My forecast has been for a powerful Inflationary Recession to occur, a consistently laid out analysis, delivered during the last year or more in clear terms. That has been my call, and continues to be my call. The Deflationist camp is making more noises. They do not know their limitations, which are obstructed by a blind eye toward the monetary inflation. They do not understand it, so they ignore it, and attempt to encapsulate it into a convenient bottle set aside on the margin. Gonzalo Lira will be proved wrong about price inflation showing on the official Consumer Price Inflation index. So what? The prevailing price inflation will ramp past 12% easily as he also predicts. His style is wonderful, even if a mirror is a fixture at his desk. His details in argument are strong and cogent. An anger meter is a fixture at my desk. So what? Since the emergency G-7 Meeting held two weeks ago, the central banks have joined forces in a Global QE movement that will propel the Gold & Silver price much higher and render deep further damage to the USDollar. The Deflationists paid no notice, or did not notice, or did not comprehend the importance. They are a laughing stock crew of half blind shamans.
USFED MOUTHPIECE ECHOS
The Deflationists fail consistently to measure the flow or pace of inflation, seeming mouthpieces without realization for the USFed and Wall Street itself, whose incessant calls of dreaded deflation have opened the political floodgate for global monetary hyper-inflation. They do not even recognize their compromised subservient support role. The aberrant crowd of Deflationists have a blind eye to the dynamics of inflation, and how it transforms from excessive funds in the financial system, to reaction against the USDollar, to rising commodity prices, to rising cost structure, and finally to extreme pressures for end product prices, including higher wages. They dismiss each step of the way, and do not bother to explain their progressive errors along the pathogenesis pathway. The USFed has passively developed followers like a Pied Piper. They are just lousy economists in the Deflationist camp. A good technical analyst on chart interpretation in no way makes for economist qualification. They cannot integrate complex systems where both asset deflation and monetary inflation coincide, collide, and conspire to produce economic wreckage and price inflation. They act sheepish when what they predict will not happen, actually comes to pass. Recall they have been preaching for three years that crude oil and gold would descend lower in prices. They serve as the bell tower in an empty village. They have also been preaching that end product prices would fall also due to low final demand. They are consistently wrong, but never apologetic. Sadly, most Deflationists cannot adequate even define deflation, even when challenged. It is a catch-word they fixate upon, that permits them to dismiss anything and everything pertaining to the ravaging complex effects of monetary inflation, whose dynamics are beyond their scope of comprehension, perhaps even recognition.
Mine are not rants, but detailed arguments with numerous factors fortifying arguments put forth toward a thesis defended on many fronts in broad fashion for over five years. To be sure, my work includes some invective due to overflowing anger at the system having gone so far awry with deep fraud, coordinated media deception, impunity for those responsible, and elevated powers granted to them during reforms. Rants are shallow harangues. Mine is thorough analysis put to paper. These guys should consult a dictionary, as some of their own haughty dismissals fail to address or respond to much of anything my work has put forth. The word rant might invite an accusation of shallow in the mental process. They often argue in a circle under the pretense of confrontation, never addressing important points like the flow of the increased monetary aggregate, and its destinations with strong effects. One analyst in particular should really stick to what he does best, that being technical chart analysis. While the historical economics books of the past are indeed enlightening in theory, little truly applies to explain all that occurs in the profound intervention and rigged financial markets led by a criminal elite class whose main enterprise is clearly war and narcotics, followed by orchestrated chaos designed to permit broad elite powers. Their past excellent work should be kept on the wall for constant reminder of true market forces, true economic forces, all of which are opposed by powerful criminal actions and heavy handed monetary policy.
THE BLIND EYE TO INFLATION
My main ongoing criticism of the Deflation camp has been their blind eye to the human response to asset deflation. Obvious home prices fell and continue to fall, and related asset backed bonds have fallen progressively into ruin. That is not the point. Their camp has consistently ignored the central bank response with multi-$trillion monetary expansion. In round #1, the excesses were tucked away in the Federal Reserve interest bearing account for the big banks. They were essentially Loan Loss Reserves of those banks, which were removed from the big bank balance sheets only to be relocated on the USFed books. In round #2, the excesses went global with the entire commodity complex exploding upward in price. Purchase of USTreasury Bonds in the hundreds of $billions cannot be contained anymore than herding tiger cats. Most noticeable among commodity price rises was in food & energy. With most food items up 15% to 20% in price in a single year, and gasoline up 25% in several months, the pinch is on with powerful price inflation. But it appears on the cost side, as my analysis has mentioned numerous times. What the Deflationists miss from the start is that the extreme storm conditions come from the falling asset prices and wage effects on the one side to form a low pressure zone, meeting the rising monetary expansion and counter reaction by commodity prices against the debased USDollar in a high pressure zone. Thus the collision and powerful storm vortex, which they miss with blind eyes. Their camp never addresses the storm conditions, ever. The Deflationists show their blind eye by overlooking, or ignoring, or never noticing the storm itself, where natural collapse meets extraordinary monetary aggregate growth in reaction. They never mention multi-$trillion central bank expansion of the money supply, which debases the value of money, even making a total mockery of money, thereby adding to the cost structure in a massive way, pressuring prices and wages. The rising stock indexes serve as evidence of the monetary inflation, which they do not recognize.
My point made consistently is that wages will not keep pace with rising costs, even made a national priority to halt the secondary inflation effects on wages. In that sense, my analysis has joined the Deflationists, but only with one foot in their shallow pond of constructs, hardly qualifying as a School of Thought. Since wages do not keep pace with costs, the unemployment will rise and has risen, a point made consistently here. Therefore my work cannot be carelessly labeled as over the top inflationist. Sadly, most Deflationists do not understand how to read my analysis, because they operate with a blind eye to the many sided crisis, too focused on his narrow perspective that cannot adapt to the current complex situation. The Deflationists cannot integrate into their shallow thinking the combination of inflation on the monetary side and deflation on the asset (and wage) side, surely a difficult and extraordinary situation loaded with complexity. They lost my respect long ago, the entire clan. Most of their followers in paid subscription services suffered crippling personal financial losses. A few analyst newsletter writers from their camp have learned nothing and continue their tired saw with shallow analysis and a string of wrong-footed forecasts. So be it!
IMPORTANT CRUX OF THE MATTER
The heart of the matter is not the outcome, but the path to the end point. If a man and woman are destined to be placed in a cemetery crypt, is that a reason not to marry and enjoy a life together, filled with bliss and human challenge? Of course not. One should hate to be married to one of those Deflation Knuckleheads, a downtrodden and bleak crowd. The pathway is where fortunes are made and lost. The Deflationists have gotten it wrong for a long time. One should not be overly concerned about three years from now if an economic collapse takes place. That is the obvious outcome, not too challenging an issue at all. The Deflationists believe they offer wisdom in such a pronouncement. It is obvious. The wrong-footed Deflationists have focused on for a long time, with precious little elucidation of the path to the end. My concern is the extent to which the cost structure will rise, and then how much the end product & service price system will rise, and how much the wages will rise in compensation upon concerted demand. The Deflationists have ignored the pressure in 2007 and 2008 and never foresaw the entire Quantitative Easing movement, which was forecasted with ease in the Hat Trick Letter. The Deflationists consistently ignore the powerful effects of Quantitative Easing itself. They dismiss the human response to falling asset prices. The only conventional assets rising nowadays are stocks and farmlands. The thesis put forth that DEFLATION WILL PREVAIL BY SNUFFING OUT THE HYPER-INFLATION represents a cavalier avoidance of the entire sequence toward the end, reveals lack of comprehension of the extreme forces in conflict, and attempts to sit above the fray in arrogance beset by ignorance. Of more concern to me, and millions of people, is the important middle portion of the game, that happen from innings three thru eight. The ninth inning calls by wrong-footed blind eyed Deflationists pale by comparison to discussions on whether banksters take global control of governments, how the current monetary system is fracturing, whether new monetary forms are shoved down our throats, or how an alternative oppositional monetary system can overthrow those in regimes in power. They never discuss such lofty but important concepts, since they do not comprehend them, cannot perceive them, and cannot envision them. They retreat from such discussions.
The Deflationist themes ignore the Inflation story. The G-7 Meeting to adopt the Yen Selloff Pact was a veiled GLOBAL QE ACCORD. The pact has not even been discussed by the shallow Deflationist camp even though it is the most signficant policy directive since September 2008, more important than the original QE decision in March 2009. That is because it is Global QE, stamped and approved by the major central banks, monetary hyper-inflation gone global. The Deflationists live in a cave, unaware of such events or dismissive of them in arrogance. They instead continue to defend the wrong-footed construct of Deflation. In personal email and telephone exchanges, my habit is to constantly laugh at their pre-occupation with Deflation. On more than 40-50 occasions with certain contacts, my reply is simply WHAT IS DEFLATION?? Shallow responses come in return, unimpressive one and all. We will continue to experience and suffer both deflation of assets and wages, during a massive storm of hyper-inflation from central banks. The inflationary effect is a perverse factor toward the real game on stage. Do not expect wages to keep up with the rising costs. This has been a major point of mine all along, so a massive squeeze will continue. The Deflationists do not understand the reaction to the squeeze, focusing arrogantly on the endpoint. Their work is of little practical value, certainly of zero investment value. The squeeze will render harm to both households and businesses, with lost discretionary spending and lost profit margins. Their debate over which prevails misses the entire point. That is, the Deflation will continue in certain asset classes, especially housing and commercial property, while the Inflation will continue in monetary aggregate, TO MAKE A GROWING POWERFUL DAMAGING GLOBAL HURRICANE. Much end product price inflation will come. More end service price inflation will come. See shipping charges for a start. It seems obvious that the Deflationists ignore the battle and try to describe the outcome in narrow myopic terms. In a sense, they are the flat earth society.
ELOQUENCE LACED WITH IGNORANCE
Obviously, we cannot have a Weimar-style hyper-inflation. We do live in a credit based global economy. But the reasons why differ since the current global situation is different. The Weimar conditions were local to the microcosm that was Germany. It was enclosed. The current situation has its Weimar elements, especially endorsed by the recent March G-7 Meeting. That is global Weimar by any name, given its global coordination of USTreasury Bond purchase after broad discharge from Japan. The Deflationists cannot comprehend a global Weimar concept.
FURTHER REBUTTAL TO THE BLIND EYE
To begin with, 12 to 18 months ago the Deflationist camp claimed the price of crude oil and the Gold price would fall and dramatically so. Wrong on both counts. Curiously, the camp avoids defending their wrong-footed points as the months pass, while the crude oil price zips past $120 (Brent that is, since West Texas is the province of paper games), while the Gold price hurtles toward $1500. Have Deflationists not noticed? People are moving rapidly out of quickly debased paper money and into tangible goods. Conversion of USTreasurys has become commonplace among sovereign wealth funds. Have Deflationists not noticed? This is the basis of the commodity price rise and the basis of the precious metals price rise. The USFed has in fact picked up almost the entire slack in USTBond purchase during the massive conversion process. The movement is better observed outside the US Dome of Perception, where foreign USTBond creditiors have openly halted their USTreasury bids, replaced by the USFed printing pre$$ eagerly. Foreign sovereign wealth funds across the globe have openly expressed their dismay over the entire QE initiatives, anger of unilateral monetary policy decisions made in the United States with seeming contempt, and the consequent harsh effect on commodity prices. They have increased their gold (and even silver) purchases in conversion of US$-based assets. They have rebalanced their reserves. They have stopped bidding at USTreasury auctions. Have Deflationists not noticed?
Germany's financial collapse took several years. So is the US financial collapse, a long painful process. What began with a subprime mortgage problem in mid-2007 spread to a full blown housing decline, a bank insolvency problem, then a sovereign debt problem, then a monetary inflation solution with severe blowback, and now a monetary system discredit problem. The pathogenesis has so far spanned four years. Have Deflationists not noticed? Anyone who believes the US financial collapse could occur in a single week is a moron. Actually, such an observer would be a blind man and moron. The US banking system in my view suffered a death experience in September 2008. The coroner was overridden by the Financial Accounting Standards Board, thus declaring the corpse permitted to walk with props and to speak from a recorded message, pretending to be alive. After April 1st decree in 2009, the Zombies have roamed the US landscape freely. Have Deflationists not noticed? The big US banks have been operating with an Extend & Pretend policy that their crippled balance sheet overloaded with toxic credit assets will somehow recover in the next year. Instead, the Real Estate Owned (REO) residential homes on the bank books have ballooned to over one million properties. Almost half of all home sales are short sales and foreclosure sales. The entire process has been extended to the extreme over times. Have Deflationists not noticed?
Financial assets are indeed being shifted into hard assets, in particular the basic commodities. Nations are building stockpiles. The main focus has been on crude oil to the commecial side and to Gold & Silver on the financial side. But some speculation has come to the copper market (which JPMorgan seems interested in), to the coffee market due to problems in Africa, to the sugar market (which JPMorgan seems fond of), and to the cotton market from broad necessity. Financial mavens, news anchors, and hedge fund managers have all been touting their strategies in response to runaway monetary inflation commanded from the marbled offices of the USFed. They respond to the devaluation of money itself. The migration to hard assets is well along. Have Deflationists not noticed?
Did somebody say there was insufficient currency to drive up and power hyper-inflation? Excuse me, but that statement truly misses the 800-pound gorilla sitting at the Deflationist dinner table. The USFed has expanded its balance sheet to over $3 trillion. The USFed has printed over $2.7 trillion in QE programs, with much more to come. That figure does not account for their secretive monetary extensions, like grants without collateral to fellow central bankers and friends of the syndicate. In fact, the QE program will soon be announced as ended, since so offensive, when in fact it will be incorporated and melded completely into routine weekly activity. The Euro Central Bank, the Bank of England, and the Bank of Japan have all joined in the paper confetti production enterprise. Have Deflationists not noticed? The spillover from the banks who hoarded the USTBonds took place and the spilled funds hit the commodity market. The Deflationists claimed it would not happen, no spillover of any kind. They were wrong. The next spillover will be to end product prices, and to some extent wages. The Deflationists will be wrong again. But the wage hikes will not be adequate to manage the higher costs to come. The increase in money supply plays out symptomatically under their noses without much recognition or comprehension.
The next phase will be for Cost Push, which will introduce higher prices and smaller packages by vendors. Then come demands for higher wages with high pitched battles. Some will be won, many will be lost, especially given the state government union legislation that has bagun to ban collective bargaining. The workers will lose more than in the 1980 decade, when 10% and 12% salary gains were commonplace. The corporations are supposely flush with these $2 trillion in cash on their balance sheets. Let's see how much are devoted to commodity investments in counter action to the USDollar debasement (not noticed by Deflationists) and how much are devoted to labor concessions under demand of work action (not expected by Deflationists). My preference would be for capital investment and factory revamps, but the United States and its newfound marxism blended with fascism and oppressive regulatory impositions is not a place conducive for corporate expansion. These are some of the dynamics underway, which are not detected by those with blind eyes. The Deflationists prefer to cling to shallow arguments of a move straight to deflation without all the intermediary steps that cannot comprehend.
Cash held by the people and investors and hedge funds pension funds and elsewhere is in a massive migration to hard assets. Physical goods & tangible assets are rising in price. Have Deflationists not noticed? Witness the burgeoning demand for USMint coins, resulting in shortages and production shutdowns across the world. Have Deflationists not noticed? Amplifying the USFed money output parade, the troubles in Egypt with associated threats to the Suez Canal, followed by troubles in Libya with interruptions to output, have all contributed to the movement of funds into hard assets like crude oil. Have Deflationists not noticed? As for buyers, right now the only (or primary) buyer for USTreasurys is the USFed itself. Plenty of global funds continue to chase crude oil, industrial metals, grains, farmlands, cotton, coffee, sugar, as well as the King Gold & Queen Silver. Have Deflationists not noticed? The interesting opportunities will continue to be offered for wealth accumulation in defense of the unspeakable abuses of money. These are the middle innings of opportunity when it is still legal to build and hold wealth. Those years might be nearing an end, unfortunately as we near open confiscation after hidden confiscation. The money to bid tangible assets skyward, my blind fools, is from the collective gaggle of central banks which are in a panic printing money without the controls to direct it where they wish. This is not a rant, but rather a directed rebuttal of a shallow discourse laden with blind spots, shallow arguments, and arrogance. Let us gaze at the fool with a blind eye in a purple robe sitting on a self-designed throne, with zero authority and a track record of major missed events.
GOLD & SILVER REACTION TO MONETARY DESTRUCTION
Acute Silver shortages are in front of our noses, in the news, and point to extreme vulnerability in the USDollar, if not the USGovt debt condition. The USMint in possible illegal manner has at times suspended the production of Silver coins to be minted. They by law are commissioned to continue to meet public demand, which means they must bid up the Silver price if required. The COMEX shortage of Silver is so widespread and in the open, that futures contracts are being settled in cash, after the contract owner signs a waiver to permit the breach of contract itself. A 25% to 30% cash settlement bonus has become the norm. Such actions in policy have lit a fire under the Silver market and lifted its price. Angry from incessant charges of currency manipulation, the Chinese have responded by purchasing large truckloads of Gold & Silver. The real manipulation is by the USFed, whose debt monetization has gone global, whose USDollar effect is undeniable. That is blatant manipulation of not only the sovereign debt, but the currency denominated in it, extending to the entire monetary system. The group of major fiat currencies are all attached like a floating papyrus bound by threads. They are discredited in unison, weighed down by a debt burden and rotten paper.
The Euro is rising, despite its crippled condition. The ruse of a higher interest rate set by the Euro Central Bank is really amusing. Maybe they will come through with an inflation beater rate hike of a puny 25 basis points. How irrelevant? Both the US and EU have prevailing inflation rates over 8%. The cost of money remains 7% below the prevailing price inflation, maybe 12% too low for practical commerce. The appeal of the Euro comes from the totally obscene ruinous debased condition of the USDollar. The reverse beauty contest leaves the clownbuck as the gal left on stage seeking a dance partner. The toothless Euro at least has two dancing legs. The USDollar has none, nor teeth. The newest wrinkle in currency flows is the Arab investment in Euros, as they seek anything but USDollars. The US War Machine has targeted Libya, and turned its head from Bahrain. Just this week, Prince Turki of the House of Saud warned his princes that the Saudi Arabians must seek protection from other sources besides the United States. With the Saudis acknowledging security shortcomings, one must bring into focus the Petro-Dollar Standard, the defacto accord between the US and Saudi Arabia. They sell OPEC crude oil in US$ denomination only, and the USMilitary provides security protection for the royals in power as they accumulate great wealth. The accord is slowly disintegrating, with enormous potential impact to the USDollar standing. The US$ DX index is flirting with yet another breakdown below critical support. Each bounce off support is met by fresh selling. It seems military underpinning for the USDollar is slowly fading away like an old soldier after several decades.
The Gold breakout is clearly timid, lacking gusto and strong conviction. The Powerz have decided that they must contain the Gold price advance. The factors pushing up Gold are numerous. The sovereign debt decay process has led to lost integrity in the global monetary system organized as major currencies. They are all being debased by mammoth money printing initiatives with the full blessing of the governments and finance ministries. Each paper ambush led by naked shorting of the futures contract has resulted in a slingshot lift in Silver, a veritable nasty backfire in their faces. Those who cannot accept such a forecast of $100 Silver come from the same crowd that refused to believe last November that a $25 price would give way to a $40 price. But the Powerz cannot halt the powerful impressive advance of Silver, which will next take assault on the $50 mark. In two years, it will surpass the $100 mark, maybe sooner. The Gold price will make new highs in repeated fashion, and continue the upward movement, but it will be slow and steady toward the $2000 mark, inhibited the entire way. But Silver will be the impressive winner in the precious metals arena. At least one Silver substitute is already well over $1000 in price. That is the hint and clue of future price direction. Silver will take no prisoners while Gold shakes off its bondage. It has almost reached my $40 stated target, right on cue. One of the most profound changes that has come to the precious metals market is the shift, whereby price discovery has moved directly to the physical market. The paper futures market has been thoroughly corrupted.
The latest travesty is that JPMorgan is attempting to take delivery on a large portion of its short silver position. No misprint here. On their short position, that is, so that they can deliver it!! That is like making a demand to a credit card bank that the borrower intends to collect the debt from the creditor. Utterly absurd. That comedy is worth more to watch than the CFTC charade on position limits. The other profound change is that inflation expectations are being dictated by the Gold & Silver market, not the USTreasury Bonds any longer. The USFed Chairman has lost an enormous amount of credibility in his focus upon the long-term USTBond as an indication of price inflation expectations. The USGovt debt securities have lost their buyers. Not only is the USFed monetizing USTreasurys at a $100 billion clip per month, they are also purchasing the Treasury Inflation Protection Securities (TIPS). The TIPS are supposed to act as an inflation gauge. It too is corrupted.
