, and heavy handed leveraged control of price suppression. If investors are loaded with such ETFunds, then someday they will realize a divergence between the share price and the underlying prices, probably some lawsuits for impropriety and malfeasance, and likely forced liquidations without participation in the rallies observed. As Stewart Dougherty put it, "Big Money is going to be way too smart to buy the Exchange Traded Funds that have been pimped to retail investors as a way to sterlize their money and keep it out of the metals market for which it was internded." The solution is to own a gold or silver bullion account. See the Sprott (PHYS) fund which is given a 30% price premium, due to integrity.


The public disgust and anger is growing fast. The Tea Party movement has gained acceptance and vigor at the grassroots level. Some like Bill Clinton attempt to associate the Tea Party participants with terrorists, which is ludicrous. George Washington, Patrick Henry, Thomas Jefferson, John Adams, James Madison, and especially the outspoken Benjamin Franklin might be maligned if alive today, or at least harassed with tax audits. At least one might sit in a secret prison without criminal charges filed. The USCongress is distrusted more than Wall Street. Bankers are despised and disrespected. The people did not want a national Health Care program, but their desires are secondary. The USGovt had better beware of a blossoming of civil disobedience in reaction. One form is not to make mortgage payments. Another form is to drain investment accounts and to purchase gold & silver, coins or bullion, either way.


International prestige has vanished for the United States. The revolt that started against the USDollar two years ago has branched in multiple directions. US bankers are on the extreme defensive, the former ambassadors to economic export. The narco war and oil war have tarnished the US reputation. The military services fraud has tarnished the US reputation. The abuse of NATO airbases has tarnished the US reputation. The Wall Street toxic bond export on a global scale has tarnished the US reputation. The interference with foreign sovereign debt by Wall Street and US-based hedge funds has tarnished the US reputation. The heavy hand of IMF and World Bank leverage, pressures, and poison pills has tarnished the US reputation. The ratcheting trade war and stream of tariffs and complaints by the USGovt have tarnished the US reputation. The Madoff Ponzi Scheme has tarnished the US reputation. The numerous nationalized companies has tarnished the US reputation. The new prosecutions against Wall Street fraud have tarnished the US reputation. The flood of new USTreasury Bond supply has tarnished the US reputation. The lack of leadership in times of crisis has tarnished the US reputation.


In the last two years, much attention has been given the Flash Trading, also called High Frequency Trading, even the basic name of Computer Program Trading. Estimates that 73% of the New York Stock Exchange trading volume is from program trading. So Wall Street is essentially deeply committed to circle jerk endeavors, or exercises to eat each other' lunch, certainly not producing anything. Paul Volcker accused the financial industry of one good innovation in 20 years, the automatic teller machine. He finds no value in either credit derivatives or computer program trading. In fact, much of the Flash Trading proprietary devices are elaborate insider trading mechanisms that view the order stream and front run. See the Goldman Sachs incident one year ago, when an employee stole the illegal software, but the FBI came to the rescue of GSax and kept the story and device under wraps. The Flash Trading was unleashed on May 6th again. A grand heist ensued, clearly motivated by insider information of a weekend European bank rescue and $1 trillion monetization package. Lack of liquidity is blamed, but so is lack of value. In today's world of high finance, a flash trade computer program device is a different form of pistol used in a holdup, gunning for the sell stops, filling them at absurdly low levels, mugged on the trading platforms. The Dark Pools in OTC trading account for $60 trillion in annual activity, versus a mere $5 trillion in monitored traffic. That translates to more back alleys for mugging than passageways well lit to prevent criminals at work.


Since late November when the Dubai debt went into default, the sovereign debt crisis has been unleashed like a relentless storm. Following Dubai was Greece, the common denominator being the London and West Europe banks. Denials are shallow minded and stupid when analysts claim that sovereign debt risk is fenced from one nation to another. Contagion will be the norm. Much of the Greek Govt debt is held by Swiss, London, and French banks. So a rescue of Greece is tantamount to a rescue of these big exposed banks. The rash of sovereign debts facing default, or pressure toward default, testifies to the failure of the monetary system. The usage of newly hatched money to fix problems from unbacked untethered unsecured money is lunacy. Eventually, a condition marred by debt constipation results. Uncle Sam needs to visit the toilet for relief but cannot, as his bowels are blocked by debt without benefit of healthy liquidity. His intestines are clogged with financial engineered vehicles, basic fur balls. The next nations to face the sovereign debt hammer of scrutiny and market retaliation are Italy, Spain, France, and then England. The fireworks are nowhere finished. With each new episode, the Gold price will rise further.