A bigger fool than the Deflation Knuckleheads is the USFed Chairman Bernanke. He is a myopic professor who wrote a fine piece of revisionist history of the Great Depression, who now presides over a global monetary systemic collapse. Gold is reacting, but Silver reacts even more. As long as the insolvent big US banks remain in operation and are not liquidated, as long as toxic paper repositories rest under the USGovt roof, as long as the USGovt deficits remain well above $1 trillion annually, as long as Quantitative Easing legitimizes the debt monetization without checks, the GOLD PRICE WILL RISE INDEFINITELY. It is that simple.
http://www.kitco.com/ind/willie/apr072011.html
Showing posts with label willie. Show all posts
Showing posts with label willie. Show all posts
8 April 2011
17 January 2011
Long Shadows Cast Over Useconomy
Numerous are the threats to the USEconomy and US financial structures. Many are hidden threats, subtle challenges to undermine increasingly fragile support systems, planks, and cables that hold the system together. The year 2011 will be when the system breaks in open visible fashion, when the explanations that justify it sound silly and baseless, when the entire bond world endures major crashes. All thing financial are inter-related. Recall that in summer 2007, the professor occupying the US Federal Reserve claimed the subprime mortgage crisis was isolated. The Jackass countered with a claim that the bond market was suffering a crisis in absolute terms, where all bond markets were on the verge of fracture, perhaps globally. In year 2008 the banking system in the Western world broke, fatally and irreparably in my view. In 2009, the solutions, the treatment, the official programs were all exaggerated for their effectiveness while banker welfare became a fixture. Neglect of the people on Main Street became policy. In 2010, the system revealed it is still broken. The global monetary system after all rests atop the sovereign bond market. This year, it must fight off a collapse. Many are the hidden points of vulnerability. Gold & Silver will continue to be the great beneficiaries.
BOND OUTFLOWS
Huge outflows have struck from US-based bond funds, while the outflows continue for stock funds since may 2010. Even the flagship pimco bond fund saw net redemptions. The public is stepping aside as the usfed does its destructive work. No end is in sight for the stock fund outflows. A public boycott seems firmly in place. The new event is the largest bond fund outflow in almost 30 months. The Investment Company Institute reported that in the week ended December 15th, another massive outflow took place from domestic stock funds. It was the 33rd week in a row, amounting to an exit of $2.4 billion. Worse, taxable and municipal bonds saw a nasty shocker of $8.62 billion in outflows, which included another record $4.9 billion in muni bond outflows. Bond mutual funds had the biggest client withdrawals in more than two years, as a flight from fixed income investments has accelerated. The withdrawals were the largest since mid-October 2008, when investors pulled out $17.6 billion from bond funds. The US bond fund retreat showed acceleration signs, since the rise was from $1.66 billion the week before, according to the ICI report. So outflows are in progress for both US stocks and US bonds!! Year to date, investors have yanked $100 billion in funds from US-focused equity mutual funds, offset by a smaller $16 billion in comparable inflows into equity strategies via ETFunds. The $250 billion PIMCO Total Return Fund, managed by Bill Gross, had its first net withdrawals in two years in November as investors pulled $1.9 billion, according to Morningstar.
The public has grown jaded by stories of flash trading smears of the stock market, insider trading scandals, and incessant internal reports of stock support from the Working Group for Financial Markets. They sense stock prices are heavily manipulated and not a reflection of true value. They might on a wider basis believe that most US financial markets are either in ruins or corrupted. The vast record outflows accompany a rise in the S&P500 stock index, which is a clear signal of USGovt prop programs in a corrupt market. Ridiculous illogical and ludicrous interpretations continue to be disseminated about the USEconomy in recovery. The false story has become a billboard message of deception. We are told that investors are retreating from bond funds after signs of an economic recovery and a stock market rally, which have lifted interest rates broadly. The reality is something quite different. The selloff in USTreasurys happened exactly after the US Federal Reserve in November offered specific details on its pledge to purchase $600 billion in bond assets to revive the sluggish USEconomy. The 10-year USTreasury yields lie in the 3.2% to 3.4% range, much higher than the 2.49% in the first week of November. The bond market contradiction to the USFed monetization plan is without precedent in US bond market history, a grandiose insult.
The QE2 team is buying $100 billion in USTBonds per month, taking up the slack, without producing any decline in bond yields. The USFed is running a dangerous desperate gambit. Attempts to hold together the ustreasury market during its QE2 strongarm episode are underway. Obviously the USFed is the USTreasury market, with outsized USTBond purchases as part of its QE2 program. An approved posse of market specialists is buying hundreds of $billions of USTreasury securities on the open market. They are filling a vacuum. They are offsetting global creditors in abandonment. They bought in 2011 a full 75% of all USGovt debt issuance, just like Banana Republics!! They must keep the interest rates low. They must prevent a credit derivative blowup event. The USFed is fast losing all credibility, exhausting its power, testing its limits, fighting off demands for independent audits. The QE2 team seeks the best price available. However, due the fully advertised initiative and the heavy volume, is destined to pay a premium price. They have tipped their hand, as they buy $100 billion per month in USTreasurys. It is not possible to be a known buyer with a schedule and agenda, and execute favorable prices. An unexpected backfire occurred on the way to the QE2 launch. Bond yields fell sharply between August and November as the markets anticipated the new program. Bond yields have defiantly risen since details on QE2 were formally announced in November, delivering losses to the frontrunners in the autumn months. Too much doubt was left lingering on the volume of the program, and furthermore, whether a QE3 would launch. Bernanke actually hinted of a third launch, foolishly. The states need several hundred $billion, another monetization object.
GOLD & SILVER PREPARE FOR ANOTHER BREAKOUT
A major consolidation is taking place in the Gold price. A near total disconnect has occurred between the physical Gold & Silver markets and the control strings from the paper futures market held by the maestros. Grotesque shortages exist in silver. Difficulties in gold delivery are commonplace. The central banks and Bank For Intl Settlements scramble to keep gold & silver supplied to the exchanges, in order to avert openly visible defaults. A strong uptrend with rising moving averages is evident in Gold. The breakout in October has been consolidating for three full months, while Europe experiences its open sores of sovereign debt distress. Its price will soon encounter the uptrend lines for likely ignition. When a European aid package is assembled, whether of substance or not, merely if it seems credible, the Euro currency will rebound and the Gold bull will resume. In year 2011, the global monetary system will fracture in visible fashion. Its broken debt foundation will be the proximal cause. Gold is widely regarded as a reserve asset, no longer a stodgy secure asset for Arab sheiks. The dirtiest little secret might be that private Wall Street firm accounts own vast Gold bullion accounts, while their corporate banking entities in South Manhattan own the short futures positions, soon to be dumped on the USGovt in formal fashion. The greatest propulsion force to the Gold price is obviously the USFed and its grandiose QE2 initiative. Their purchase of $100 billion in USTBonds per month signifies that they are the USTreasury Bond market. PIMCO is worried sick about the unbridled monetization. The USFed monetized 75% of USGovt debt in 2011. When the USFed is done with QE2, they will argue for a QE3, probably to cover state debt shortfalls. The precedent has been set. The global currency war is in full swing. Simply put, the Gold price will rise when China is prepared to pay a higher price, after exhausting supply at lower prices.
The greatest offender in currency manipulation and currency undermine is the United States. It is essential that the USGovt continue to make accusations against foreign central bankers, in order to deflect attention. The problem is QE2, and the likelihood of a followup QE3. The USGovt is without permission forcing a debt writedown on foreign USTreasury creditors by installing inflation engines. See the commodity prices, led by food & energy. The USFed and USDept Treasury will proclaim victory by mid-summer, as price inflation begins to rage much hotter. They will call it economic growth. Check import price inflation from the last three months of 2011. Import prices rose 3.7% during that brief time. Not just emerging economies like China and Brazil are contending with price inflation. The US does too, but it calls it growth, since its economic trackers are much more accomplished decepticons. When job losses mount in the second half of 2011, the lies will be unmasked. The USFed is the greatest destoyer of working capital in the history of the world. Their balance sheet is negative $1 trillion and growing worse, their highly appropriate report card. Their wretched financial condition matches their decaying reputation. They are the buyer of worthless toxic bonds, the buyer of last resort. The housing market will NOT recover to bail them out.
USGOVT BUDGET BATTLES
Budget battles are sure to reveal the true fascist motives of those in power. The people will be denied while the war machine is preserved, guns & bombs over bread & butter, big banks over households. In fact, the defense budgets will not be reduced. Rather, defense contractors will be forced to eat cost overruns without volume cutbacks in weapon units at all. The war is sacred, the signature mark of the fascist state. The USGovt seems to have suddenly found religion in reducing the budget and its deeply engrained deficit. It is more superficial than from the heart with conviction. The new wave is all about perceptions. To be sure, some in the USCongress are worried sick and scared pale over the prospects of a structural $trillion deficit. A decade ago such a deficit magnitude would be considered a telltale signature of a Banana Republic nation sliding toward the Third World perilously. The budget battle with the new USCongress will be extremely revealing of the priorities for the Syndicate in full control of the USGovt and press networks. The budget process will in my view continue to place the war as a sacred priority not to be touched, not to be altered, not to be disrupted. In rough terms, the USGovt budget contains components 20.0% Defense, 21.0% Social Security & Medicare, and 14.0% Safety Net System.
In my view, the budget cuts will come exclusively from the people and their homes and work centers, their pensions, their Social Security & Medicare. Tax deduction removals and phaseouts will be a centerpiece. The war machine has given stress to the defense contractors, who will be expected to absorb cost overruns in weapons programs, according to recent Pentagon pronouncements. Enormous costs are involved with the war machine support. The base military budget is $536 billion. The extended budget for the wars adds another $170 billion in supplemental spending, which officials prefer to call Overseas Contingency Operations since it sounds more sophisticated.
The total sum, over $700 billion per year, is the sacred cost of the USMilitary. It includes hundreds of overseas bases, lavish embassies, and endless weapon systems, of types conventional, nuclear, and drones. The United States spends as much on annual military investment as the rest of the world combined, according to the Stockholm Intl Peace Research Institute. One must wonder if the wars are to produce enemies. The United States maintains troops at more than 560 bases and other sites abroad. The outsized yawning Defense spending is a primary cause for USGovt insolvency. It has a staggering deficit impact on the budget and the negative international image of the nation. Watch the unfolding events as the USGovt and USCongress grapple with spending cuts. They will avoid Pentagon and defense budget cuts with fierce opposition. This is a key part of the Fascist Business Model, as sacred as Wall Street largesse.
Harken back to the 1950 decade, during the post-WW2 glow. President Dwight Eisenhower once said, "Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed." The words from Ike fell on deaf ears. Not until the last decade have his words rung shrill. He never met the current crowd in control, but he could see a path to their evolution, which he called the Military Industrial Complex. No disrespect is meant to soldiers who have sacrificed. One must wonder for what cause their sacrifice has been, and toward what outsized profits to defense and service contractors, even Syndicate bank accounts. Talk has already begun, that "out of respect for our fighting soldiers and veterans" who have served in active duty, the defense budget will be spared of cuts. Watch the priorities be revealed as the battle unfolds over the budget. In my view, the potential for defense cuts and huge savings is great but it will not be tapped. Instead the people will be asked to expect less aid, to rely upon less, to eat less, to expect less federal help, and endure poverty more.
SHADOW HOME INVENTORY
The standard inventory of homes comes from brokers and multilists. The hidden inventory of homes adds another 50% to 80% to the working supply, half of that from pending seizures, half from bank owned units festering on their balance sheets. Home prices cannot rise in such a deeply distressed climate. The unofficial shadow inventory is another one million homes. Any economist who overlooks the hidden supply of homes is a hack. The housing market cannot recovery for another two years, until it works off the hidden inventory. The problem is that the ongoing home foreclosures results in more bank seizures, and a steady source of renewed hidden inventory. Housing is a crippled market, one that acts like a gigantic millstone around the USEconomy. Housing prices will descend further in 2011, as the shadow inventory acts with powerful forces upon the Supply & Demand equation. It still applies despite any messianic proclamations from banking high priests or Wall Street marketing agents. The mainstream has finally begun to grasp the wreckage and ruin, but not that the housing sector will cause a systemic failure for the nation. It is most assuredly coming. The contradictions and shallow work of Roubini are worth a pass. His work has been ridiculed in the past by the Jackass, like a few months ago when he expected the gold market to turn down. Instead, it rose another 10% to 15% in a string of breakouts. Yet he is still revered, and sought as a guest on the financial networks.
Nouriel Roubini offers some obvious commentary, followed by contradictory nonsense about a USEconomic recovery. His inconsistency earns him a 'C Minus' grade in his own class. The professor is a fool once again. Roubini acknowledges that the housing market is in a double dip, as prices can only go down. He brought attention to what he called below trend economic growth as baseline, but also two negative factors specific to the housing market. The first factor is the expiration of federal home buyer tax credits for first-time home buyers. The housing prices have been falling every month since the tax credit expired last May. He correctly identified the stolen demand from the future to take advantage of the home buyer credit. So he makes an obvious point. The second factor putting downward pressure on home prices is the ongoing chaos with mortgage documentation, and the related temporary moratorium by banks for mortgage foreclosure proceedings. The suspension appears to be ending. Aware of an imminent flood of housing supply, Roubini said "There has been an effective moratorium on foreclosures. The shadow inventory of not-yet-foreclosed homes, due to the moratorium, will surge in the next year. Supply will increase, demand will drop." Obvious points, enough to force a USEconomic recession without a remote chance otherwise.
Roubini remains a shallow economist without strong basis for his opinions, even plain contradictions. He does not expect a double dip recession, since he believes the USGovt kool-aid on doctored statistics. The dull blade Roubini said, "The rest of the economy is recovering. Most of the numbers are consistent with a growth rate of 2.7%, still below trend. So unemployment will likely remain above 9%. The EuroZone shock, long-term structural deficits, and state & local governments operating near bankruptcy are other ominous economic signs on the horizon. The 12 million households are already in negative equity and 8 million more have an Loan-to-Value between 95% and 100%. Thus even a 5% fall in home price will push an extra 8 million in negative equity with risk of millions walking away from their home, i.e. jingle mail." Without realization, he undermines his own assessment of slow USEconomic growth, and provides ample justification for a worse recession than already is in progress. His housing market observations contradict his economic outlook. He does not realize (or admit) that price inflation is running at over 7% right here, right now. Therefore the GDP estimates are all way high, exaggerated by 5% or more. The USEconomy is mired in a deep recession. Sadly, Roubini is a victim of the establishment, which ordered him to compromise his work in order to continue to occupy an important post. See the CNBC article.
The Great Roubini is awakening to the disaster in housing, but he does not yet grasp how it will result in a systemic USEconomic failure. He begins with a slow growth scenario, then cannot justify it, even to contradict it while discussing relevant factors. He will be one of the first shoddy economists to claim the USEconomy is in recovery, as price inflation accelerates, which will incorrectly be labeled it growth. My theory is simple. If the entire USEconomy depended upon the housing boom to expand from 2003 to 2007, then it will be capable of collapsing the same structures given the extreme vulnerability to debt. The vicious cycle will be powerful, unstoppable, and deadly. It has been game over since the September 2008 events when the US banking system collapsed and died, led by Lehman Brothers, Fannie Mae, and AIG. The weight of the continuing housing market decline, combined with strangulation in the banks with toxic debt paper and a surplus of home inventory, is easily sufficient to cause a systemic failure to the entire USEconomy. The big banks are stuck in mud at the cemetery gate. That failure is in progress with momentum. Guys like Roubini and Krugman will be the last to realize the collapse. They are celebrated cheerleaders within the system, compromised souls.
LABOR MARKET STEP-DOWN
The economic step-down is a hidden powerful effect in the de-industrialization of America. The job growth is not a sufficient condition for the USEconomy recovery. People are taking lesser jobs, with huge declines in income. Fewer opportunities exist, while survival demands tough decisions. The endless USEconomic recession has an ugly trademark. People are taking steep pay cuts, enduring lasting reductions in wages. People are taking jobs far below their skill levels. Between 2007 and 2009, more than half the full-time workers who lost jobs (held for at least three years) and found new jobs later reported wage declines, according to the USDept Labor. The detail is 36% of them reported the new job paid 20% less than the previous lost job. An effect rarely seen in recessions since the Great Depression, wages have taken a sharp and swift decline for a significant slice of the labor market. THIS IS A THIRD WORLD HARBINGER. It is worse for many others. The unemployment rolls include 14.5 million people, even 6.4 million stuck jobless for more than six months. A key part of earnings losses, according to the survey, is that workers skills acquired over the last two decades that are fast becoming outdated and obsolete. Then instead of gaining new skills for a higher paying job, they often settle for a lower wage and stop their job hunts, unable to benefit from training. Lack of retraining programs is a huge dropped ball by the USGovt, whose economists cannot find their hind parts with their hands. Research shows that children of displaced workers also suffer in a domino effect. Even those fortunate to remain on the same jobs have seen wage cuts. Many assume more duties too.
RETAIL LEADERS ON THE ROPES
Howard Davidowitz screams his case on the broad retail distress, with details. He warns of huge unresolved problems with commercial property loans, with great stress for landlords. A Paradigm Shift is underway, for smaller footprint shopping centers, as the United States footprint is double anything reasonable. The consumer model is fast breaking down. Davidowitz does not mince words, as he destroyed the illusion of a USEconomic recovery, pointing out absolutely no consumer renaissance. During a recent Bloomberg interview, retail expert Howard Davidowitz shattered the consensus klapptrapp, with quality content and logical thought. He said, "I am not surprised by the strength of retail sales, because I knew that 30% of consumers are responsible for retail sales, and these 30% did much better because of the performance of capital markets. I do not think it is indicative of anything going forward. I do not think the economy is going to get any better. If you look at our fiscal and monetary policy, we went two trillion dollars in the hole last year. Two trillion, to produce this, and unemployment went up to 9.8%! We have spent two trillion dollars. We are printing money. We are going bananas. Our the balance sheet, we have $2.6 trillion on there, and for what? Look at government securities, and mortgage backed securities. If interest rates go up a point Bernanke's bankrupt. Everything he has bought is underwater. All the mortgage bonds are underwater, the whole country is underwater. Does anyone see the issue now with why rising interest rates, aside from predicting a supposed recovery, may also, courtesy of its [greatly increased wrecked bond investments], actually predicts the insolvency of the Federal Reserve?" His comments are not a breath of fresh air, strewn with honesty.
Davidowitz provided several key observations on the supposed retail renaissance. Wal-Mart makes for 10% of US retail sales, has 150 million customers, and its stock it is down six consecutive quarters, not a good sign. Sears is the largest department store in America, but their stock is in terrible shape. Best Buy suffered a huge earnings miss. The financial loss recorded by ToysRUs increased last quarter. Supermarket chain A&P recently filed for bankruptcy. Department store chain Loehmanns just filed for bankruptcy. Charming Shoppes announced plans to close 100 stores. TJMaxx just liquidated AJRight. Davidowitz honed in on Sears for crucifixion. Sears is in the tank, ready to fold its tents in his opinion. Eddie Lampert took over the company recently from his hedge fund position, lacking any conceivable operational experience. He has engrained a policy that departs from price competition. He has not invested in capital equipment upgrades. He has sold his best stores. His online investment has not succeeded. The corporation is gutted, heading for the dumpster, then cemetery. If Lampert were smart, he would sell the company to a greater fool. A joke has surfaced, that A&P might merge with Stop & Shop, with a new corporate name of Stop & Pee, which would open enormous marketing potential.
In addition to dissecting the collapse of Sears, analyst Davidowitz observed what should be a loud glaring alarm signal for guys like Ackman and all those who are betting on the resurgence of the US mall storefront with vehicles like General Growth. The bulk of retail store traffic is moving online, where incidentally the only jobs created are those of packagers and quality control line people either in China or in some warehouse in Texas, California, or Florida. Davidowitz said, "Online sales have to lead you to question the whole retail selling strategy. We have 21 square feet of selling space for every man woman and child in this country. We already have double of what we need. With the explosion of online sales, what happens to all these retail malls and shopping centers which are marginals? Huge changes are going to be taking place as people continue shopping online. A revolution in retail is coming in both size and location of stores, a trend starting with the advent of much smaller Wal-Mart stores. In the end what to do with the retail space is going to be a huge question for retail in the next ten years. That is why Wal-Mart is starting to build smaller stores. That is why Wal-Mart is building more overseas than they are building here. It is going to be the biggest retail change that we have ever seen." The bulldozing of half the US retail malls will be a positive move for economic progress, but extremely disruptive.
The biggest losers in the maverick analyst's estimation will be commercial real estate landlords. Expect great pain for the REIT investments (stock trusts). Howard continues in his railing, making the point of commercial loans next collapsing, a point made by the Jackass for the last 18 months or more. He said "Landlords better start figuring it out pretty quick because they already have occupancy problems, rent problems, and everything else right now. I do not think the Commercial Real Estate (CRE) problems are fixed by any means. That is why we are going to close hundreds of community banks going forward. We are going to close hundreds more. Those CRE debts are coming due and they will not be able to be rolled over. We have lots of problems still coming up in the banking system, and the problems in the real estate issue is here for a long time. In other news, Kool Aid to be served in aisle 5 of the next door Sears box from now until permanent closing time." The man is solid as a rock in his retail analysis, accurate as a sharp knife, with no nonsense.
COMPLEX SOCIETIES & SYSTEMS
Complex societies do not last forever. They break down from internal stresses as often as from external. A society must maintain its system, with more energy expended when more complex. The reserves can be tapped repeatedly if crisis is not averted from regulatory machinery. In time, neglect enters the picture, as stresses break the fabric. Joseph Tainter is well-known for his classic book entitled "The Collapse of Complex Societies" despite his expertise as an archeologist. He must have done much thinking about the collapse of societies whose ruins he unearthed in massive digs. Tainter is on record with his developed thesis, born out of his dissatisfaction with prevailing collapse theories. His argument is straightforward. Human societies are problem solving organizations, which supply the necessities along with entertainment, as well as training to ensure continuation. The over-arching Sociopolitical systems require energy for their maintenance. If left without proper tending, they fall apart like a garden without attention. Increasing complexity carries with it increased cost per capita. Simple monarchies need much less maintenance than democracies, as voices are heard and justice grinds slowly. Investment in sociopolitical complexity often reaches a point of declining marginal returns, as time passes, interest wanes, justice disappoints. When debt saturation occurs, like today, the cost of maintenance and decline can be overwhelming. The complex system becomes vulnerable to collapse after great stresses and what Tainter calls perturbations, better thought of as disruptions or disturbances.
Stress and perturbation are a constant feature of any complex society, always occurring somewhere in its territory. The developed operating regulatory machinery is designed to deal with unplanned changes. Imagine spotty agricultural failures, border conflicts, large scale accidents, social eruptions, and disease outbreaks. Such localized stress tends to recur with regularity, and thus can be anticipated with preparations. To meet major unexpected stress surges, the society must have some form of net reserve. It can take the form of excess productive capacities in farm output, stored energy, or stockpiled minerals, or hoarded surpluses from past production, even reserve savings. Stress surges of great magnitude cannot be accommodated without such a reserve. A society beset by regular self-inflicted crises will be forced to draw upon its stored reserves too quickly. As declining marginal returns are experienced, the society must contend with rising systemic risk. The costs outweigh the yield put in reserve. Excess productive capacity will at some point be exhausted, and accumulated surpluses allocated to current operating needs will be used up. Even when the adversities are met and the surges are dealt with, a detriment to the system as a whole occurs. The society is weakened in the process, and made more vulnerable to the next crisis. Once a complex society develops the vulnerabilities of declining marginal returns, collapse might require the sufficient passage of time to render probable the occurrence of an insurmountable calamity.
More importantly, declining marginal returns make complexity a less attractive goal to maintain. The problem solving strategy takes a secondary role to instituting simpler systems. The society tends to accept the option for less costly and less sophisticated social forms. The alternative embraced eventually is an endorsed level of disintegration. This has occurred to the United States in grand style. As marginal returns deteriorate, tax rates rise with less benefit to the local level. Irrigation systems go untended, bridges and roads are not maintained, the frontier is not adequately defended, product liability is not protected, and fraud prevention is compromised. Notice in the US how cities exhaust their funds with pension programs, unable to provide proper services like police protection. Notice how the US has countless bridges and pipelines (water, sewer, energy) that have gone without proper care. The nation has turned too much attention to war.
As the process degrades, many of the social units that comprise a complex society no longer pursue the increased general advantage, and instead pursue a strategy of personal independence. Then begins a different pursuit of their own immediate goals rather than long-term goals of the networked hierarchy. They see little benefit coming from systemic contributions. Behavioral interdependence (constructive groups) yields way to broader independence (working on one's own). Shrinking resources are strained even more, as control slides away and is lost. The investment in regulatory systems is crucial, as efficiency devices. When they degrade into support systems for corruption, the system falters from its own rotten moral fabric and invites the seeds of rebellion. Eventually, perturbation occurs from within, as civil disobedience takes root. The lack of justice, the apparent predation by the upper hierarchy levels (bankers), and public frustration breeds anarchy like thousands of microdots within the society. See the home mortgage voluntary defaults. Justice is a delicate factor within a society. When justice is dealt, order tends to be preserved. When justice is absent, like for the big US banks, like for military aggression, the people object and depart from norms. The presence in the last two decades of bigger amplitudes in the crisis pain and cost, together with greater frequency of events in cycles, has combined to deplete the reserves of the nation. The Rubin Doctrine of surviving today even if taking aware reserves from tomorrow has assured much greater risk of systemic ruin. In my view, it has guaranteed ruin and collapse. See the Naked Capitalism for a thought provoking article. Complex systems are fascinating, especially when they enter a period of dysfunction.
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January 12, 2011
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BOND OUTFLOWS
Huge outflows have struck from US-based bond funds, while the outflows continue for stock funds since may 2010. Even the flagship pimco bond fund saw net redemptions. The public is stepping aside as the usfed does its destructive work. No end is in sight for the stock fund outflows. A public boycott seems firmly in place. The new event is the largest bond fund outflow in almost 30 months. The Investment Company Institute reported that in the week ended December 15th, another massive outflow took place from domestic stock funds. It was the 33rd week in a row, amounting to an exit of $2.4 billion. Worse, taxable and municipal bonds saw a nasty shocker of $8.62 billion in outflows, which included another record $4.9 billion in muni bond outflows. Bond mutual funds had the biggest client withdrawals in more than two years, as a flight from fixed income investments has accelerated. The withdrawals were the largest since mid-October 2008, when investors pulled out $17.6 billion from bond funds. The US bond fund retreat showed acceleration signs, since the rise was from $1.66 billion the week before, according to the ICI report. So outflows are in progress for both US stocks and US bonds!! Year to date, investors have yanked $100 billion in funds from US-focused equity mutual funds, offset by a smaller $16 billion in comparable inflows into equity strategies via ETFunds. The $250 billion PIMCO Total Return Fund, managed by Bill Gross, had its first net withdrawals in two years in November as investors pulled $1.9 billion, according to Morningstar.
The public has grown jaded by stories of flash trading smears of the stock market, insider trading scandals, and incessant internal reports of stock support from the Working Group for Financial Markets. They sense stock prices are heavily manipulated and not a reflection of true value. They might on a wider basis believe that most US financial markets are either in ruins or corrupted. The vast record outflows accompany a rise in the S&P500 stock index, which is a clear signal of USGovt prop programs in a corrupt market. Ridiculous illogical and ludicrous interpretations continue to be disseminated about the USEconomy in recovery. The false story has become a billboard message of deception. We are told that investors are retreating from bond funds after signs of an economic recovery and a stock market rally, which have lifted interest rates broadly. The reality is something quite different. The selloff in USTreasurys happened exactly after the US Federal Reserve in November offered specific details on its pledge to purchase $600 billion in bond assets to revive the sluggish USEconomy. The 10-year USTreasury yields lie in the 3.2% to 3.4% range, much higher than the 2.49% in the first week of November. The bond market contradiction to the USFed monetization plan is without precedent in US bond market history, a grandiose insult.
The QE2 team is buying $100 billion in USTBonds per month, taking up the slack, without producing any decline in bond yields. The USFed is running a dangerous desperate gambit. Attempts to hold together the ustreasury market during its QE2 strongarm episode are underway. Obviously the USFed is the USTreasury market, with outsized USTBond purchases as part of its QE2 program. An approved posse of market specialists is buying hundreds of $billions of USTreasury securities on the open market. They are filling a vacuum. They are offsetting global creditors in abandonment. They bought in 2011 a full 75% of all USGovt debt issuance, just like Banana Republics!! They must keep the interest rates low. They must prevent a credit derivative blowup event. The USFed is fast losing all credibility, exhausting its power, testing its limits, fighting off demands for independent audits. The QE2 team seeks the best price available. However, due the fully advertised initiative and the heavy volume, is destined to pay a premium price. They have tipped their hand, as they buy $100 billion per month in USTreasurys. It is not possible to be a known buyer with a schedule and agenda, and execute favorable prices. An unexpected backfire occurred on the way to the QE2 launch. Bond yields fell sharply between August and November as the markets anticipated the new program. Bond yields have defiantly risen since details on QE2 were formally announced in November, delivering losses to the frontrunners in the autumn months. Too much doubt was left lingering on the volume of the program, and furthermore, whether a QE3 would launch. Bernanke actually hinted of a third launch, foolishly. The states need several hundred $billion, another monetization object.
GOLD & SILVER PREPARE FOR ANOTHER BREAKOUT
A major consolidation is taking place in the Gold price. A near total disconnect has occurred between the physical Gold & Silver markets and the control strings from the paper futures market held by the maestros. Grotesque shortages exist in silver. Difficulties in gold delivery are commonplace. The central banks and Bank For Intl Settlements scramble to keep gold & silver supplied to the exchanges, in order to avert openly visible defaults. A strong uptrend with rising moving averages is evident in Gold. The breakout in October has been consolidating for three full months, while Europe experiences its open sores of sovereign debt distress. Its price will soon encounter the uptrend lines for likely ignition. When a European aid package is assembled, whether of substance or not, merely if it seems credible, the Euro currency will rebound and the Gold bull will resume. In year 2011, the global monetary system will fracture in visible fashion. Its broken debt foundation will be the proximal cause. Gold is widely regarded as a reserve asset, no longer a stodgy secure asset for Arab sheiks. The dirtiest little secret might be that private Wall Street firm accounts own vast Gold bullion accounts, while their corporate banking entities in South Manhattan own the short futures positions, soon to be dumped on the USGovt in formal fashion. The greatest propulsion force to the Gold price is obviously the USFed and its grandiose QE2 initiative. Their purchase of $100 billion in USTBonds per month signifies that they are the USTreasury Bond market. PIMCO is worried sick about the unbridled monetization. The USFed monetized 75% of USGovt debt in 2011. When the USFed is done with QE2, they will argue for a QE3, probably to cover state debt shortfalls. The precedent has been set. The global currency war is in full swing. Simply put, the Gold price will rise when China is prepared to pay a higher price, after exhausting supply at lower prices.
The greatest offender in currency manipulation and currency undermine is the United States. It is essential that the USGovt continue to make accusations against foreign central bankers, in order to deflect attention. The problem is QE2, and the likelihood of a followup QE3. The USGovt is without permission forcing a debt writedown on foreign USTreasury creditors by installing inflation engines. See the commodity prices, led by food & energy. The USFed and USDept Treasury will proclaim victory by mid-summer, as price inflation begins to rage much hotter. They will call it economic growth. Check import price inflation from the last three months of 2011. Import prices rose 3.7% during that brief time. Not just emerging economies like China and Brazil are contending with price inflation. The US does too, but it calls it growth, since its economic trackers are much more accomplished decepticons. When job losses mount in the second half of 2011, the lies will be unmasked. The USFed is the greatest destoyer of working capital in the history of the world. Their balance sheet is negative $1 trillion and growing worse, their highly appropriate report card. Their wretched financial condition matches their decaying reputation. They are the buyer of worthless toxic bonds, the buyer of last resort. The housing market will NOT recover to bail them out.
USGOVT BUDGET BATTLES
Budget battles are sure to reveal the true fascist motives of those in power. The people will be denied while the war machine is preserved, guns & bombs over bread & butter, big banks over households. In fact, the defense budgets will not be reduced. Rather, defense contractors will be forced to eat cost overruns without volume cutbacks in weapon units at all. The war is sacred, the signature mark of the fascist state. The USGovt seems to have suddenly found religion in reducing the budget and its deeply engrained deficit. It is more superficial than from the heart with conviction. The new wave is all about perceptions. To be sure, some in the USCongress are worried sick and scared pale over the prospects of a structural $trillion deficit. A decade ago such a deficit magnitude would be considered a telltale signature of a Banana Republic nation sliding toward the Third World perilously. The budget battle with the new USCongress will be extremely revealing of the priorities for the Syndicate in full control of the USGovt and press networks. The budget process will in my view continue to place the war as a sacred priority not to be touched, not to be altered, not to be disrupted. In rough terms, the USGovt budget contains components 20.0% Defense, 21.0% Social Security & Medicare, and 14.0% Safety Net System.
In my view, the budget cuts will come exclusively from the people and their homes and work centers, their pensions, their Social Security & Medicare. Tax deduction removals and phaseouts will be a centerpiece. The war machine has given stress to the defense contractors, who will be expected to absorb cost overruns in weapons programs, according to recent Pentagon pronouncements. Enormous costs are involved with the war machine support. The base military budget is $536 billion. The extended budget for the wars adds another $170 billion in supplemental spending, which officials prefer to call Overseas Contingency Operations since it sounds more sophisticated.
The total sum, over $700 billion per year, is the sacred cost of the USMilitary. It includes hundreds of overseas bases, lavish embassies, and endless weapon systems, of types conventional, nuclear, and drones. The United States spends as much on annual military investment as the rest of the world combined, according to the Stockholm Intl Peace Research Institute. One must wonder if the wars are to produce enemies. The United States maintains troops at more than 560 bases and other sites abroad. The outsized yawning Defense spending is a primary cause for USGovt insolvency. It has a staggering deficit impact on the budget and the negative international image of the nation. Watch the unfolding events as the USGovt and USCongress grapple with spending cuts. They will avoid Pentagon and defense budget cuts with fierce opposition. This is a key part of the Fascist Business Model, as sacred as Wall Street largesse.
Harken back to the 1950 decade, during the post-WW2 glow. President Dwight Eisenhower once said, "Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed." The words from Ike fell on deaf ears. Not until the last decade have his words rung shrill. He never met the current crowd in control, but he could see a path to their evolution, which he called the Military Industrial Complex. No disrespect is meant to soldiers who have sacrificed. One must wonder for what cause their sacrifice has been, and toward what outsized profits to defense and service contractors, even Syndicate bank accounts. Talk has already begun, that "out of respect for our fighting soldiers and veterans" who have served in active duty, the defense budget will be spared of cuts. Watch the priorities be revealed as the battle unfolds over the budget. In my view, the potential for defense cuts and huge savings is great but it will not be tapped. Instead the people will be asked to expect less aid, to rely upon less, to eat less, to expect less federal help, and endure poverty more.
SHADOW HOME INVENTORY
The standard inventory of homes comes from brokers and multilists. The hidden inventory of homes adds another 50% to 80% to the working supply, half of that from pending seizures, half from bank owned units festering on their balance sheets. Home prices cannot rise in such a deeply distressed climate. The unofficial shadow inventory is another one million homes. Any economist who overlooks the hidden supply of homes is a hack. The housing market cannot recovery for another two years, until it works off the hidden inventory. The problem is that the ongoing home foreclosures results in more bank seizures, and a steady source of renewed hidden inventory. Housing is a crippled market, one that acts like a gigantic millstone around the USEconomy. Housing prices will descend further in 2011, as the shadow inventory acts with powerful forces upon the Supply & Demand equation. It still applies despite any messianic proclamations from banking high priests or Wall Street marketing agents. The mainstream has finally begun to grasp the wreckage and ruin, but not that the housing sector will cause a systemic failure for the nation. It is most assuredly coming. The contradictions and shallow work of Roubini are worth a pass. His work has been ridiculed in the past by the Jackass, like a few months ago when he expected the gold market to turn down. Instead, it rose another 10% to 15% in a string of breakouts. Yet he is still revered, and sought as a guest on the financial networks.
Nouriel Roubini offers some obvious commentary, followed by contradictory nonsense about a USEconomic recovery. His inconsistency earns him a 'C Minus' grade in his own class. The professor is a fool once again. Roubini acknowledges that the housing market is in a double dip, as prices can only go down. He brought attention to what he called below trend economic growth as baseline, but also two negative factors specific to the housing market. The first factor is the expiration of federal home buyer tax credits for first-time home buyers. The housing prices have been falling every month since the tax credit expired last May. He correctly identified the stolen demand from the future to take advantage of the home buyer credit. So he makes an obvious point. The second factor putting downward pressure on home prices is the ongoing chaos with mortgage documentation, and the related temporary moratorium by banks for mortgage foreclosure proceedings. The suspension appears to be ending. Aware of an imminent flood of housing supply, Roubini said "There has been an effective moratorium on foreclosures. The shadow inventory of not-yet-foreclosed homes, due to the moratorium, will surge in the next year. Supply will increase, demand will drop." Obvious points, enough to force a USEconomic recession without a remote chance otherwise.
Roubini remains a shallow economist without strong basis for his opinions, even plain contradictions. He does not expect a double dip recession, since he believes the USGovt kool-aid on doctored statistics. The dull blade Roubini said, "The rest of the economy is recovering. Most of the numbers are consistent with a growth rate of 2.7%, still below trend. So unemployment will likely remain above 9%. The EuroZone shock, long-term structural deficits, and state & local governments operating near bankruptcy are other ominous economic signs on the horizon. The 12 million households are already in negative equity and 8 million more have an Loan-to-Value between 95% and 100%. Thus even a 5% fall in home price will push an extra 8 million in negative equity with risk of millions walking away from their home, i.e. jingle mail." Without realization, he undermines his own assessment of slow USEconomic growth, and provides ample justification for a worse recession than already is in progress. His housing market observations contradict his economic outlook. He does not realize (or admit) that price inflation is running at over 7% right here, right now. Therefore the GDP estimates are all way high, exaggerated by 5% or more. The USEconomy is mired in a deep recession. Sadly, Roubini is a victim of the establishment, which ordered him to compromise his work in order to continue to occupy an important post. See the CNBC article.
The Great Roubini is awakening to the disaster in housing, but he does not yet grasp how it will result in a systemic USEconomic failure. He begins with a slow growth scenario, then cannot justify it, even to contradict it while discussing relevant factors. He will be one of the first shoddy economists to claim the USEconomy is in recovery, as price inflation accelerates, which will incorrectly be labeled it growth. My theory is simple. If the entire USEconomy depended upon the housing boom to expand from 2003 to 2007, then it will be capable of collapsing the same structures given the extreme vulnerability to debt. The vicious cycle will be powerful, unstoppable, and deadly. It has been game over since the September 2008 events when the US banking system collapsed and died, led by Lehman Brothers, Fannie Mae, and AIG. The weight of the continuing housing market decline, combined with strangulation in the banks with toxic debt paper and a surplus of home inventory, is easily sufficient to cause a systemic failure to the entire USEconomy. The big banks are stuck in mud at the cemetery gate. That failure is in progress with momentum. Guys like Roubini and Krugman will be the last to realize the collapse. They are celebrated cheerleaders within the system, compromised souls.
LABOR MARKET STEP-DOWN
The economic step-down is a hidden powerful effect in the de-industrialization of America. The job growth is not a sufficient condition for the USEconomy recovery. People are taking lesser jobs, with huge declines in income. Fewer opportunities exist, while survival demands tough decisions. The endless USEconomic recession has an ugly trademark. People are taking steep pay cuts, enduring lasting reductions in wages. People are taking jobs far below their skill levels. Between 2007 and 2009, more than half the full-time workers who lost jobs (held for at least three years) and found new jobs later reported wage declines, according to the USDept Labor. The detail is 36% of them reported the new job paid 20% less than the previous lost job. An effect rarely seen in recessions since the Great Depression, wages have taken a sharp and swift decline for a significant slice of the labor market. THIS IS A THIRD WORLD HARBINGER. It is worse for many others. The unemployment rolls include 14.5 million people, even 6.4 million stuck jobless for more than six months. A key part of earnings losses, according to the survey, is that workers skills acquired over the last two decades that are fast becoming outdated and obsolete. Then instead of gaining new skills for a higher paying job, they often settle for a lower wage and stop their job hunts, unable to benefit from training. Lack of retraining programs is a huge dropped ball by the USGovt, whose economists cannot find their hind parts with their hands. Research shows that children of displaced workers also suffer in a domino effect. Even those fortunate to remain on the same jobs have seen wage cuts. Many assume more duties too.
RETAIL LEADERS ON THE ROPES
Howard Davidowitz screams his case on the broad retail distress, with details. He warns of huge unresolved problems with commercial property loans, with great stress for landlords. A Paradigm Shift is underway, for smaller footprint shopping centers, as the United States footprint is double anything reasonable. The consumer model is fast breaking down. Davidowitz does not mince words, as he destroyed the illusion of a USEconomic recovery, pointing out absolutely no consumer renaissance. During a recent Bloomberg interview, retail expert Howard Davidowitz shattered the consensus klapptrapp, with quality content and logical thought. He said, "I am not surprised by the strength of retail sales, because I knew that 30% of consumers are responsible for retail sales, and these 30% did much better because of the performance of capital markets. I do not think it is indicative of anything going forward. I do not think the economy is going to get any better. If you look at our fiscal and monetary policy, we went two trillion dollars in the hole last year. Two trillion, to produce this, and unemployment went up to 9.8%! We have spent two trillion dollars. We are printing money. We are going bananas. Our the balance sheet, we have $2.6 trillion on there, and for what? Look at government securities, and mortgage backed securities. If interest rates go up a point Bernanke's bankrupt. Everything he has bought is underwater. All the mortgage bonds are underwater, the whole country is underwater. Does anyone see the issue now with why rising interest rates, aside from predicting a supposed recovery, may also, courtesy of its [greatly increased wrecked bond investments], actually predicts the insolvency of the Federal Reserve?" His comments are not a breath of fresh air, strewn with honesty.
Davidowitz provided several key observations on the supposed retail renaissance. Wal-Mart makes for 10% of US retail sales, has 150 million customers, and its stock it is down six consecutive quarters, not a good sign. Sears is the largest department store in America, but their stock is in terrible shape. Best Buy suffered a huge earnings miss. The financial loss recorded by ToysRUs increased last quarter. Supermarket chain A&P recently filed for bankruptcy. Department store chain Loehmanns just filed for bankruptcy. Charming Shoppes announced plans to close 100 stores. TJMaxx just liquidated AJRight. Davidowitz honed in on Sears for crucifixion. Sears is in the tank, ready to fold its tents in his opinion. Eddie Lampert took over the company recently from his hedge fund position, lacking any conceivable operational experience. He has engrained a policy that departs from price competition. He has not invested in capital equipment upgrades. He has sold his best stores. His online investment has not succeeded. The corporation is gutted, heading for the dumpster, then cemetery. If Lampert were smart, he would sell the company to a greater fool. A joke has surfaced, that A&P might merge with Stop & Shop, with a new corporate name of Stop & Pee, which would open enormous marketing potential.
In addition to dissecting the collapse of Sears, analyst Davidowitz observed what should be a loud glaring alarm signal for guys like Ackman and all those who are betting on the resurgence of the US mall storefront with vehicles like General Growth. The bulk of retail store traffic is moving online, where incidentally the only jobs created are those of packagers and quality control line people either in China or in some warehouse in Texas, California, or Florida. Davidowitz said, "Online sales have to lead you to question the whole retail selling strategy. We have 21 square feet of selling space for every man woman and child in this country. We already have double of what we need. With the explosion of online sales, what happens to all these retail malls and shopping centers which are marginals? Huge changes are going to be taking place as people continue shopping online. A revolution in retail is coming in both size and location of stores, a trend starting with the advent of much smaller Wal-Mart stores. In the end what to do with the retail space is going to be a huge question for retail in the next ten years. That is why Wal-Mart is starting to build smaller stores. That is why Wal-Mart is building more overseas than they are building here. It is going to be the biggest retail change that we have ever seen." The bulldozing of half the US retail malls will be a positive move for economic progress, but extremely disruptive.
The biggest losers in the maverick analyst's estimation will be commercial real estate landlords. Expect great pain for the REIT investments (stock trusts). Howard continues in his railing, making the point of commercial loans next collapsing, a point made by the Jackass for the last 18 months or more. He said "Landlords better start figuring it out pretty quick because they already have occupancy problems, rent problems, and everything else right now. I do not think the Commercial Real Estate (CRE) problems are fixed by any means. That is why we are going to close hundreds of community banks going forward. We are going to close hundreds more. Those CRE debts are coming due and they will not be able to be rolled over. We have lots of problems still coming up in the banking system, and the problems in the real estate issue is here for a long time. In other news, Kool Aid to be served in aisle 5 of the next door Sears box from now until permanent closing time." The man is solid as a rock in his retail analysis, accurate as a sharp knife, with no nonsense.
COMPLEX SOCIETIES & SYSTEMS
Complex societies do not last forever. They break down from internal stresses as often as from external. A society must maintain its system, with more energy expended when more complex. The reserves can be tapped repeatedly if crisis is not averted from regulatory machinery. In time, neglect enters the picture, as stresses break the fabric. Joseph Tainter is well-known for his classic book entitled "The Collapse of Complex Societies" despite his expertise as an archeologist. He must have done much thinking about the collapse of societies whose ruins he unearthed in massive digs. Tainter is on record with his developed thesis, born out of his dissatisfaction with prevailing collapse theories. His argument is straightforward. Human societies are problem solving organizations, which supply the necessities along with entertainment, as well as training to ensure continuation. The over-arching Sociopolitical systems require energy for their maintenance. If left without proper tending, they fall apart like a garden without attention. Increasing complexity carries with it increased cost per capita. Simple monarchies need much less maintenance than democracies, as voices are heard and justice grinds slowly. Investment in sociopolitical complexity often reaches a point of declining marginal returns, as time passes, interest wanes, justice disappoints. When debt saturation occurs, like today, the cost of maintenance and decline can be overwhelming. The complex system becomes vulnerable to collapse after great stresses and what Tainter calls perturbations, better thought of as disruptions or disturbances.
Stress and perturbation are a constant feature of any complex society, always occurring somewhere in its territory. The developed operating regulatory machinery is designed to deal with unplanned changes. Imagine spotty agricultural failures, border conflicts, large scale accidents, social eruptions, and disease outbreaks. Such localized stress tends to recur with regularity, and thus can be anticipated with preparations. To meet major unexpected stress surges, the society must have some form of net reserve. It can take the form of excess productive capacities in farm output, stored energy, or stockpiled minerals, or hoarded surpluses from past production, even reserve savings. Stress surges of great magnitude cannot be accommodated without such a reserve. A society beset by regular self-inflicted crises will be forced to draw upon its stored reserves too quickly. As declining marginal returns are experienced, the society must contend with rising systemic risk. The costs outweigh the yield put in reserve. Excess productive capacity will at some point be exhausted, and accumulated surpluses allocated to current operating needs will be used up. Even when the adversities are met and the surges are dealt with, a detriment to the system as a whole occurs. The society is weakened in the process, and made more vulnerable to the next crisis. Once a complex society develops the vulnerabilities of declining marginal returns, collapse might require the sufficient passage of time to render probable the occurrence of an insurmountable calamity.
More importantly, declining marginal returns make complexity a less attractive goal to maintain. The problem solving strategy takes a secondary role to instituting simpler systems. The society tends to accept the option for less costly and less sophisticated social forms. The alternative embraced eventually is an endorsed level of disintegration. This has occurred to the United States in grand style. As marginal returns deteriorate, tax rates rise with less benefit to the local level. Irrigation systems go untended, bridges and roads are not maintained, the frontier is not adequately defended, product liability is not protected, and fraud prevention is compromised. Notice in the US how cities exhaust their funds with pension programs, unable to provide proper services like police protection. Notice how the US has countless bridges and pipelines (water, sewer, energy) that have gone without proper care. The nation has turned too much attention to war.
As the process degrades, many of the social units that comprise a complex society no longer pursue the increased general advantage, and instead pursue a strategy of personal independence. Then begins a different pursuit of their own immediate goals rather than long-term goals of the networked hierarchy. They see little benefit coming from systemic contributions. Behavioral interdependence (constructive groups) yields way to broader independence (working on one's own). Shrinking resources are strained even more, as control slides away and is lost. The investment in regulatory systems is crucial, as efficiency devices. When they degrade into support systems for corruption, the system falters from its own rotten moral fabric and invites the seeds of rebellion. Eventually, perturbation occurs from within, as civil disobedience takes root. The lack of justice, the apparent predation by the upper hierarchy levels (bankers), and public frustration breeds anarchy like thousands of microdots within the society. See the home mortgage voluntary defaults. Justice is a delicate factor within a society. When justice is dealt, order tends to be preserved. When justice is absent, like for the big US banks, like for military aggression, the people object and depart from norms. The presence in the last two decades of bigger amplitudes in the crisis pain and cost, together with greater frequency of events in cycles, has combined to deplete the reserves of the nation. The Rubin Doctrine of surviving today even if taking aware reserves from tomorrow has assured much greater risk of systemic ruin. In my view, it has guaranteed ruin and collapse. See the Naked Capitalism for a thought provoking article. Complex systems are fascinating, especially when they enter a period of dysfunction.
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Jim Willie CB
Editor of the "HAT TRICK LETTER"
Hat Trick Letter
January 12, 2011
http://www.kitco.com/ind/willie/jan132011.html
16 December 2009
Full Circle of Govt Debt Default
by Jim Willie, CB. Editor, Hat Trick Letter | December 15, 2009
The continuation of the bank dominoes took 14 months, but it occurred. The initial destructive impact craters were carved in the United States and England. To be sure, major damage was done to assets in Spain and Greece and other smaller nations in the last year, but their banks had remained insulated. The discredit and death of the central bank franchise system showed first clear evidence in September 2008 on Wall Street. The unique mysterious aspect of banking systems is how they cannot be rebuilt once they turn insolvent. They rot in place, a process accelerated by rotten ethical values, euphemistically called moral hazard. To be sure, much so-called money flows through the dead rotten parts, but nothing becomes resuscitated except balance sheets. And besides, those balance sheets only look better due to accounting rules changes that deviate from mark to market (reality). The distortions magnify and turn cancerous. See the outsized mortgage bonds with no value at all. See the foreclosed homes withheld from the market for sale in bloated bank inventory. See the big bank balance sheets with large entries of idle money sitting in the US Federal Reserve. The dirtiest American secret in the banking world is not monetization of bonds. It is that US banks are deeply insolvent and would have suffered a worse fate in the last year if not for extortion from TARP funds as well as rescue funds coming from syndicate contraband accounts. See the Raw Story article and reference to the United Nations Office on Drugs & Crime (CLICK HERE).
INITIAL BANG
Focus on the bank impact craters, not the assets within those bank portfolios tied to bonds and properties. The US housing market turned down, and the mortgage finance bubble burst. The primary victims were Lehman Brothers, Fannie Mae, and AIG, which all died. Fannie and AIG remain in the Intensive Care located south of the Black Hole down yonder under the USGovt tent. To say they have not died is pure denial at best and stupidity at worst, since they continue to generate grandiose losses, as most rotting dead bodies do. The process is called advanced cadaver decomposition, accelerated by the wondrous financial engineering acid reflux. The tales of destruction in dead banks from the initial bang extended to the AngloSphere as Northern Rock, Royal Bank of Scotland, and HBOS effectively died. It remains to be seen if the venerable Lloyds is an empty shell prone and a cave-in also. Nevermind the details of the many death spirals. Focus on the dominoes and their sequential steps in magnificent wreckage. Marvel at the total lack of recognition by the official spokesmen for financial reality at the USDept Treasury, Wall Street analysts, London analysts, and European analysts. They never comment on sovereign debt insurance or default. Both are covered in the December Hat Trick Letter.
One must inquire why the blindness. The main reasons are many, but two stick out from the aerial view. The bank leaders and their supporting cast are attempting to accomplish the impossible. They strive to revive a dead entity, drained of structural integrity, lacking in motivation to function in capital formation, devoid of vibrant liquidity flow, and directly attached to the syndicate strongholds where the drain continues. They live and operate within their Dome of Fiat Perception, whose major layer is the Dome of American Perception. Unfortunately, those working within the American fence posts suffer the greatest blindness, the tragic effect of engrained arrogance after years of incredibly broad bully tactics and criminal abuse. For those sleepy brain-dead in denial of criminal abuse, a challenge. Just identify where the prosecutions are for multi-trillion dollar bond fraud in global export of toxic mortgage bonds and their derivative brethren, perpetrated by protected Wall Street firms! If one cannot identify, please sit down and be quiet, since clearly integrity was perhaps checked in at the corporate gate in exchange for a paycheck. Wall Street prefers to call the fraud mere errors of judgment. And a murder spree at a shopping mall is an firearms accident! A closer examination can detect continuity in the Treasury Secy post, and in the Securities & Exchange Commission, both still showing Wall Street pedigree. They strive to keep the lid on Wall Street legal matters, and do a great job.
DELAYED SECONG BANG
Finally, the harsh reality from the weight of gravity and the passage of time resulted in a second bang. One can always question the motivation of the Dubai World default, and the fact that it occurred when the USDollar was badly oversold. One can question the wisdom to attempt to force Abu Dhabi to cover the bad debts or assumptions that it would cover the bad debts. One can point to a hidden motive to ruin Iranian assets and trade routes, since they own 30% of Dubai properties and benefit from restricted product shipment through Dubai corporations. Regardless, the aerial view is most important. The biggest victims are the London and European banks heavily exposed to Dubai debt. The Powerz prefer to call it a rally on the USDollar from seeking the safety and security. But to the rotten ramparts of the US financial core? HARDLY!! Instead what happened was that the British Pound and Euro currency fell during an expected retreat after a realization of upcoming declared losses. The US has fortified a false front from accounting marked to fantasy that produced a stock rally and recent culmination in the most fraudulent Non-Farm Payroll report in modern history.
The November Jobs Report was dismantled in several pages of the Hat Trick Letter Macro Economic Report just posted, a grand convenient fiction. The easy dismissal has escaped the mainstream lapdog US press. It included Birth-Death Model fictional adjustments (gigantic for past revisions), constant unstable seasonal adjustments, to begin with. Dismissal included weak TrimTabs data, flagging USGovt tax revenue data, a surprise downturn in ISM service sector data, and still prevalent Challenger Gray & Christmas large site job cuts to make a mockery of the ballyhooed report. So the USDollar rally occurred, give them credit, since they needed it to avoid major losses upon the US$ DX futures option expiration. The Powerz got their onions squeezed in a vise and short hairs clipped on the gold futures options expiration three weeks ago, but they avoided a second massacre on the DX expiration last week. Now the US$ has stalled at the downtrend line.
The second bang was not so important in providing a lift in the Dead Man Walking Dollar, as it was in signaling a resumption in the dominoes. The central bank system has its next shock in store. The downgrades to government debt for Greece, Spain, and Portugal given last week by ratings agencies signal upcoming debt related earthquakes. In the United States, the game is known innocuously as Extend & Pretend. The Europeans are gifted in the same chicanery. The entire banking system in Spain has kept housing inventory, whether from foreclosures or ruined projects, at still elevated prices, stubbornly refusing to mark them down the necessary 30% or 50%. As a result, Spain has a wide gap between bid and offer, and a huge inventory sitting idle, a stalemate that leads to sinkholes.
THE NEXT BIG BANG
The second bang from Dubai is the most important destabilizing debt event in 14 months, but minimized in the United States. The US press hardly even mentions the downgrades across European on sovereign debt. The US press actually boasts that the financial markets are handling the Dubai situation very well, and might be past it already. What incredible denial, but much expected. The second bang signals the beginning of sovereign debt defaults, several of them, and the reshaping of Europe, both with the European Union and the Euro currency. The movement toward a Parliamentary European Union might soon be dead on arrival. The split of the Euro currency is soon to become a reality, a forecast made months before the Persian Gulf debt default forecast. The prudent action is to put the Lisbon Treaty on hold while member nations default on sovereign debt.
Spain's Govt default will soon default. The reality of proper accounting for property writedowns and the corresponding bank debt losses will have a calamitous effect. Over 20% unemployment and the powerful recession in progress will ensure a Spanish Govt debt default. But the immediate fireworks are seen in Greece, where the Premier Papandreou has shown defiance. He will not permit the nation to undergo the mindless reckless coerced IMF restrictions and guidelines, with the workers of Greece suffering. The past record of such IMF strictures results in permanent crippling of nations, with too many precedents to fill a single page. Something very unusual comes to Greece in response to official defiance, something unprecedented yet powerful and unpleasant. Riots will return to Athens, with much greater force and intensity, and spread across Europe. But the spillover of emotions will lead to much bigger events. The momentum of Spanish and Greek defaults will kill the European Monetary Union, and thus the EU itself. The re-emergence of the Deutsche Mark is assured, except it will be called a variant of the Euro. The codenames to date are the Core Euro or the Nordic Euro. It will become the official currency of Germany and certain stronger Central Europe nations with a trade surplus. If France manages to be included in the Core, it will be a miracle and pure gift. The Germans will need squires to carry their bags, an expedient perhaps. Effects from the currency on trade export will leave France reeling but Germany struggling.
AFTERSHOCK BANGS
Once the cracks in Europe are broken wide open, the minor European nations will fall like flies trapped in a hot summer window. The Baltic States are weak and will no longer be carried. But the bigger and more visible tragedies will be seen in Eastern Europe. A curious malformation was constructed in recent years. The Eastern European nations attempted a reconstruction, with new industrial development. However, they went too far on the mortgage side, emulating Europe, England, and the United States. In doing so, they mixed in a deadly potion on the mortgage finance formula. The nations of Hungary, Poland, and Czech Republic used cheap Swiss funds in the mortgage funding, and will probably all default on sovereign debt. The base Swiss interest rate of 1.5% pumped money into Eastern European homes. Their local currencies each fell around 40% to 60%, making for a total disaster for Swiss bankers. Translated mortgage losses are in the 70% to 80% range. In fact Swiss bankers are struggling to achieve their equilibrium after deep damage in three aspects: toxic US bonds, devastating Eastern European mortgages, and threats to private bank accounts. The aftershock bangs to the Baltic States and Eastern Europe will set up a powerful additional event that will be seen as a climax.
CLIMAX TO EUROPEAN BANGS
At least one major European nation will suffer the ignominy of a sovereign default. By this time, Spain and Greece will have been wrecked, along with Portugal, possibly Italy also, and maybe even Ireland. The prime victims to close the process of sovereign debt default will include France and the United Kingdom. Considered untouchable, these nations will succumb to the wretched financial foundations that befall them. France unfortunately has too many similarities to Spain, which debtors cannot overlook any longer. The United Kingdom unfortunately has too many similarities to the United States, which debtors cannot overlook since the UK cannot print money like the Americans to buy more time, or draw upon clandestine sources of funds. The UK will run out of time. With the French and British defaults, the game goes ballistic and enters the TWILIGHT ZONE.
RUN ON THE USDOLLAR
Some might look at a dangerous run on the USDollar and a severe decline being the primary requirement for a rise in the gold price. It is true that for a long time the most heavily correlated factor for gold rising has been the US$ falling. A negative correlation has been vividly clear. More importantly though, a transition has begun in the last few months. The most important factor for gold has become, and will continue to be the falling value of the major currencies, all the major currencies, not only the USDollar. One must exclude the Japanese Yen in such an argument, since its 0% interest rate has rendered the Bank of Japan a neutered central bank. Watch the BOJ now, as it actually defends against profound damage from a rising Yen currency in the unprecedented process of an unwind to the grandest carry trade ever connected to financial engineering machinery. In fact, a handoff from the Yen Carry Trade to the Dollar Carry Trade is exactly what the USFed and USDept Treasury wish to interrupt. Never in history has a carry trade been installed to drain the vitality of the global reserve currency, to force and retain a near 0% interest rate, and to enable a continued falling value in the US$.
The most important factor for Gold, worth repeating, has become, and will continue to be the falling value of the major currencies. The entire gaggle of currencies is in deep trouble from government sponsored debasement. The entire gaggle of central banks is in deep trouble from discredit to their franchise system. Gold will rise in a powerful manner from the debasement of the major currencies, in particular the USDollar, the Euro, and the British Pound. The process of currency destruction will involve rotations. The events of the last month have shown that severe losses by London and European banks, from Dubai debt default, bring about an indirect lift in the USDollar. It occurred from a selloff of the British Pound and Euro currency, whose banks are lined up for new profound losses. The Powerz portrayed the Dubai events as a flight to security in the USDollar. If so, why is the long-term USTreasury Bond yield rising? The concept of retreating to a currency, the US$, with trillion$ federal deficits, an insolvent banking system, and an economy struggling under the weight of 25% homeowners insolvent on their home loans, IS TOTALLY LUDICROUS. Soon the counter concept of retreating from a currency into Gold will be better understood.
The next confusing events will probably bring about a decline in the Euro currency from imminent and actual default in at least two European Union member nation government debt securities. That is at least two European national sovereign debt defaults. The Euro should decline from such severe events, amidst uncertainty, at least initially. Later, when the European Monetary Union fractures with a shattering deafening blow, the new central core of the Euro currency will be revealed. When that historic event occurs, essentially the revival of the Deutsche Mark, the USDollar will resume its decline in a powerful manner. Gold will then rise in response powerfully in US$ terms. During the monetary earthquake with European government defaults, the gold price will rise powerfully in Euro terms. After the introduction of the new Core Euro currency, the gold price in Core Euro terms will stabilize, with a handoff given to the gold rally in US$ terms. Such will be the nature of the rotation phenomenon. Mainstream analysts will make errors all along the way to promote the false notion of flight to US$ safety and security, when none exists. A flight out of paper fiat currency is the key, and flight into Gold is the major mega-trend that has begun to occur and will continue to occur. Those naysayers might want to examine the gold accumulation by the major savers of the world, who happen to be the major creditors to the USGovt and thereby the major supporters to the USDollar, namely China. They plan to increase their gold holdings six-fold in the next several years. Central banks in aggregate have turned to accumulation in the last several months.
THE MAIN EVENT IS USTREASURY DEFAULT
No forecast invites more private anger, insults, dismissive comments, and generally negative email than my forecast made in autumn 2008 of a USTreasury Default. The climax of the string of global sovereign defaults will be the government debt default for the USGovt, in the USTreasurys. Events in the last year support the forecast. Federal deficits are rising dangerously, over a trillion$ annually. The Greenspan-Guidotti criterion for debt default has long ago been triggered, even assuming the USGovt OWNS ANY GOLD. It does not. Rather it owns clear ledger items called 'Deep Storage Gold' that is not deep in underground vaults, but deep in mountain ore deposits, not yet mined, kept very secretive. The short-term USGovt debt is over $2 trillion, closer to $3.5 trillion if immediate debt finance is counted, as in the next 12 months. The Stimulus Bill was a travesty, more wasted funds and opportunities. The TARP Fund was an $800 billion slush fund, clouded still in secrecy. The foreign wars are a sacred big money loser, with more deficits associated. The competent economists like former USFed Chairman Volcker warn that structural reform is non-existent in the USEconomy and financial sector. Volcker further warns that derivatives have done great harm, and contain no value, only a shift of financial rents. The Global Paradigm Shift is in full force since the spring months, led by the twin concepts of diversification out of US$-based reserves, and of the movement to establish an IMF basket currency as an alternative for international commerce and transaction settlement. The end of the US$ for crude oil sales has been written on the walls. The end to the US$ credit card with unlimited balance is soon to end.
Those people who act as naysayers, even to offer private criticism for the USTreasury Default forecast, seem never to grasp the above arguments, all of which have absolutely zero precedent. They did not foresee many important events, each of which were important Hat Trick Letter forecasts come true. 1) They did not foresee the insolvency of the US banking system. 2) They did not foresee the broader breakdown and wreckage in the mortgage finance industry beyond subprime. 3) They did not foresee the severe whacking to the British Pound. 4) They did not foresee the nationalization and insolvency of fraud ridden Fannie Mae. 5) They did not foresee the downturn and endless US housing bear market decline. 6) They did not foresee the heralded end of the Petro-Dollar, as in exclusive US$ usage for crude oil sales. 7) They did not foresee the Persian Gulf debt shock wave. In fact, they do not foresee anything except the sound of their own voices. THEY WILL NOT RECOGNIZE THE USTREASURY DEFAULT, MOST LIKELY TO COME AS A FORCED DEBT WRITEDOWN WITH DEEP CREDITOR LOSSES. We are in historically unprecedented times. Look for a new USDollar to be used inside the United States fence posts, since the USGovt does not control contracts conducted globally. The devaluation of the US$ will come full circle, and lead to an implosion internally.
TRIGGER EVENT, INSOLVENT USFED !!
The US Federal Reserve is under fire. Many in the USCongress wish to force audits of its balance sheet. Many in the USCongress wish to determine what it does with hundreds of billion$ in USGovt funds. Many citizens in the United States wish to understand its everyday operations and where its loyalty lies, let alone how it manages to fail at both its primary functions. Its defenders cannot come to grips with how the US$ has fallen over 98% in value since its inception. Its defenders cannot come to grips with how the USEconomy is stifled by near 20% unemployment (when those without work are counted). Its defenders cannot justify, or even permit true statistics, regarding the powerful monetization of US$-based official bonds. We are witnessing the Weimar-ization of the USFed and the USTreasury Bond and the USDollar. Once again, American economists ignore history, choose to rewrite it, and ignore the path leading to increasingly damaging cycles. This cycle is systemic, not a business cycle, not a credit cycle, and it contains a cliff much bigger and deeper. The train wreck in progress will culminate in a USTreasury Default.
Put aside the growing debt of the USGovt for a moment. Put aside the growing balance sheet of the USFed for a moment. Put aside the dogmatic belief that the USFed can print money to alleviate financial problems for a moment. Put aside the shifting sands notion that the USDollar will remain the safe haven for a moment. Instead, consider two important notions, monetization and balance sheet. The USFed has been monetizing USAgency Mortgage Bonds in the US credit market, in fact a colossal amount held by foreign central banks. The USFed has been monetizing USTreasury Bonds both by the domestic primary bond dealers, taking their unsold inventory merely one week after auctions. The cash value from foreign mortgage bonds serves as a monetization tool for foreign USTreasury bidding at the same auctions.
Lastly, just look at the USFed balance sheet and its ratio makeup. The USFed is bond buyer of last resort. In expanding its balance sheet, newly acquired assets have terrible quality. The USFed might actually be insolvent here & now due to rising mortgage bond purchases. Half their balance sheet is mortgage bonds. If they are worth just 6% less in true value, the USFed is broke. My conclusion is that the USFed is $100's of billions in the red. Nobody seems to care, believing they can just print money and eliminate their insolvency. It aint that simple.
The US Federal Reserve is killing itself by massive purchases of badly impaired assets, often the toxic assets almost no banks or investors want. Sure, it is also debasing the USDollar in doing so. The most dangerous assets under heavy accumulation are the mortgage backed securities issued by Fannie Mae and Freddie Mac. Demand for them is nonexistent. In the process the USFed has ruined its balance sheet. The ruin has occurred in just the last 12 months. Instead of acting in its historical role as the 'lender of last resort', the USFed has on its own expanded its mandate to become the 'buyer of last resort.' The end result is powerful, as they are a Substandard Junk Bond Warehouse. The destruction of the USFed balance sheet is apparent from the following chart with data, prepared by BusinessInsider.com. See the light blue Fed Agency Debt in the upper right, the cancer that grew upon their balance sheet. Their true value is an order of magnitude lower than book value maintained by the august body. This central bank is walking dead.
Two major billboards must be written and read. 1) The USFed is insolvent. 2) The USFed is dangerously over-leveraged. According to its latest report, the US Federal Reserve owns over $1 trillion of mortgage backed securities, equal to 45.6% of the entire portfolio. One year ago mortgage backed securities were under 1% of its total assets. Actually the number was 0.6%, to make a 76-fold increase in toxic mortgage bond assets on the USFed balance sheet. The credit market actually believes the USFed stepped in and helped the system. But in doing so, they killed themselves. Just like other major banks such as the Wall Street firms, the USFed is very highly leveraged. The USFed carries $2157 billion of debt on $52.8 billion of capital, producing a leverage ratio of 40.8 to 1 ratio. Think over-leveraged, insolvent, and dead, but not yet declared dead. They might actually resign their commission contract with the USCongress, and thereby force a USTreasury Default!!
Here is where the insolvency risk screams out in obvious manner. Its listed mortgage bonds are 19 times greater than its capital, equal to 5.3% in inverse. So therefore, if the true value of these toxic assets is actually 6% lower than their recorded book value, the US Federal Reserve capital is depleted, effectively rendering it insolvent. It stands to reason that if Fannie Mae is insolvent, if Freddie Mac is insolvent, and if monetization supports their bonds, while the market shuns them, then the true value of the mortgage backed securities with their brand is less than 94.7% of their book value. Therefore one might safely conclude that on a strict accounting basis, the USFed is effectively insolvent. My simple guess is that the USAgency Mortgage Bonds on the official USFed balance sheet are worth perhap 30% to 50% less than cited on their books. That would leave the USFed insolvent by 15% to 25%.
One might wonder of motive for the USFed to offer big banks an interest yield on assets held on account. The reason might be to shore up its broken toxic balance sheet and fight off their own insolvency. The USFed remains liquid because banks continue to provide it with funding. Few if any questions come regarding the US Federal Reserve liabilities. The USFed is insolvent, just like the USGovt, just like the Social Security Trust Fund, just like the FDIC, just like US banks, just like US homeowners, and just like US leadership!!!
THE LEGITIMATE & TRUE SAFE HAVEN
That valid haven has been gold & silver for thousands of years. It will continue to be the safe haven. The major global currencies are being horribly debased as major governments fight off insolvent banking systems. In doing so, they have set up conditions for a string of sovereign debt default incidents. They will occur like a string of dominoes arranged in a global circle. The process was begun in the US and UK with broken banking systems and extraordinary measures to deal with it, like bank aid packages, stimulus packages, and liquidity facilities out the ying yang. The naive crowd thought the process ended when the US, UK, and Europe responded with official government rescues and aid, complete with certain nationalizations of key banks and financial institutions. Dubai defaults demonstrate the process continues for credit market crises. No climax has come, but the future holds plenty.
During the rotational lifts and fades of the major currencies, the one constant has been and will continue to be gold & silver. Notice today Tuesday December 15th, the Euro currency is down 130 basis points to the 145.3 area, but gold is flat on the day and silver is flat on the day, almost no change in each. Other warning signs remain, as the crude oil is back over the $70 mark and the 10-year USTNote yield has reached 3.6% in a recent rise. The so-called USDollar rebound has occurred with a rising long-term USTreasury yield, a contradiction for any claim of a flight to safe haven. The only lift for any US$ counter-trend rally come from walking atop the broken structures of other major currencies. The grand rotation during defaults will lift the Gold & Silver prices tremendously. Watch the back door vulnerability. As central banks and sovereign debt securities undergo a powerful unprecedented siege, their defense of the Gold-Dollar balance beam will vanish. British and European weakness does not translate to USDollar strength, not with destroyed finances for the USGovt and an insolvent balance sheet for the USFed. It instead translates to strength in the Gold & Silver bastions for monetary integrity.
Copyright © 2009 Jim Willie, CB
http://www.financialsense.com/fsu/editorials/willie/2009/1215.html
by Jim Willie, CB. Editor, Hat Trick Letter | December 15, 2009
The continuation of the bank dominoes took 14 months, but it occurred. The initial destructive impact craters were carved in the United States and England. To be sure, major damage was done to assets in Spain and Greece and other smaller nations in the last year, but their banks had remained insulated. The discredit and death of the central bank franchise system showed first clear evidence in September 2008 on Wall Street. The unique mysterious aspect of banking systems is how they cannot be rebuilt once they turn insolvent. They rot in place, a process accelerated by rotten ethical values, euphemistically called moral hazard. To be sure, much so-called money flows through the dead rotten parts, but nothing becomes resuscitated except balance sheets. And besides, those balance sheets only look better due to accounting rules changes that deviate from mark to market (reality). The distortions magnify and turn cancerous. See the outsized mortgage bonds with no value at all. See the foreclosed homes withheld from the market for sale in bloated bank inventory. See the big bank balance sheets with large entries of idle money sitting in the US Federal Reserve. The dirtiest American secret in the banking world is not monetization of bonds. It is that US banks are deeply insolvent and would have suffered a worse fate in the last year if not for extortion from TARP funds as well as rescue funds coming from syndicate contraband accounts. See the Raw Story article and reference to the United Nations Office on Drugs & Crime (CLICK HERE).
INITIAL BANG
Focus on the bank impact craters, not the assets within those bank portfolios tied to bonds and properties. The US housing market turned down, and the mortgage finance bubble burst. The primary victims were Lehman Brothers, Fannie Mae, and AIG, which all died. Fannie and AIG remain in the Intensive Care located south of the Black Hole down yonder under the USGovt tent. To say they have not died is pure denial at best and stupidity at worst, since they continue to generate grandiose losses, as most rotting dead bodies do. The process is called advanced cadaver decomposition, accelerated by the wondrous financial engineering acid reflux. The tales of destruction in dead banks from the initial bang extended to the AngloSphere as Northern Rock, Royal Bank of Scotland, and HBOS effectively died. It remains to be seen if the venerable Lloyds is an empty shell prone and a cave-in also. Nevermind the details of the many death spirals. Focus on the dominoes and their sequential steps in magnificent wreckage. Marvel at the total lack of recognition by the official spokesmen for financial reality at the USDept Treasury, Wall Street analysts, London analysts, and European analysts. They never comment on sovereign debt insurance or default. Both are covered in the December Hat Trick Letter.
One must inquire why the blindness. The main reasons are many, but two stick out from the aerial view. The bank leaders and their supporting cast are attempting to accomplish the impossible. They strive to revive a dead entity, drained of structural integrity, lacking in motivation to function in capital formation, devoid of vibrant liquidity flow, and directly attached to the syndicate strongholds where the drain continues. They live and operate within their Dome of Fiat Perception, whose major layer is the Dome of American Perception. Unfortunately, those working within the American fence posts suffer the greatest blindness, the tragic effect of engrained arrogance after years of incredibly broad bully tactics and criminal abuse. For those sleepy brain-dead in denial of criminal abuse, a challenge. Just identify where the prosecutions are for multi-trillion dollar bond fraud in global export of toxic mortgage bonds and their derivative brethren, perpetrated by protected Wall Street firms! If one cannot identify, please sit down and be quiet, since clearly integrity was perhaps checked in at the corporate gate in exchange for a paycheck. Wall Street prefers to call the fraud mere errors of judgment. And a murder spree at a shopping mall is an firearms accident! A closer examination can detect continuity in the Treasury Secy post, and in the Securities & Exchange Commission, both still showing Wall Street pedigree. They strive to keep the lid on Wall Street legal matters, and do a great job.
DELAYED SECONG BANG
Finally, the harsh reality from the weight of gravity and the passage of time resulted in a second bang. One can always question the motivation of the Dubai World default, and the fact that it occurred when the USDollar was badly oversold. One can question the wisdom to attempt to force Abu Dhabi to cover the bad debts or assumptions that it would cover the bad debts. One can point to a hidden motive to ruin Iranian assets and trade routes, since they own 30% of Dubai properties and benefit from restricted product shipment through Dubai corporations. Regardless, the aerial view is most important. The biggest victims are the London and European banks heavily exposed to Dubai debt. The Powerz prefer to call it a rally on the USDollar from seeking the safety and security. But to the rotten ramparts of the US financial core? HARDLY!! Instead what happened was that the British Pound and Euro currency fell during an expected retreat after a realization of upcoming declared losses. The US has fortified a false front from accounting marked to fantasy that produced a stock rally and recent culmination in the most fraudulent Non-Farm Payroll report in modern history.
The November Jobs Report was dismantled in several pages of the Hat Trick Letter Macro Economic Report just posted, a grand convenient fiction. The easy dismissal has escaped the mainstream lapdog US press. It included Birth-Death Model fictional adjustments (gigantic for past revisions), constant unstable seasonal adjustments, to begin with. Dismissal included weak TrimTabs data, flagging USGovt tax revenue data, a surprise downturn in ISM service sector data, and still prevalent Challenger Gray & Christmas large site job cuts to make a mockery of the ballyhooed report. So the USDollar rally occurred, give them credit, since they needed it to avoid major losses upon the US$ DX futures option expiration. The Powerz got their onions squeezed in a vise and short hairs clipped on the gold futures options expiration three weeks ago, but they avoided a second massacre on the DX expiration last week. Now the US$ has stalled at the downtrend line.
The second bang was not so important in providing a lift in the Dead Man Walking Dollar, as it was in signaling a resumption in the dominoes. The central bank system has its next shock in store. The downgrades to government debt for Greece, Spain, and Portugal given last week by ratings agencies signal upcoming debt related earthquakes. In the United States, the game is known innocuously as Extend & Pretend. The Europeans are gifted in the same chicanery. The entire banking system in Spain has kept housing inventory, whether from foreclosures or ruined projects, at still elevated prices, stubbornly refusing to mark them down the necessary 30% or 50%. As a result, Spain has a wide gap between bid and offer, and a huge inventory sitting idle, a stalemate that leads to sinkholes.
THE NEXT BIG BANG
The second bang from Dubai is the most important destabilizing debt event in 14 months, but minimized in the United States. The US press hardly even mentions the downgrades across European on sovereign debt. The US press actually boasts that the financial markets are handling the Dubai situation very well, and might be past it already. What incredible denial, but much expected. The second bang signals the beginning of sovereign debt defaults, several of them, and the reshaping of Europe, both with the European Union and the Euro currency. The movement toward a Parliamentary European Union might soon be dead on arrival. The split of the Euro currency is soon to become a reality, a forecast made months before the Persian Gulf debt default forecast. The prudent action is to put the Lisbon Treaty on hold while member nations default on sovereign debt.
Spain's Govt default will soon default. The reality of proper accounting for property writedowns and the corresponding bank debt losses will have a calamitous effect. Over 20% unemployment and the powerful recession in progress will ensure a Spanish Govt debt default. But the immediate fireworks are seen in Greece, where the Premier Papandreou has shown defiance. He will not permit the nation to undergo the mindless reckless coerced IMF restrictions and guidelines, with the workers of Greece suffering. The past record of such IMF strictures results in permanent crippling of nations, with too many precedents to fill a single page. Something very unusual comes to Greece in response to official defiance, something unprecedented yet powerful and unpleasant. Riots will return to Athens, with much greater force and intensity, and spread across Europe. But the spillover of emotions will lead to much bigger events. The momentum of Spanish and Greek defaults will kill the European Monetary Union, and thus the EU itself. The re-emergence of the Deutsche Mark is assured, except it will be called a variant of the Euro. The codenames to date are the Core Euro or the Nordic Euro. It will become the official currency of Germany and certain stronger Central Europe nations with a trade surplus. If France manages to be included in the Core, it will be a miracle and pure gift. The Germans will need squires to carry their bags, an expedient perhaps. Effects from the currency on trade export will leave France reeling but Germany struggling.
AFTERSHOCK BANGS
Once the cracks in Europe are broken wide open, the minor European nations will fall like flies trapped in a hot summer window. The Baltic States are weak and will no longer be carried. But the bigger and more visible tragedies will be seen in Eastern Europe. A curious malformation was constructed in recent years. The Eastern European nations attempted a reconstruction, with new industrial development. However, they went too far on the mortgage side, emulating Europe, England, and the United States. In doing so, they mixed in a deadly potion on the mortgage finance formula. The nations of Hungary, Poland, and Czech Republic used cheap Swiss funds in the mortgage funding, and will probably all default on sovereign debt. The base Swiss interest rate of 1.5% pumped money into Eastern European homes. Their local currencies each fell around 40% to 60%, making for a total disaster for Swiss bankers. Translated mortgage losses are in the 70% to 80% range. In fact Swiss bankers are struggling to achieve their equilibrium after deep damage in three aspects: toxic US bonds, devastating Eastern European mortgages, and threats to private bank accounts. The aftershock bangs to the Baltic States and Eastern Europe will set up a powerful additional event that will be seen as a climax.
CLIMAX TO EUROPEAN BANGS
At least one major European nation will suffer the ignominy of a sovereign default. By this time, Spain and Greece will have been wrecked, along with Portugal, possibly Italy also, and maybe even Ireland. The prime victims to close the process of sovereign debt default will include France and the United Kingdom. Considered untouchable, these nations will succumb to the wretched financial foundations that befall them. France unfortunately has too many similarities to Spain, which debtors cannot overlook any longer. The United Kingdom unfortunately has too many similarities to the United States, which debtors cannot overlook since the UK cannot print money like the Americans to buy more time, or draw upon clandestine sources of funds. The UK will run out of time. With the French and British defaults, the game goes ballistic and enters the TWILIGHT ZONE.
RUN ON THE USDOLLAR
Some might look at a dangerous run on the USDollar and a severe decline being the primary requirement for a rise in the gold price. It is true that for a long time the most heavily correlated factor for gold rising has been the US$ falling. A negative correlation has been vividly clear. More importantly though, a transition has begun in the last few months. The most important factor for gold has become, and will continue to be the falling value of the major currencies, all the major currencies, not only the USDollar. One must exclude the Japanese Yen in such an argument, since its 0% interest rate has rendered the Bank of Japan a neutered central bank. Watch the BOJ now, as it actually defends against profound damage from a rising Yen currency in the unprecedented process of an unwind to the grandest carry trade ever connected to financial engineering machinery. In fact, a handoff from the Yen Carry Trade to the Dollar Carry Trade is exactly what the USFed and USDept Treasury wish to interrupt. Never in history has a carry trade been installed to drain the vitality of the global reserve currency, to force and retain a near 0% interest rate, and to enable a continued falling value in the US$.
The most important factor for Gold, worth repeating, has become, and will continue to be the falling value of the major currencies. The entire gaggle of currencies is in deep trouble from government sponsored debasement. The entire gaggle of central banks is in deep trouble from discredit to their franchise system. Gold will rise in a powerful manner from the debasement of the major currencies, in particular the USDollar, the Euro, and the British Pound. The process of currency destruction will involve rotations. The events of the last month have shown that severe losses by London and European banks, from Dubai debt default, bring about an indirect lift in the USDollar. It occurred from a selloff of the British Pound and Euro currency, whose banks are lined up for new profound losses. The Powerz portrayed the Dubai events as a flight to security in the USDollar. If so, why is the long-term USTreasury Bond yield rising? The concept of retreating to a currency, the US$, with trillion$ federal deficits, an insolvent banking system, and an economy struggling under the weight of 25% homeowners insolvent on their home loans, IS TOTALLY LUDICROUS. Soon the counter concept of retreating from a currency into Gold will be better understood.
The next confusing events will probably bring about a decline in the Euro currency from imminent and actual default in at least two European Union member nation government debt securities. That is at least two European national sovereign debt defaults. The Euro should decline from such severe events, amidst uncertainty, at least initially. Later, when the European Monetary Union fractures with a shattering deafening blow, the new central core of the Euro currency will be revealed. When that historic event occurs, essentially the revival of the Deutsche Mark, the USDollar will resume its decline in a powerful manner. Gold will then rise in response powerfully in US$ terms. During the monetary earthquake with European government defaults, the gold price will rise powerfully in Euro terms. After the introduction of the new Core Euro currency, the gold price in Core Euro terms will stabilize, with a handoff given to the gold rally in US$ terms. Such will be the nature of the rotation phenomenon. Mainstream analysts will make errors all along the way to promote the false notion of flight to US$ safety and security, when none exists. A flight out of paper fiat currency is the key, and flight into Gold is the major mega-trend that has begun to occur and will continue to occur. Those naysayers might want to examine the gold accumulation by the major savers of the world, who happen to be the major creditors to the USGovt and thereby the major supporters to the USDollar, namely China. They plan to increase their gold holdings six-fold in the next several years. Central banks in aggregate have turned to accumulation in the last several months.
THE MAIN EVENT IS USTREASURY DEFAULT
No forecast invites more private anger, insults, dismissive comments, and generally negative email than my forecast made in autumn 2008 of a USTreasury Default. The climax of the string of global sovereign defaults will be the government debt default for the USGovt, in the USTreasurys. Events in the last year support the forecast. Federal deficits are rising dangerously, over a trillion$ annually. The Greenspan-Guidotti criterion for debt default has long ago been triggered, even assuming the USGovt OWNS ANY GOLD. It does not. Rather it owns clear ledger items called 'Deep Storage Gold' that is not deep in underground vaults, but deep in mountain ore deposits, not yet mined, kept very secretive. The short-term USGovt debt is over $2 trillion, closer to $3.5 trillion if immediate debt finance is counted, as in the next 12 months. The Stimulus Bill was a travesty, more wasted funds and opportunities. The TARP Fund was an $800 billion slush fund, clouded still in secrecy. The foreign wars are a sacred big money loser, with more deficits associated. The competent economists like former USFed Chairman Volcker warn that structural reform is non-existent in the USEconomy and financial sector. Volcker further warns that derivatives have done great harm, and contain no value, only a shift of financial rents. The Global Paradigm Shift is in full force since the spring months, led by the twin concepts of diversification out of US$-based reserves, and of the movement to establish an IMF basket currency as an alternative for international commerce and transaction settlement. The end of the US$ for crude oil sales has been written on the walls. The end to the US$ credit card with unlimited balance is soon to end.
Those people who act as naysayers, even to offer private criticism for the USTreasury Default forecast, seem never to grasp the above arguments, all of which have absolutely zero precedent. They did not foresee many important events, each of which were important Hat Trick Letter forecasts come true. 1) They did not foresee the insolvency of the US banking system. 2) They did not foresee the broader breakdown and wreckage in the mortgage finance industry beyond subprime. 3) They did not foresee the severe whacking to the British Pound. 4) They did not foresee the nationalization and insolvency of fraud ridden Fannie Mae. 5) They did not foresee the downturn and endless US housing bear market decline. 6) They did not foresee the heralded end of the Petro-Dollar, as in exclusive US$ usage for crude oil sales. 7) They did not foresee the Persian Gulf debt shock wave. In fact, they do not foresee anything except the sound of their own voices. THEY WILL NOT RECOGNIZE THE USTREASURY DEFAULT, MOST LIKELY TO COME AS A FORCED DEBT WRITEDOWN WITH DEEP CREDITOR LOSSES. We are in historically unprecedented times. Look for a new USDollar to be used inside the United States fence posts, since the USGovt does not control contracts conducted globally. The devaluation of the US$ will come full circle, and lead to an implosion internally.
TRIGGER EVENT, INSOLVENT USFED !!
The US Federal Reserve is under fire. Many in the USCongress wish to force audits of its balance sheet. Many in the USCongress wish to determine what it does with hundreds of billion$ in USGovt funds. Many citizens in the United States wish to understand its everyday operations and where its loyalty lies, let alone how it manages to fail at both its primary functions. Its defenders cannot come to grips with how the US$ has fallen over 98% in value since its inception. Its defenders cannot come to grips with how the USEconomy is stifled by near 20% unemployment (when those without work are counted). Its defenders cannot justify, or even permit true statistics, regarding the powerful monetization of US$-based official bonds. We are witnessing the Weimar-ization of the USFed and the USTreasury Bond and the USDollar. Once again, American economists ignore history, choose to rewrite it, and ignore the path leading to increasingly damaging cycles. This cycle is systemic, not a business cycle, not a credit cycle, and it contains a cliff much bigger and deeper. The train wreck in progress will culminate in a USTreasury Default.
Put aside the growing debt of the USGovt for a moment. Put aside the growing balance sheet of the USFed for a moment. Put aside the dogmatic belief that the USFed can print money to alleviate financial problems for a moment. Put aside the shifting sands notion that the USDollar will remain the safe haven for a moment. Instead, consider two important notions, monetization and balance sheet. The USFed has been monetizing USAgency Mortgage Bonds in the US credit market, in fact a colossal amount held by foreign central banks. The USFed has been monetizing USTreasury Bonds both by the domestic primary bond dealers, taking their unsold inventory merely one week after auctions. The cash value from foreign mortgage bonds serves as a monetization tool for foreign USTreasury bidding at the same auctions.
Lastly, just look at the USFed balance sheet and its ratio makeup. The USFed is bond buyer of last resort. In expanding its balance sheet, newly acquired assets have terrible quality. The USFed might actually be insolvent here & now due to rising mortgage bond purchases. Half their balance sheet is mortgage bonds. If they are worth just 6% less in true value, the USFed is broke. My conclusion is that the USFed is $100's of billions in the red. Nobody seems to care, believing they can just print money and eliminate their insolvency. It aint that simple.
The US Federal Reserve is killing itself by massive purchases of badly impaired assets, often the toxic assets almost no banks or investors want. Sure, it is also debasing the USDollar in doing so. The most dangerous assets under heavy accumulation are the mortgage backed securities issued by Fannie Mae and Freddie Mac. Demand for them is nonexistent. In the process the USFed has ruined its balance sheet. The ruin has occurred in just the last 12 months. Instead of acting in its historical role as the 'lender of last resort', the USFed has on its own expanded its mandate to become the 'buyer of last resort.' The end result is powerful, as they are a Substandard Junk Bond Warehouse. The destruction of the USFed balance sheet is apparent from the following chart with data, prepared by BusinessInsider.com. See the light blue Fed Agency Debt in the upper right, the cancer that grew upon their balance sheet. Their true value is an order of magnitude lower than book value maintained by the august body. This central bank is walking dead.
Two major billboards must be written and read. 1) The USFed is insolvent. 2) The USFed is dangerously over-leveraged. According to its latest report, the US Federal Reserve owns over $1 trillion of mortgage backed securities, equal to 45.6% of the entire portfolio. One year ago mortgage backed securities were under 1% of its total assets. Actually the number was 0.6%, to make a 76-fold increase in toxic mortgage bond assets on the USFed balance sheet. The credit market actually believes the USFed stepped in and helped the system. But in doing so, they killed themselves. Just like other major banks such as the Wall Street firms, the USFed is very highly leveraged. The USFed carries $2157 billion of debt on $52.8 billion of capital, producing a leverage ratio of 40.8 to 1 ratio. Think over-leveraged, insolvent, and dead, but not yet declared dead. They might actually resign their commission contract with the USCongress, and thereby force a USTreasury Default!!
Here is where the insolvency risk screams out in obvious manner. Its listed mortgage bonds are 19 times greater than its capital, equal to 5.3% in inverse. So therefore, if the true value of these toxic assets is actually 6% lower than their recorded book value, the US Federal Reserve capital is depleted, effectively rendering it insolvent. It stands to reason that if Fannie Mae is insolvent, if Freddie Mac is insolvent, and if monetization supports their bonds, while the market shuns them, then the true value of the mortgage backed securities with their brand is less than 94.7% of their book value. Therefore one might safely conclude that on a strict accounting basis, the USFed is effectively insolvent. My simple guess is that the USAgency Mortgage Bonds on the official USFed balance sheet are worth perhap 30% to 50% less than cited on their books. That would leave the USFed insolvent by 15% to 25%.
One might wonder of motive for the USFed to offer big banks an interest yield on assets held on account. The reason might be to shore up its broken toxic balance sheet and fight off their own insolvency. The USFed remains liquid because banks continue to provide it with funding. Few if any questions come regarding the US Federal Reserve liabilities. The USFed is insolvent, just like the USGovt, just like the Social Security Trust Fund, just like the FDIC, just like US banks, just like US homeowners, and just like US leadership!!!
THE LEGITIMATE & TRUE SAFE HAVEN
That valid haven has been gold & silver for thousands of years. It will continue to be the safe haven. The major global currencies are being horribly debased as major governments fight off insolvent banking systems. In doing so, they have set up conditions for a string of sovereign debt default incidents. They will occur like a string of dominoes arranged in a global circle. The process was begun in the US and UK with broken banking systems and extraordinary measures to deal with it, like bank aid packages, stimulus packages, and liquidity facilities out the ying yang. The naive crowd thought the process ended when the US, UK, and Europe responded with official government rescues and aid, complete with certain nationalizations of key banks and financial institutions. Dubai defaults demonstrate the process continues for credit market crises. No climax has come, but the future holds plenty.
During the rotational lifts and fades of the major currencies, the one constant has been and will continue to be gold & silver. Notice today Tuesday December 15th, the Euro currency is down 130 basis points to the 145.3 area, but gold is flat on the day and silver is flat on the day, almost no change in each. Other warning signs remain, as the crude oil is back over the $70 mark and the 10-year USTNote yield has reached 3.6% in a recent rise. The so-called USDollar rebound has occurred with a rising long-term USTreasury yield, a contradiction for any claim of a flight to safe haven. The only lift for any US$ counter-trend rally come from walking atop the broken structures of other major currencies. The grand rotation during defaults will lift the Gold & Silver prices tremendously. Watch the back door vulnerability. As central banks and sovereign debt securities undergo a powerful unprecedented siege, their defense of the Gold-Dollar balance beam will vanish. British and European weakness does not translate to USDollar strength, not with destroyed finances for the USGovt and an insolvent balance sheet for the USFed. It instead translates to strength in the Gold & Silver bastions for monetary integrity.
Copyright © 2009 Jim Willie, CB
http://www.financialsense.com/fsu/editorials/willie/2009/1215.html
4 December 2009
Gold Desafio: Global Struggle
by Jim Willie, CB. Editor, Hat Trick Letter
The gold market has become, despite little recognition by the financial press, the battlefield for global control of the financial world. To the winner go the spoils and access to the helm. To the winner goes control of global banking, dominance in commerce, and the advantage in some degree of printing money on a credit card that all nations must finance indirectly. Nevermind the military aspect. In the Untied States, the custodial control of the USDollar as global reserve currency enabled it to spawn numerous syndicates with criminal impunity, since under the USGovt aegis (if not management). The gold market is the site of the most ominous dangerous life changing battle in recent history. My work has frequently mentioned a Paradigm Shift in progress. The shift is of power, influence, dominance, control, privilege, and direction. It also permits the writing of history itself. Since the end of World War II, the Untied States and Great Britain created an empire based primarily upon economic and financial prowess, but certainly reinforced by military strength. With the fall of Wall Street, the ruin of US banks, the insolvency of American households, and the quagmire of US foreign wars, the shift has accelerated. The parallel debacles and ruin into insolvent for Great Britain has ushered in an Anglo removal from the power circuit. The transition will not be smooth. See the endless wars, the attacks on tax havens, and the viruses.
Notice the slow fade of the Japanese, a nation having served as US Lackeys for more than a few decades. They must next join forces with the Chinese, and perhaps bow but not too much since they bring tremendous technological prowess to the table. Thousand year old enmity must yield to cooperative alliance and ventures. Regional unity will become of paramount importance in the next chapter of economic development. The Tokyo mavens are suffering from the shock of the Yen Carry Trade unwinding process. Weeks ago, my articles pointed out how the rise in the Japanese Yen would keep the pressure firmly on their economy, clearly still export driven. The USDollar crisis has its own core troubles. But they are amplified by a stronger yen currency, which is undergoing a handoff to the Dollar Carry Trade. The Yen currency continues to push higher, causing the Japanese Govt to assemble and hammer out emergency policy. Never in history has a carry trade fed off and exploited a decline in the global reserve currency. These are historic times.
GOLD AS CRUX FOR BATTLE
The shift in power is most evident in the rapid rise in accumulated gold by the Chinese Govt. In my view this is the actual crux of the global desafio. In the Spanish language, desafio means a great struggle and battle, much akin to jihad in the Arabic language, but without the warlike military connotation or tendency toward glorified suicide. My first exposure was the Discovery Channel. A show focused upon the Alaskan Desafio as some brave group weathered the wintry storms, traveled with sled dogs, and struggled to eat and sleep. This gold desafio is for global control. Those who control the gold control the global banking with all its trappings. The corrupted COMEX and London Bullion Market Assn are the clear battlegrounds for the gold battle. In an open manner, no longer hidden from view, the COMEX is settling gold long futures contracts with Street Tracks GLD shares. Investors in GLD shares should be horrified at shareholder contamination. Clearly, the COMEX does not have much of any gold bullion, yet it operates formally as an exchange to sell gold, and to create a market for gold price discovery. Some call this new redemption developed appropriately a silent COMEX default, and correctly so. It is the early chapter of a COMEX default, presaged last May.
The two-sided fraud deserves mention once more. In time, the Street Tracks GLD (run by State Street, with JPMorgan as custodian) will be exposed as totally corrupt. They are using GLD shares openly now to cover COMEX short futures contracts. They are likely providing GLD bullion to London to satisfy futures contract delivery demands. Evidence painted a picture after London gold delivery stresses occurred at the same time as vast deletions from the GLD bar list, which suddenly reappeared days later. That is burning the candle at both ends of the GLD itself. Eventually my expectation is for GLD shares to sell at a 40% discount to gold price as the lack of gold inventory is revealed. Then later, after lawsuits, the GLD might easily sell at 80% discount. Finally the climax could be prosecution for fraud and all investors will be given 20 cents per dollar versus gold. Who knows? Maybe it will be 30% and 60% and 40 cents per dollar. The trouble for hapless unsuspecting investors is they did not read the prospectus, which permits such misuse of GLD shares. They just might be lazy and qualified sheeple. The Wall Street crowd did effective planning. One must give a tip of the hat to their brain trust. The GLD is a tool to drain gold demand from the public and to supply it to the syndicate. It is one of the most brilliant open ploys in financial history.
THE ANTICIPATED DUBAI CRUSH
On October 8th, the Jackass gave you a "TOLD YA SO" on the announced previewed end of the Petro-Dollar. The Saudis, with Chinese and Russians on their left and right arms, heralded the end of the sale of crude oil in US$ terms, with French and Japanese in tow. The Germans secretly were in charge of counseling toward the forged deal, but preferred the shadows. The new crude oil transaction settlement system will take time, but surely not to require eight years until 2018 as announced. That stated target date was intended to deflect and distract from US retaliation. The mere announcement should be regarded as a schematic diagram for architects and investors alike to follow. New systems must be constructed. Investors ahead of the curve will be the primary beneficiaries. The changes that result from the announcement itself will assure the completion date to be just 2 or 3 years, not 8 years.
In just two short months, it is time to say "TOLD YA SO" again, this time on the story that came out of the United Arab Emirates. Or should they be also called the Untied Arab Emirates, after their squabbles between city states? The Dubai World debt default and restructure has caused shock waves the world over. IT WAS FORECASTED IN AUGUST BY THE HAT TRICK LETTER. The vast construction bust has caused anticipated ripples. The threat to London banks is acute. Time will tell whether its ripples will cause sufficient damage to London and New York bankers to topple them and to force lost control in other banking functions like gold management, as my forecast indicated. It seems that worsened big London bank solvency from underwritten Dubai losses, rather than Arab USTreasury Bond dumping, will be the principal cause of any imminent breakdown, if it occurs. See the article entitled "US Bank Enemies at the Gates" from late August (CLICK HERE).
For the record, here is what was written over three months ago by the Jackass pen. "The regional construction boom in the Arab world has an epicenter in Dubai. Unfortunately, it has gone bust, and loudly so. If not for the prompt aid by Abu Dhabi bankers, a vast liquidation of Dubai would have embarrassed them in front of the world. Instead, a new threat comes. The Abu Dhabi rescue next must contend with an indigestion problem, as USTreasurys and likely other US$-based bonds are flooding their banking system. They might own a considerable batch of US bank stocks, soon to be dumped. Ambition led to a whiff of hubris, as fantastic architectural design led to large scope, seen in the skyscrapers and bridges. Not shown are the spectacular communities designed as trees with branches and leaf petals, many empty, busted, and without investment income. But they overdid it, and now must deal with corporate failures and liquidation challenges. The Persian Gulf bank failures represent the clear and present threat. The outsized projects have yielded to outsized rescues and next outsized indigestion to handle the funds in ways so as to avoid a string of national bank failures. Vast liquidations come, word comes from contacts.
A bank panic in the Persian Gulf could ensue very soon, a back door threat. It would clearly have origins in the United Arab Emirates, spread to the entire Persian Gulf like to Saudi Arabia, Kuwait, and elsewhere. From this global toehold, the bank panic could then spread to London, New York, and points in Europe. The UAE bankers must manage their situation. They are loaded to the gills with USTreasurys, the main currency used in the liquidations and rescues local to the UAE. They also have pet stock accounts in big US banks. As further liquidations occur, avoidance of bank failures seems a remote prospect. Watch the enemies at the gates, outside looking in, in urgent need of dumping USTreasury Bonds and other US$-denominated securities."
Much can be told about hidden developments, like family squabbles between the UAE emirate rulers, bitterness over shame brought to the region, anger from unheeded counsel, sudden departures of people in key posts, and a desire to punish (even exploit) the decline in fortunes. The biggest question in my book is how much Abu Dhabi bankers wish to permit London bankers to absorb losses, before Abu Dhabi cleans up and grabs liquidated properties in Dubai at deeply distressed prices? Negotiations are underway, heated, and of vital importance in London between all the bankers involved. What can London offer Abu Dhabi? That is the question. The Arab world takes a dim view of debt to begin with. They abhor home and property mortgages generally, and thus never invest in mortgage bonds. To prove the point, hundreds of Dubai Prisoners languish in their hotels and apartments. They are British, American, and European engineers, financial cogs, analysts, and other workers whose employers from the parent Western firms defaulted on very large loans. These people will remain prisoners, and will likely become pawns in the game during negotiations. Conditions grew so desperate that hundreds of cars lie abandoned at airports, from workers who fled the region before trapped in homes.
Expert analysts warn of continued shock waves, as almost nothing has been resolved, very little asset or corporate liquidation has occurred, fallout has not yet been permitted, bank losses have not been declared, and resolution prices have not been posted. The internal battle between UAE city states, one rich in oil and a banking center, the other recovering from a construction bust amidst great hubris and displayed magnificent follies, will play itself out in the coming several months or years. The internal families are locked in a power struggle. In Dubai, 30% of their economy is derived from real estate, construction, and other property development. They have some truly braindead concepts and ideas at work, like indoor snow skiing, like cooled beaches with underground pipes, and golf courses that require much output from the desalinization plants to water the green landscape against sandy backgrounds. These are like plebeian versions of marble palaces in the desert. To be sure, a great awakening comes as a load of debt is dumped on the big bankers, just when they might have thought the worst was over.
One friend calls the Dubai construction array the greatest property folly in a century. Maybe so! Next come shock waves to London banks. The follies must be liquidated, with great losses dumped upon balance sheets. The banks must take much more lumps and losses. The original $10 billion in debt loss is more like $80 billion. Details on the story appear in the upcoming December Hat Trick Letter reports, which are streaming in on a daily basis. European banks have some exposure too, but not as much as London. The Abu Dhabi rulers must complete bargains with London bankers, who have conspired to suppress the gold price for two decades. The UAE leaders hold a huge amount of gold, and have demanded its return from London custodial accounts. Resentment seethes beneath the surface, the basis for Arab vengeance. The fallout will be wreckage of Royal Bank of Scotland, and maybe HSBC too.
In the process, watch power shift to Abu Dhabi as concessions are made by London under extreme pressures. Parts of Dubai are ghost towns, almost totally unoccupied vast projects. The biggest question in my book is whether RBS can go bust and be liquidated while still operating under the British Govt aegis? Lloyds will take large blows as well. The shock waves have not yet fully reverberated. They will continue for months. The Dubai property prices have not yet bottomed, and might settle at 20 cents per dollar on original basis. The legion of Western wonks in the financial sector stupidly expected Abu Dhabi to rescue all Dubai loans, without benefit of much knowledge of resentment, family conflicts, banker ambitions, and ramifications that extend to the new Gulf Dinar currency that shifted planning rooms (Saudi to Russian). My August article implied the Dubai bust would result since Abu Dhabi would not step in and bail out their UAE brethren. The inner conflicts and agendas were well known all along here.
The next shoe for the condemned Caucasian crowd is mortgage losses from Eastern Europe. For several years, the Swiss provided the funds as a result of their 1.5% steady official rate. At the time, it was 3% below the rest of the continent. The combination of home loan default, and sharply lower Eastern Europe currency basis has resulted in near total losses to Swiss banks on such mortgage portfolios. Also, watch Greece, which could be the next Dubai crush zone. It is a construction bust center also, like Spain. The socialist roots in Southern Europe have enabled a denial of property price declines from Spain to Italy to Greece. Instead of vast arrays of homes being sold at distressed lower prices, they sit in inventory at elevated absurd high prices. The bust impact comes soon, as these assets cannot be carried much longer on the books.
GO GOLD GO GOLD
This is just the beginning. We are still in the proverbial second inning of this gold explosion. Gold continues to rise because the system is breaking, because almost zero remedy has been completed, because pressures are brought to bear using the same broken tools to fix the problems, because mountains of new money are wasted and paid to failed bankers, because the crisis is ongoing, because the economies are not responding to stimulus, because home foreclosures and job losses continue unabated. Much more government rescue and stimulus comes, MUCH MORE. The Chinese are firmly in control of the gold price. They inch up the gold price systematically in order to release more supply from both the cash desperate and the investment knuckleheads. A big story has hit the press, that HSBC is backing out of the gold storage business. My gut tells me that HSBC might be clearing major bank vault space to hold Chinese deliveries from metals exchanges. The gold price does not merely rise from a weakening USDollar and major currencies. Nations intentionally try to undercut themselves in order to preserve their export economies. The gold price also rises from the gradual removal of shackles that have falsely suppressed the price, as supply has dwindled, replaced by paper gold, and probably tungsten gold too. In the last couple weeks, extraordinary scrutiny has come to the gold delivery system. The process reveals an unspeakable global shortage of gold bullion. The gold price is attempting to adjust to a proper higher price free from interference, based upon supply matching demand. The gold price will rise further from continued debasement of the major currencies. Even now, with the COMEX and LBMA in London, the gold market cannot clear at the current price. There is an extreme shortage of gold bullion in physical supply, due to years of price intervention and replacement by paper gold. Apart from weak or destroyed currencies, the gold price must be higher from basic intervention relief.
Some argue that gold must rise to match the supply of newly created money, bound in the fiat currencies with pretty designs and colored ink, even watermarks. Gold should rise in parallel with money creation, but not in lockstep. A currency can always be fixed according to a cover clause that dictates 1% of money can be redeemed in gold. Later, a move to 1.5% in the gold cover clause would fortify one currency in much the same way that official national interest rates lift currencies upon changed policy. Personally my wish is for the gold price to continue its powerful bull run without the Euro currency breakout toward 160. That would expose all the currencies together as horribly weak if not invalid. If the Euro rushes toward 160, the gold market in Europe must then adapt to an interruption in the bull roaming on the continent. Stand back! The explosive upward thrust in the gold price is still a threat, much like Mount St Helens. The Powerz have begun to lose control of the gold market.
No search for safe haven in the USDollar took place after the Dubai world shock. Rather it was a retreat from the British Pound and Euro currencies, which bore the risk of loans underwritten. In one short week, the effect has dissipated, as the USDollar is weaker than BEFORE the Dubai incident broke to make news. All currencies are weak relative to the stable powerful reliable gold. The USDollar is showing a steady relentless weakness, unable to snap into any recovery. It is my view that ruining the federal finances is what Obama was hired to do by the syndicate. The high risk of USMilitary coup in the future remains acute in order to avert a USTreasury default, or perhaps coincident with a default. Obama's specific job is to run up deficits and ruin the dollar, which paves the way for the coup. The Cap & Trade game is just another fraud revealed, with credit given to the intrepid internet websites that gave up the ghost. The upcoming coup has a definite purpose, to remove foreign creditors from any receivership tribunal. The Untied States can become a sequestered state, free from foreign interference. Yet isolation would be the fate won.
ENTER THE CLOWNS
Don't bother to pardon the misspelled names, done to disguise the identities of clowns within our midst. The Jackass is fully capable of errors, usually admitted quickly. My biggest arena for errors has been long-term USTreasury Bond yields, due to interventions, interference, and monetizations. Other errors have been made, hoped to be minor in nature. An extraordinary amount of information must be digested, absorbed, and integrated into any editorial analytic work that covers a complex and treacherous financial world. Errors come since we are human. But what follows is not ordinary, and speaks to an arena tilted toward deception delivered with motive. My work has an objective to analyze correctly, to highlight connected factors, to explain complexities, to forewarn with lead time, and to make forecasts. The string of solid forecasts is my carrying card. Other foibles are carried. My body is adorned by moles, one just like my mother's. More than a few wild long hairs grow from my eyebrows, making some wonder if General Elmo Zumwalt was a distant uncle. My eyes are uneven, one lower, but no glasses are needed to correct vision. My head is balding, but hats keep it warm. My right foot is pigeon toed, that results in a hook in the soccer kick. The left kick is more adept. But my work is factual, helped along by wonderful reliable sources and numerous newshound friends. Minor errors are committed along the way. One should care not about a minor typo within articles offered in the public domain, despite my usual final proofread pass. What follows is a list of elements inside the gold community, often doing a notable disservice.
Why are the US financial airwaves polluted by Denis Gartmann and his consistently incorrect and shallow preachings? His fund is down, not down hard, as he maintains his negative opinion of the gold asset story. He hedged a gold position with an offsetting currency position, resulting in a total waste of investment funds. Gold just happens to be the biggest story and one of the best performing assets in the last half decade. One might conclude such strong performance is worthy of disdain, disrespect, and disrepute. NOT! A contact of mine is considering a new Anti-Gartmann Fund, with a double leverage component that takes the opposite position of the Gartmann fool. Given his steadily shallow analysis and lack of comprehension of the gold market, one might conclude that Gartmann has a secondary income source from Wall Street firms. He might indeed be paid to denigrate the Gold Bull market, despite the tarnish to his reputation. An aside on Gartmann, who used to speak as the Cambridge House gold conferences alongside the Jackass. He appeared in 2005, much to my surprise, since he is so incredibly lacking in insight. From the podium, in front of over 1000 people, he delivered probably the stupidest speech ever to penetrate my ears. Gartmann actually claimed, one year before the housing bust struck, that the USEconomy was still grossly under-leveraged. He actually made numerous points about how the assets within the Untied States still had countless additional collateral from which to draw credit. He actually spoke of numerous new avenues to extend credit, and how the extra funds to surge within the channels of the American system would result in much greater economic growth. He concluded that the best days of the USEconomy were well ahead of us. He praised the merits of risk. Then came the bust. One must wonder if the 1000 people remember the idiotic preachings and drivel from the man that day in Vancouver. The Jackass sure does, one of only a handful who emitted laughter during the Gartmann ideological face plant in the snow. What is his latest correct forecast??
The same conference featured Doug Kasey, who went galactic in a mindless harangue. He spoke of the eventual cap on commodity prices from mining asteroids in the solar system. You see, they are rich in iron and other base metals. He ignored the cost of mining in the deep solar recesses, and how the high cost would impose a cost cap, but one perhaps 50 to 100 times the current commodity prices. After all, in order to exploit the vast asteroid metal supply, one must escape the earth's orbit, at a heavy cost, an overlooked factor. The conference management might have done well to give Doug a face to face check before he stepped up to the podium. Man oh man!! That was a memorable conference with two icons displaying their unwaxed cross-eyed viewpoints for all to see. One must give Kasey credit for many speeches that challenge the honesty and integrity of the USGovt and USMilitary enterprises.
Next take Pablo Van Eaton. The man sounds good, looks great, has a great speaker voice, and is a nice fellow. But he carries a distinction above all others. Van Eaton provides the most eloquent and well constructed arguments for consistently wrong forecasts, and has done so for several years. He had one good call a few years ago on mining stocks hitting a peak, but that call has been eclipsed by a long list in a row that seems not to end. It is like he was a champion on his school forensic team, burdened by arguing the merits of a plainly wrong position, but excelled. When gold was meandering in the low to middle 900 level for months earlier this year, he forecasted a move in the gold price down below 800, as the deflation threat would take its toll. However fallible, he is still invited to appear as a panelist on the dinner hour shows for the Canadian Business Channel. The major investment houses must love his steady disdain shown for the gold market. His subscribers are welcome to switch over to the Hat Trick Letter, where correct forecasts are not only important but are regularly given. Pablo attracts crowds at the conferences. Bless them one and all who hang on his every word, as they must have very short memories. What is his latest correct forecast??
A vivid memory is etched in the Jackass mind from the Calgary conference in 2004, offered also by the Cambridge House. Van Eaton shared generously a taxicab with the Jackass to the airport. The conference had ended. During the taxi ride, Van Eaton expounded on why the USDollar would suffer a serious decline from May to the end of the 2004 year, since Asian sovereign funds would diversify away from the USDollar. In direct rebuttal, the Jackass explained in simple terms that the US Federal Reserve had begun to raise the official interest rate, and would continue for several more meetings. The Jackass rebuttal argument was that we live in a bond driven world, and as long as the official US interest rate was rising, the USDollar would continue to rise in a surprisingly counter-trend rally from basic bond speculation. The point was made quietly, tactfully, professionally, since Pablo was paying for the taxi. Furthermore, my extended argument was that the Asians would hold off on a major dumping of US$-based assets, and instead sell after a year or two had passed. Score one more correct call for the Jackass, and one more wrong forecast for Van Eaton, who shared the same fallacious argument before 1000 people at the same Calgary conference. IN THE NEXT FEW MONTHS, THE USDOLLAR ENJOYED A POWERFUL UPWARD RALLY IN PURE COUNTER-TREND FASHION. It ended when the USFed halted the rate hikes, as forewarned. One must wonder where Pablo takes his cues, or who pays his clandestine paychecks. One must not become too enamored of that charming foreign accent, which delivers a flow a words like a melody. The Jackass does not care if a hillbilly accent is worn when the mental acumen comes through in brilliance. Take TBoone Pickens. His homey folksy Texan accent is charming, and sounds nowhere near as intelligent and alluring as Van Eaton. But Pickens is as consistently correct on forecasts as Van Eaton is wrong.
Another lame entry is Richard Burnedstein, the respected economist from Merrill Lynch. This week he said gold has no driving fundamentals that justify its rising price. Clearly Burnedstein loves the paper game, and surely maintains a high derived price on all things paper. His paycheck is also high, derived from a major paper merchant firm. One must excuse Richard since he at least comes forth with the Merrill Lynch name attached to his own, including all appearances. So his preachings are a much more genuine acknowledged compromise of mental processes. He is paid to represent his firm, whereas Gartmann could easily be receiving large funds from the back door, where his allegiance lies and influence of partners is more hidden. Never forget that Wall Street earns almost zero investment banker fees from gold or the mining firms. It is like dogs selling cat food; they don't do it! What mining firms do solicit in funds for stock issuance is largely conducted in Toronto and Vancouver. So the gold fundamentals are lacking in the man's compromised view. What is his latest correct forecast??
One must suppose that skyrocketing gold investment demand and rush to diversify out of a collapsing dollar do not qualify as fundamental. And the absence of metals exchange gold inventory also does not qualify as fundamental. And the Chinese pledge to lift their gold reserves 10-fold to 10 thousand metric tonnes in eight to ten years, that is not fundamental either. And the G-20 pledges to formally move toward an IMF basket of currencies, known as the Special Drawing Rights, and away from the USDollar, that is not fundamental either. And the Saudi announcement of a phase-out of sales for crude oil in US$ terms over the next few years, neither is that a fundamental. And the grossly insolvent banks in the Untied States, England, and Europe, which are simultaneously struggling, unable to extend loans, desperately suckling from government teats, that is not fundamental either. Burnedstein plainly fails to recognize that the entire world is grasping for something tangible within the global monetary system overrun by toxic paper, and that anchor reached for is gold.
The last two figures that complete the clown show are more closely tied to websites and their associated businesses. Bobo Moriarity is the owner and editor of a formerly prominent website. He shows a surplus of his own articles on his website, usually to extol the merits of some stock he owns. Many thrive and do very well. Not many other analyst articles appear. In Spanish, a bobo is an idiot, a dunce, by the way. Big Bobo, who is reportedly wonderful on field trips to visit mine properties, has called the $1190 gold high of last week a top. He did not use the word bubble, but he expects a notable correction and a long period to achieve new highs. The gold price has gone north instead, laying waste to his forecast, which was correct, but only for approximately one day. Maybe when the gold price reaches $1250 per ounce, he will retract his forecast. He has shown a disproportional disrespectful critical insulting tone to the lowly Jackass from an error committed. It is admitted. The pre-1964 dimes were silver coated but with copper core (not zinc), and besides, in earlier years the dimes were only 93% silver anyway (not 100%). Points taken! Beat me with a stick, but not a golden rod! The switch from majority silver to negligible silver in US coinage escapes Moriarity to this day. His criticism includes great departures from the reality of my correct forecasts and command of the English language, even sentence construction. He is way out of bounds! He finds no merit in the entire tungsten story, and urges proof put on the table. Proof comes but not soon, since murder is often an obstacle to arriving at such press conferences. Maybe when the gold price reaches $1300 or $1500 per ounce, he will understand the Global Paradigm Shift and why gold has risen in a powerful manner in the last two months. Maybe he is not aware that the Chinese are major buyers, and even control the price rise step by step. Surely he does. The most basic Head & Shoulders Reversal Pattern dictates a price target of 1300. The Christmas season is traditionally strong, another factor ignored by Bobo. So he thumbs his nose at seasonal strength and aint a chartist either. To the good Captain, let the gold battle cry be "1-2-3 GOLD" !!
Then we have Jon Needler, who must be the son of the website owners where he displays his anti-gold propaganda. To point out Needler's erroneous forecasts and perspectives would require a full article at least 15 pages in length. He seems the most likely to receive a secondary clandestine remuneration for his diligent work in denigrating the gold market. He comprehends precious little about gold or silver. His arguments are so full of holes that a high school economics student could easily challenge him. His forecasts are consistently not just wrong, but wrong in powerful directional thrusts. Yet his work continues to be posted, despite little or no value. Precisely zero rebuttal will be given, since his work is so extraordinarily devoid of substance or quality. In fact, Needler serves as a salesman for paper gold certificate who openly admits his preference for gold coins. What is his latest correct forecast??
Then consider Henry Orlandwini. His work is actually quite good. The one Hat Trick Letter subscriber is still hoping for return of the $28k absconded by him. Occasionally, like today, he said something that struck the Jackass as lacking deeper insight. He said, "I think currencies are devaluing more than gold is rising, and that is why I contend that overbought is a relative term. Gold is rising, but not as fast as the world currencies are falling." The initial reaction here was "wow, really dumb statement." This is a much bigger phenomenon than just currencies falling. We are in the midst of a systemic breakdown and major financial upheaval. We have a broken monetary system, a threatened global reserve currency, discredited central banks, insolvent major banking systems, and an important Paradigm Shift away from the USDollar as power shifts also to the East. Orlandwini is watching too much the branches, leaves, and ferns within the forest, and seems to be missing the bigger picture. When he attempts to forecast the gold price today and the US$ DX index today, identifying resistance and support levels, he might be missing the biggest story of the last few decades. It is the collapse of the US$-based global monetary system and the urgent effort to replace it and to salvage wealth accumulated. Furthermore, and more precisely, the gold price is pushed by not only a weakening USDollar and weakening major global currencies. They are simultaneously being destroyed, debauched, and debased, not just weakened. The additional force that Orlandwini overlooks is that the gold price is attempting to free itself from the Wall Street and London City shackles. The gold price (silver too) is attempting to find its correct price, even besides the continued weakening of currencies.
Lastly, consider US Federal Reserve Chairman Ben Bernanke. He was clearly chosen by the syndicate to continue the Banker Welfare programs, to run the USDollar printing press until it seizes up, and to preach about how deflation will not happen here. He has not uttered one correct forecast in his entire tenure. He missed every single major banking turn of events, every single breakdown, misjudged the size of bank losses every step of the way, and has missed the economic relapse. The battle for the Bernanke re-appointment will reveal the titanic struggle for wresting control of the USDollar, the US banking system, and the disclosure of deeply engrained corruption. If truth be known, the center of the financial syndicate is the USFed, with operations headquartered in Goldman Sachs and JPMorgan. Payoffs from TARP Funds were diverse. Extortion was probably involved amidst reported death threats to Paulson and other Heads of Banking State. Orders were given to use TARP Funds but do not lend. Guidance was given for acquisitions of ailing banks, not loans. The USFed is the center nexus that processes narco syndicate funds. If truth be known, so is Dubai, by way of Baghdad.
Copyright © 2009 Jim Willie, CB
http://www.financialsense.com/fsu/editorials/willie/2009/1202.html
by Jim Willie, CB. Editor, Hat Trick Letter
The gold market has become, despite little recognition by the financial press, the battlefield for global control of the financial world. To the winner go the spoils and access to the helm. To the winner goes control of global banking, dominance in commerce, and the advantage in some degree of printing money on a credit card that all nations must finance indirectly. Nevermind the military aspect. In the Untied States, the custodial control of the USDollar as global reserve currency enabled it to spawn numerous syndicates with criminal impunity, since under the USGovt aegis (if not management). The gold market is the site of the most ominous dangerous life changing battle in recent history. My work has frequently mentioned a Paradigm Shift in progress. The shift is of power, influence, dominance, control, privilege, and direction. It also permits the writing of history itself. Since the end of World War II, the Untied States and Great Britain created an empire based primarily upon economic and financial prowess, but certainly reinforced by military strength. With the fall of Wall Street, the ruin of US banks, the insolvency of American households, and the quagmire of US foreign wars, the shift has accelerated. The parallel debacles and ruin into insolvent for Great Britain has ushered in an Anglo removal from the power circuit. The transition will not be smooth. See the endless wars, the attacks on tax havens, and the viruses.
Notice the slow fade of the Japanese, a nation having served as US Lackeys for more than a few decades. They must next join forces with the Chinese, and perhaps bow but not too much since they bring tremendous technological prowess to the table. Thousand year old enmity must yield to cooperative alliance and ventures. Regional unity will become of paramount importance in the next chapter of economic development. The Tokyo mavens are suffering from the shock of the Yen Carry Trade unwinding process. Weeks ago, my articles pointed out how the rise in the Japanese Yen would keep the pressure firmly on their economy, clearly still export driven. The USDollar crisis has its own core troubles. But they are amplified by a stronger yen currency, which is undergoing a handoff to the Dollar Carry Trade. The Yen currency continues to push higher, causing the Japanese Govt to assemble and hammer out emergency policy. Never in history has a carry trade fed off and exploited a decline in the global reserve currency. These are historic times.
GOLD AS CRUX FOR BATTLE
The shift in power is most evident in the rapid rise in accumulated gold by the Chinese Govt. In my view this is the actual crux of the global desafio. In the Spanish language, desafio means a great struggle and battle, much akin to jihad in the Arabic language, but without the warlike military connotation or tendency toward glorified suicide. My first exposure was the Discovery Channel. A show focused upon the Alaskan Desafio as some brave group weathered the wintry storms, traveled with sled dogs, and struggled to eat and sleep. This gold desafio is for global control. Those who control the gold control the global banking with all its trappings. The corrupted COMEX and London Bullion Market Assn are the clear battlegrounds for the gold battle. In an open manner, no longer hidden from view, the COMEX is settling gold long futures contracts with Street Tracks GLD shares. Investors in GLD shares should be horrified at shareholder contamination. Clearly, the COMEX does not have much of any gold bullion, yet it operates formally as an exchange to sell gold, and to create a market for gold price discovery. Some call this new redemption developed appropriately a silent COMEX default, and correctly so. It is the early chapter of a COMEX default, presaged last May.
The two-sided fraud deserves mention once more. In time, the Street Tracks GLD (run by State Street, with JPMorgan as custodian) will be exposed as totally corrupt. They are using GLD shares openly now to cover COMEX short futures contracts. They are likely providing GLD bullion to London to satisfy futures contract delivery demands. Evidence painted a picture after London gold delivery stresses occurred at the same time as vast deletions from the GLD bar list, which suddenly reappeared days later. That is burning the candle at both ends of the GLD itself. Eventually my expectation is for GLD shares to sell at a 40% discount to gold price as the lack of gold inventory is revealed. Then later, after lawsuits, the GLD might easily sell at 80% discount. Finally the climax could be prosecution for fraud and all investors will be given 20 cents per dollar versus gold. Who knows? Maybe it will be 30% and 60% and 40 cents per dollar. The trouble for hapless unsuspecting investors is they did not read the prospectus, which permits such misuse of GLD shares. They just might be lazy and qualified sheeple. The Wall Street crowd did effective planning. One must give a tip of the hat to their brain trust. The GLD is a tool to drain gold demand from the public and to supply it to the syndicate. It is one of the most brilliant open ploys in financial history.
THE ANTICIPATED DUBAI CRUSH
On October 8th, the Jackass gave you a "TOLD YA SO" on the announced previewed end of the Petro-Dollar. The Saudis, with Chinese and Russians on their left and right arms, heralded the end of the sale of crude oil in US$ terms, with French and Japanese in tow. The Germans secretly were in charge of counseling toward the forged deal, but preferred the shadows. The new crude oil transaction settlement system will take time, but surely not to require eight years until 2018 as announced. That stated target date was intended to deflect and distract from US retaliation. The mere announcement should be regarded as a schematic diagram for architects and investors alike to follow. New systems must be constructed. Investors ahead of the curve will be the primary beneficiaries. The changes that result from the announcement itself will assure the completion date to be just 2 or 3 years, not 8 years.
In just two short months, it is time to say "TOLD YA SO" again, this time on the story that came out of the United Arab Emirates. Or should they be also called the Untied Arab Emirates, after their squabbles between city states? The Dubai World debt default and restructure has caused shock waves the world over. IT WAS FORECASTED IN AUGUST BY THE HAT TRICK LETTER. The vast construction bust has caused anticipated ripples. The threat to London banks is acute. Time will tell whether its ripples will cause sufficient damage to London and New York bankers to topple them and to force lost control in other banking functions like gold management, as my forecast indicated. It seems that worsened big London bank solvency from underwritten Dubai losses, rather than Arab USTreasury Bond dumping, will be the principal cause of any imminent breakdown, if it occurs. See the article entitled "US Bank Enemies at the Gates" from late August (CLICK HERE).
For the record, here is what was written over three months ago by the Jackass pen. "The regional construction boom in the Arab world has an epicenter in Dubai. Unfortunately, it has gone bust, and loudly so. If not for the prompt aid by Abu Dhabi bankers, a vast liquidation of Dubai would have embarrassed them in front of the world. Instead, a new threat comes. The Abu Dhabi rescue next must contend with an indigestion problem, as USTreasurys and likely other US$-based bonds are flooding their banking system. They might own a considerable batch of US bank stocks, soon to be dumped. Ambition led to a whiff of hubris, as fantastic architectural design led to large scope, seen in the skyscrapers and bridges. Not shown are the spectacular communities designed as trees with branches and leaf petals, many empty, busted, and without investment income. But they overdid it, and now must deal with corporate failures and liquidation challenges. The Persian Gulf bank failures represent the clear and present threat. The outsized projects have yielded to outsized rescues and next outsized indigestion to handle the funds in ways so as to avoid a string of national bank failures. Vast liquidations come, word comes from contacts.
A bank panic in the Persian Gulf could ensue very soon, a back door threat. It would clearly have origins in the United Arab Emirates, spread to the entire Persian Gulf like to Saudi Arabia, Kuwait, and elsewhere. From this global toehold, the bank panic could then spread to London, New York, and points in Europe. The UAE bankers must manage their situation. They are loaded to the gills with USTreasurys, the main currency used in the liquidations and rescues local to the UAE. They also have pet stock accounts in big US banks. As further liquidations occur, avoidance of bank failures seems a remote prospect. Watch the enemies at the gates, outside looking in, in urgent need of dumping USTreasury Bonds and other US$-denominated securities."
Much can be told about hidden developments, like family squabbles between the UAE emirate rulers, bitterness over shame brought to the region, anger from unheeded counsel, sudden departures of people in key posts, and a desire to punish (even exploit) the decline in fortunes. The biggest question in my book is how much Abu Dhabi bankers wish to permit London bankers to absorb losses, before Abu Dhabi cleans up and grabs liquidated properties in Dubai at deeply distressed prices? Negotiations are underway, heated, and of vital importance in London between all the bankers involved. What can London offer Abu Dhabi? That is the question. The Arab world takes a dim view of debt to begin with. They abhor home and property mortgages generally, and thus never invest in mortgage bonds. To prove the point, hundreds of Dubai Prisoners languish in their hotels and apartments. They are British, American, and European engineers, financial cogs, analysts, and other workers whose employers from the parent Western firms defaulted on very large loans. These people will remain prisoners, and will likely become pawns in the game during negotiations. Conditions grew so desperate that hundreds of cars lie abandoned at airports, from workers who fled the region before trapped in homes.
Expert analysts warn of continued shock waves, as almost nothing has been resolved, very little asset or corporate liquidation has occurred, fallout has not yet been permitted, bank losses have not been declared, and resolution prices have not been posted. The internal battle between UAE city states, one rich in oil and a banking center, the other recovering from a construction bust amidst great hubris and displayed magnificent follies, will play itself out in the coming several months or years. The internal families are locked in a power struggle. In Dubai, 30% of their economy is derived from real estate, construction, and other property development. They have some truly braindead concepts and ideas at work, like indoor snow skiing, like cooled beaches with underground pipes, and golf courses that require much output from the desalinization plants to water the green landscape against sandy backgrounds. These are like plebeian versions of marble palaces in the desert. To be sure, a great awakening comes as a load of debt is dumped on the big bankers, just when they might have thought the worst was over.
One friend calls the Dubai construction array the greatest property folly in a century. Maybe so! Next come shock waves to London banks. The follies must be liquidated, with great losses dumped upon balance sheets. The banks must take much more lumps and losses. The original $10 billion in debt loss is more like $80 billion. Details on the story appear in the upcoming December Hat Trick Letter reports, which are streaming in on a daily basis. European banks have some exposure too, but not as much as London. The Abu Dhabi rulers must complete bargains with London bankers, who have conspired to suppress the gold price for two decades. The UAE leaders hold a huge amount of gold, and have demanded its return from London custodial accounts. Resentment seethes beneath the surface, the basis for Arab vengeance. The fallout will be wreckage of Royal Bank of Scotland, and maybe HSBC too.
In the process, watch power shift to Abu Dhabi as concessions are made by London under extreme pressures. Parts of Dubai are ghost towns, almost totally unoccupied vast projects. The biggest question in my book is whether RBS can go bust and be liquidated while still operating under the British Govt aegis? Lloyds will take large blows as well. The shock waves have not yet fully reverberated. They will continue for months. The Dubai property prices have not yet bottomed, and might settle at 20 cents per dollar on original basis. The legion of Western wonks in the financial sector stupidly expected Abu Dhabi to rescue all Dubai loans, without benefit of much knowledge of resentment, family conflicts, banker ambitions, and ramifications that extend to the new Gulf Dinar currency that shifted planning rooms (Saudi to Russian). My August article implied the Dubai bust would result since Abu Dhabi would not step in and bail out their UAE brethren. The inner conflicts and agendas were well known all along here.
The next shoe for the condemned Caucasian crowd is mortgage losses from Eastern Europe. For several years, the Swiss provided the funds as a result of their 1.5% steady official rate. At the time, it was 3% below the rest of the continent. The combination of home loan default, and sharply lower Eastern Europe currency basis has resulted in near total losses to Swiss banks on such mortgage portfolios. Also, watch Greece, which could be the next Dubai crush zone. It is a construction bust center also, like Spain. The socialist roots in Southern Europe have enabled a denial of property price declines from Spain to Italy to Greece. Instead of vast arrays of homes being sold at distressed lower prices, they sit in inventory at elevated absurd high prices. The bust impact comes soon, as these assets cannot be carried much longer on the books.
GO GOLD GO GOLD
This is just the beginning. We are still in the proverbial second inning of this gold explosion. Gold continues to rise because the system is breaking, because almost zero remedy has been completed, because pressures are brought to bear using the same broken tools to fix the problems, because mountains of new money are wasted and paid to failed bankers, because the crisis is ongoing, because the economies are not responding to stimulus, because home foreclosures and job losses continue unabated. Much more government rescue and stimulus comes, MUCH MORE. The Chinese are firmly in control of the gold price. They inch up the gold price systematically in order to release more supply from both the cash desperate and the investment knuckleheads. A big story has hit the press, that HSBC is backing out of the gold storage business. My gut tells me that HSBC might be clearing major bank vault space to hold Chinese deliveries from metals exchanges. The gold price does not merely rise from a weakening USDollar and major currencies. Nations intentionally try to undercut themselves in order to preserve their export economies. The gold price also rises from the gradual removal of shackles that have falsely suppressed the price, as supply has dwindled, replaced by paper gold, and probably tungsten gold too. In the last couple weeks, extraordinary scrutiny has come to the gold delivery system. The process reveals an unspeakable global shortage of gold bullion. The gold price is attempting to adjust to a proper higher price free from interference, based upon supply matching demand. The gold price will rise further from continued debasement of the major currencies. Even now, with the COMEX and LBMA in London, the gold market cannot clear at the current price. There is an extreme shortage of gold bullion in physical supply, due to years of price intervention and replacement by paper gold. Apart from weak or destroyed currencies, the gold price must be higher from basic intervention relief.
Some argue that gold must rise to match the supply of newly created money, bound in the fiat currencies with pretty designs and colored ink, even watermarks. Gold should rise in parallel with money creation, but not in lockstep. A currency can always be fixed according to a cover clause that dictates 1% of money can be redeemed in gold. Later, a move to 1.5% in the gold cover clause would fortify one currency in much the same way that official national interest rates lift currencies upon changed policy. Personally my wish is for the gold price to continue its powerful bull run without the Euro currency breakout toward 160. That would expose all the currencies together as horribly weak if not invalid. If the Euro rushes toward 160, the gold market in Europe must then adapt to an interruption in the bull roaming on the continent. Stand back! The explosive upward thrust in the gold price is still a threat, much like Mount St Helens. The Powerz have begun to lose control of the gold market.
No search for safe haven in the USDollar took place after the Dubai world shock. Rather it was a retreat from the British Pound and Euro currencies, which bore the risk of loans underwritten. In one short week, the effect has dissipated, as the USDollar is weaker than BEFORE the Dubai incident broke to make news. All currencies are weak relative to the stable powerful reliable gold. The USDollar is showing a steady relentless weakness, unable to snap into any recovery. It is my view that ruining the federal finances is what Obama was hired to do by the syndicate. The high risk of USMilitary coup in the future remains acute in order to avert a USTreasury default, or perhaps coincident with a default. Obama's specific job is to run up deficits and ruin the dollar, which paves the way for the coup. The Cap & Trade game is just another fraud revealed, with credit given to the intrepid internet websites that gave up the ghost. The upcoming coup has a definite purpose, to remove foreign creditors from any receivership tribunal. The Untied States can become a sequestered state, free from foreign interference. Yet isolation would be the fate won.
ENTER THE CLOWNS
Don't bother to pardon the misspelled names, done to disguise the identities of clowns within our midst. The Jackass is fully capable of errors, usually admitted quickly. My biggest arena for errors has been long-term USTreasury Bond yields, due to interventions, interference, and monetizations. Other errors have been made, hoped to be minor in nature. An extraordinary amount of information must be digested, absorbed, and integrated into any editorial analytic work that covers a complex and treacherous financial world. Errors come since we are human. But what follows is not ordinary, and speaks to an arena tilted toward deception delivered with motive. My work has an objective to analyze correctly, to highlight connected factors, to explain complexities, to forewarn with lead time, and to make forecasts. The string of solid forecasts is my carrying card. Other foibles are carried. My body is adorned by moles, one just like my mother's. More than a few wild long hairs grow from my eyebrows, making some wonder if General Elmo Zumwalt was a distant uncle. My eyes are uneven, one lower, but no glasses are needed to correct vision. My head is balding, but hats keep it warm. My right foot is pigeon toed, that results in a hook in the soccer kick. The left kick is more adept. But my work is factual, helped along by wonderful reliable sources and numerous newshound friends. Minor errors are committed along the way. One should care not about a minor typo within articles offered in the public domain, despite my usual final proofread pass. What follows is a list of elements inside the gold community, often doing a notable disservice.
Why are the US financial airwaves polluted by Denis Gartmann and his consistently incorrect and shallow preachings? His fund is down, not down hard, as he maintains his negative opinion of the gold asset story. He hedged a gold position with an offsetting currency position, resulting in a total waste of investment funds. Gold just happens to be the biggest story and one of the best performing assets in the last half decade. One might conclude such strong performance is worthy of disdain, disrespect, and disrepute. NOT! A contact of mine is considering a new Anti-Gartmann Fund, with a double leverage component that takes the opposite position of the Gartmann fool. Given his steadily shallow analysis and lack of comprehension of the gold market, one might conclude that Gartmann has a secondary income source from Wall Street firms. He might indeed be paid to denigrate the Gold Bull market, despite the tarnish to his reputation. An aside on Gartmann, who used to speak as the Cambridge House gold conferences alongside the Jackass. He appeared in 2005, much to my surprise, since he is so incredibly lacking in insight. From the podium, in front of over 1000 people, he delivered probably the stupidest speech ever to penetrate my ears. Gartmann actually claimed, one year before the housing bust struck, that the USEconomy was still grossly under-leveraged. He actually made numerous points about how the assets within the Untied States still had countless additional collateral from which to draw credit. He actually spoke of numerous new avenues to extend credit, and how the extra funds to surge within the channels of the American system would result in much greater economic growth. He concluded that the best days of the USEconomy were well ahead of us. He praised the merits of risk. Then came the bust. One must wonder if the 1000 people remember the idiotic preachings and drivel from the man that day in Vancouver. The Jackass sure does, one of only a handful who emitted laughter during the Gartmann ideological face plant in the snow. What is his latest correct forecast??
The same conference featured Doug Kasey, who went galactic in a mindless harangue. He spoke of the eventual cap on commodity prices from mining asteroids in the solar system. You see, they are rich in iron and other base metals. He ignored the cost of mining in the deep solar recesses, and how the high cost would impose a cost cap, but one perhaps 50 to 100 times the current commodity prices. After all, in order to exploit the vast asteroid metal supply, one must escape the earth's orbit, at a heavy cost, an overlooked factor. The conference management might have done well to give Doug a face to face check before he stepped up to the podium. Man oh man!! That was a memorable conference with two icons displaying their unwaxed cross-eyed viewpoints for all to see. One must give Kasey credit for many speeches that challenge the honesty and integrity of the USGovt and USMilitary enterprises.
Next take Pablo Van Eaton. The man sounds good, looks great, has a great speaker voice, and is a nice fellow. But he carries a distinction above all others. Van Eaton provides the most eloquent and well constructed arguments for consistently wrong forecasts, and has done so for several years. He had one good call a few years ago on mining stocks hitting a peak, but that call has been eclipsed by a long list in a row that seems not to end. It is like he was a champion on his school forensic team, burdened by arguing the merits of a plainly wrong position, but excelled. When gold was meandering in the low to middle 900 level for months earlier this year, he forecasted a move in the gold price down below 800, as the deflation threat would take its toll. However fallible, he is still invited to appear as a panelist on the dinner hour shows for the Canadian Business Channel. The major investment houses must love his steady disdain shown for the gold market. His subscribers are welcome to switch over to the Hat Trick Letter, where correct forecasts are not only important but are regularly given. Pablo attracts crowds at the conferences. Bless them one and all who hang on his every word, as they must have very short memories. What is his latest correct forecast??
A vivid memory is etched in the Jackass mind from the Calgary conference in 2004, offered also by the Cambridge House. Van Eaton shared generously a taxicab with the Jackass to the airport. The conference had ended. During the taxi ride, Van Eaton expounded on why the USDollar would suffer a serious decline from May to the end of the 2004 year, since Asian sovereign funds would diversify away from the USDollar. In direct rebuttal, the Jackass explained in simple terms that the US Federal Reserve had begun to raise the official interest rate, and would continue for several more meetings. The Jackass rebuttal argument was that we live in a bond driven world, and as long as the official US interest rate was rising, the USDollar would continue to rise in a surprisingly counter-trend rally from basic bond speculation. The point was made quietly, tactfully, professionally, since Pablo was paying for the taxi. Furthermore, my extended argument was that the Asians would hold off on a major dumping of US$-based assets, and instead sell after a year or two had passed. Score one more correct call for the Jackass, and one more wrong forecast for Van Eaton, who shared the same fallacious argument before 1000 people at the same Calgary conference. IN THE NEXT FEW MONTHS, THE USDOLLAR ENJOYED A POWERFUL UPWARD RALLY IN PURE COUNTER-TREND FASHION. It ended when the USFed halted the rate hikes, as forewarned. One must wonder where Pablo takes his cues, or who pays his clandestine paychecks. One must not become too enamored of that charming foreign accent, which delivers a flow a words like a melody. The Jackass does not care if a hillbilly accent is worn when the mental acumen comes through in brilliance. Take TBoone Pickens. His homey folksy Texan accent is charming, and sounds nowhere near as intelligent and alluring as Van Eaton. But Pickens is as consistently correct on forecasts as Van Eaton is wrong.
Another lame entry is Richard Burnedstein, the respected economist from Merrill Lynch. This week he said gold has no driving fundamentals that justify its rising price. Clearly Burnedstein loves the paper game, and surely maintains a high derived price on all things paper. His paycheck is also high, derived from a major paper merchant firm. One must excuse Richard since he at least comes forth with the Merrill Lynch name attached to his own, including all appearances. So his preachings are a much more genuine acknowledged compromise of mental processes. He is paid to represent his firm, whereas Gartmann could easily be receiving large funds from the back door, where his allegiance lies and influence of partners is more hidden. Never forget that Wall Street earns almost zero investment banker fees from gold or the mining firms. It is like dogs selling cat food; they don't do it! What mining firms do solicit in funds for stock issuance is largely conducted in Toronto and Vancouver. So the gold fundamentals are lacking in the man's compromised view. What is his latest correct forecast??
One must suppose that skyrocketing gold investment demand and rush to diversify out of a collapsing dollar do not qualify as fundamental. And the absence of metals exchange gold inventory also does not qualify as fundamental. And the Chinese pledge to lift their gold reserves 10-fold to 10 thousand metric tonnes in eight to ten years, that is not fundamental either. And the G-20 pledges to formally move toward an IMF basket of currencies, known as the Special Drawing Rights, and away from the USDollar, that is not fundamental either. And the Saudi announcement of a phase-out of sales for crude oil in US$ terms over the next few years, neither is that a fundamental. And the grossly insolvent banks in the Untied States, England, and Europe, which are simultaneously struggling, unable to extend loans, desperately suckling from government teats, that is not fundamental either. Burnedstein plainly fails to recognize that the entire world is grasping for something tangible within the global monetary system overrun by toxic paper, and that anchor reached for is gold.
The last two figures that complete the clown show are more closely tied to websites and their associated businesses. Bobo Moriarity is the owner and editor of a formerly prominent website. He shows a surplus of his own articles on his website, usually to extol the merits of some stock he owns. Many thrive and do very well. Not many other analyst articles appear. In Spanish, a bobo is an idiot, a dunce, by the way. Big Bobo, who is reportedly wonderful on field trips to visit mine properties, has called the $1190 gold high of last week a top. He did not use the word bubble, but he expects a notable correction and a long period to achieve new highs. The gold price has gone north instead, laying waste to his forecast, which was correct, but only for approximately one day. Maybe when the gold price reaches $1250 per ounce, he will retract his forecast. He has shown a disproportional disrespectful critical insulting tone to the lowly Jackass from an error committed. It is admitted. The pre-1964 dimes were silver coated but with copper core (not zinc), and besides, in earlier years the dimes were only 93% silver anyway (not 100%). Points taken! Beat me with a stick, but not a golden rod! The switch from majority silver to negligible silver in US coinage escapes Moriarity to this day. His criticism includes great departures from the reality of my correct forecasts and command of the English language, even sentence construction. He is way out of bounds! He finds no merit in the entire tungsten story, and urges proof put on the table. Proof comes but not soon, since murder is often an obstacle to arriving at such press conferences. Maybe when the gold price reaches $1300 or $1500 per ounce, he will understand the Global Paradigm Shift and why gold has risen in a powerful manner in the last two months. Maybe he is not aware that the Chinese are major buyers, and even control the price rise step by step. Surely he does. The most basic Head & Shoulders Reversal Pattern dictates a price target of 1300. The Christmas season is traditionally strong, another factor ignored by Bobo. So he thumbs his nose at seasonal strength and aint a chartist either. To the good Captain, let the gold battle cry be "1-2-3 GOLD" !!
Then we have Jon Needler, who must be the son of the website owners where he displays his anti-gold propaganda. To point out Needler's erroneous forecasts and perspectives would require a full article at least 15 pages in length. He seems the most likely to receive a secondary clandestine remuneration for his diligent work in denigrating the gold market. He comprehends precious little about gold or silver. His arguments are so full of holes that a high school economics student could easily challenge him. His forecasts are consistently not just wrong, but wrong in powerful directional thrusts. Yet his work continues to be posted, despite little or no value. Precisely zero rebuttal will be given, since his work is so extraordinarily devoid of substance or quality. In fact, Needler serves as a salesman for paper gold certificate who openly admits his preference for gold coins. What is his latest correct forecast??
Then consider Henry Orlandwini. His work is actually quite good. The one Hat Trick Letter subscriber is still hoping for return of the $28k absconded by him. Occasionally, like today, he said something that struck the Jackass as lacking deeper insight. He said, "I think currencies are devaluing more than gold is rising, and that is why I contend that overbought is a relative term. Gold is rising, but not as fast as the world currencies are falling." The initial reaction here was "wow, really dumb statement." This is a much bigger phenomenon than just currencies falling. We are in the midst of a systemic breakdown and major financial upheaval. We have a broken monetary system, a threatened global reserve currency, discredited central banks, insolvent major banking systems, and an important Paradigm Shift away from the USDollar as power shifts also to the East. Orlandwini is watching too much the branches, leaves, and ferns within the forest, and seems to be missing the bigger picture. When he attempts to forecast the gold price today and the US$ DX index today, identifying resistance and support levels, he might be missing the biggest story of the last few decades. It is the collapse of the US$-based global monetary system and the urgent effort to replace it and to salvage wealth accumulated. Furthermore, and more precisely, the gold price is pushed by not only a weakening USDollar and weakening major global currencies. They are simultaneously being destroyed, debauched, and debased, not just weakened. The additional force that Orlandwini overlooks is that the gold price is attempting to free itself from the Wall Street and London City shackles. The gold price (silver too) is attempting to find its correct price, even besides the continued weakening of currencies.
Lastly, consider US Federal Reserve Chairman Ben Bernanke. He was clearly chosen by the syndicate to continue the Banker Welfare programs, to run the USDollar printing press until it seizes up, and to preach about how deflation will not happen here. He has not uttered one correct forecast in his entire tenure. He missed every single major banking turn of events, every single breakdown, misjudged the size of bank losses every step of the way, and has missed the economic relapse. The battle for the Bernanke re-appointment will reveal the titanic struggle for wresting control of the USDollar, the US banking system, and the disclosure of deeply engrained corruption. If truth be known, the center of the financial syndicate is the USFed, with operations headquartered in Goldman Sachs and JPMorgan. Payoffs from TARP Funds were diverse. Extortion was probably involved amidst reported death threats to Paulson and other Heads of Banking State. Orders were given to use TARP Funds but do not lend. Guidance was given for acquisitions of ailing banks, not loans. The USFed is the center nexus that processes narco syndicate funds. If truth be known, so is Dubai, by way of Baghdad.
Copyright © 2009 Jim Willie, CB
http://www.financialsense.com/fsu/editorials/willie/2009/1202.html
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