The sovereign debt crisis is actually a symptom of the failed central bank franchise system. The central bank had better hurry to produce new global reserve currencies backed and fortified by gold, also possibly by crude oil, or else the fires in the government debt will continue to burn. The end result will be ruined currencies, broken national banking systems, national budgets in tatters beyond remedy, economies ground to a halt, and eventually civil strife. We are witnessing the end convulsions of the fiat paper monetary system. The central banks are powerless to stop the crisis. The $1 trillion European bank bailout plan gave lift to the Euro currency for less than 24 hours. The USDollar is viewed as likewise wrecked and undermined as the Euro. In my view, the simple perspective is that their near 0% interest rates are like a minimal pulse on the banking system, a depleted body lying in the Intensive Care ward. The currencies are all dying. Gold will rise until given proper recognition, then it will rise even more.


No charts are necessary. A thousand words might suffice, rather than six charts showing Gold breaking out to new highs across the world. Some major points scream to be told. Here is a list:
Gold is rising in every single major currency
Gold is not a hedge against price inflation, but rather against ruined monetary system
Gold is making new highs in almost every single major currency
Gold had consolidated in price for four months, the base for breakout
Gold will reach $2000 in price within the next two years time
Gold is desperately needed to anchor the failed fiat paper currency system
Gold is planned for a component role in the new Northern Euro currency
The sovereign debt crisis has fueled demand for Gold without the full realization that the central bank franchise system has failed along with the fiat currencies
Quantitative Easing is monetary hyper-inflation, the fuel of the Gold rally
Gold is urgently needed as a bank reserve to ensure proper function
Gold contains no inherent counter-party risk
Gold is in the midst of vast supply shortages
The Gold Cartel is seeing defections among its allies, who are buying gold bullion after the cartel knocks down the price
Nations are hoarding their gold mining output, the latest possibly Venezuela
Gold is seeing panic buying in parts of Europe, like Austria
Gold mining output is trending down for the past few years
Gold was by far the #1 investment asset in the entire 2000-2009 decade
The US Dow Jones Industrial Average is in multi-year decline, in Gold terms
Gold is protected from human corruption, except in its theft and hollow replacement
Gold market is receiving heavy scrutiny for corrupt metal exchanges
The London Bullion Market Assn has been in default since December, bribing on delivery demands to receive cash settlement with a 25% premium paid
The GLD gold exchange traded fund is a corrupt diversion from metal ownership
Hong Kong is soon to offer several exchange traded funds for Gold
Gold can and does rise in price concurrently with the USDollar
Future payment for oil shipments will require a gold-backed currency
New barter systems of trade will contain a gold core component
Gold is the ultimate safe haven asset
The USTreasury has no gold reserves, as Fort Knox is empty, since the Clinton-Rubin gang leased it and sold it all
PIGS nations have more gold reserves than the United States
Switzerland and Canada have almost zero gold in national reserves
The IMF gold sales are lies, actually closed out USGovt gold short transactions from past years when the Clinton-Rubin gang leased gold for sale
Gold leased from the Italian central bank was lost by LongTerm Capital Mgmt
Bear Stearns was targeted for a kill, since it was long in gold, defying Wall Street
China participates with the IMF sideshow game in order to buy its gold pledges
If Gold were revalued at 3x to 5x the price, many national banking systems would be restored to health and solvency
Price hyper-inflation is the likely next blemish on the US landscape, which will fuel broad public gold demand
Any attempt by the USGovt to confiscate gold would result in a gigantic backfire, with the gold price doubling in price, and US foreign assets subjected to freezes
Gold will reach its high range when US bankers along with London bankers face a Nuremberg style criminal trial on the global stage
Prepare for the arrival of a small group of new Gold-backed currencies, the USDollar death knell
As John Pierpont Morgan once stated under oath before the USCongress and the Pujo Commission in 1913, "Gold is money, and nothing else"

Copyright © 2010 Jim Willie, CB

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a Ph.D. in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials.

Jim Willie CB is the editor of the "HAT TRICK LETTER" Use the below link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe.