By GRETCHEN MORGENSON and CHARLES DUHIGG
The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced on Sunday, came together after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.
The proposal to place both companies, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid. Falling home prices, which are expected to lead to more defaults among the mortgages held or guaranteed by Fannie and Freddie, contributed to the urgency, regulators said.
Investors who own the companies’ common and preferred stock will suffer. Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives of both companies will be pushed out, according to those briefed on the plan.
The cost of the government’s intervention could rise into tens of billions of dollars and will probably be among the most expensive rescues ever financed by taxpayers.
Both presidential nominees expressed support for the government’s plans. Senator Barack Obama, Democrat of Illinois, said as he campaigned in Indiana that not acting could place the housing market in further distress.
Senator John McCain’s running mate, Gov. Sarah Palin, said at a rally in Colorado Springs that Fannie Mae and Freddie Mac have become too big and too expensive .
The takeover comes on the heels of a rescue of the investment bank Bear Stearns, which was sold to JPMorgan Chase in a deal backed by taxpayers. Already, the housing crisis has cost investors and consumers hundreds of billions of dollars.
The big question now is whether the federal government’s move to take over Fannie and Freddie will restore investor confidence in the nation’s credit markets, help stabilize the stock market and keep loans flowing to creditworthy borrowers.
Fannie and Freddie, by buying mortgages, provide banks and other financial institutions with fresh money to make new loans, a vital lubricant for the housing and credit markets.
Under the plan, the Treasury Department itself will begin buying mortgage securities, providing crucial market support.
As a result of the government’s intervention, the cost of borrowing for Fannie Mae and Freddie Mac should decline, because the government will be insuring their debts. Equally important, because the government is backing the companies, they will continue to buy and sell home loans.
But the plan will probably do little to stop home prices from falling further. And foreclosures are almost certain to rise.
Just a week ago, Treasury officials were still considering a wide variety of options for Fannie Mae and Freddie Mac, ranging from doing nothing to taking over the companies completely, according to people with knowledge of those discussions.
The Treasury secretary, Henry M. Paulson Jr., who won authority from Congress last month to use taxpayer money to bolster the companies, always maintained that he hoped never to use that power. But, as the companies’ stocks continued to languish and their borrowing costs rose, some within the Treasury Department began urging Mr. Paulson to intervene quickly.
Then, last week, advisers from Morgan Stanley hired by the Treasury Department to scrutinize the companies came to a troubling conclusion: Freddie Mac’s capital position was worse than initially imagined, according to people briefed on those findings. The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the companies’ capital resources and financial stability.
Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.
Representatives of both companies did not return calls or declined to comment. But officials who have been briefed on the plans said late Saturday that the companies had agreed to the takeover.
On Friday, executives from Fannie Mae and Freddie Mac were ordered to appear in the offices of their regulator, James B. Lockhart, in separate meetings. They were told that regulators were exercising their authority to place Fannie Mae and Freddie Mac in conservatorship, which would allow for uninterrupted operation of the companies but would put them under the control of Mr. Lockhart.
The details of those plans continued to be worked out on Saturday, when the Federal Reserve chairman, Ben S. Bernanke, met with Mr. Paulson, Mr. Lockhart and key company executives in Washington.
While Freddie Mac’s accounting woes make it easier for regulators to force the company into conservatorship, there was more resistance from Fannie Mae, according to people familiar with the discussions. Once the government took action against Freddie Mac, however, confidence in Fannie Mae would certainly waver. Given Fannie Mae’s declining financial condition, the company has few options but to concede to the government’s demands.
Accusations of questionable accounting are not new for either company. Earlier this decade, both companies paid large fines and ousted their top executives after accounting scandals.
Freddie Mac’s current chief executive and chairman, Richard F. Syron, joined the company in 2003 after the former managers revealed that they had manipulated earnings by almost $5 billion. The next year, Fannie Mae’s chief executive, Daniel H. Mudd, was promoted to the top spot after that company was accused of accounting errors totaling $6.3 billion.
The accounting issues that brought so much urgency to the bailout appear to center on Freddie Mac’s capital cushion, the assets that regulators require them to keep on hand to cover losses.
The methods used to bolster that cushion have caused serious concerns among the companies’ regulator, outside auditors and some investors. For example, while Freddie Mac’s portfolio contains many securities backed by subprime loans, made to the riskiest borrowers, and alt-A loans, one step up on the risk ladder, the company has not written down the value of many of those loans to reflect current market prices.
Executives have said that they intend to hold the loans to maturity, meaning they will be worth more, and they need not write down their value. But other financial institutions have written down similar securities, to comply with “mark-to-market” accounting rules. Freddie Mac holds roughly twice as many of those securities as Fannie Mae.
Freddie Mac and Fannie Mae have also inflated their financial positions by relying on deferred-tax assets — credits accumulated over the years that can be used to offset future profits. Fannie maintains that its worth is increased by $36 billion through such credits, and Freddie argues that it has a $28 billion benefit.
But such credits have no value unless the companies generate profits. They have failed to do so over the last four quarters and seem increasingly unlikely to the next year. Moreover, even when the companies had soaring profits, such credits often could not be used. That is because the companies were already able to offset taxes with other credits for affordable housing.
Most financial institutions are not allowed to count such credits as assets. The credits cannot be sold and would disappear in a receivership. Removing those credits from assets would probably push both companies’ capital below the regulatory requirements.
Regulators are also said to be scrutinizing whether the companies were trying to manage earnings by waiting to add to their reserves. Both companies have gradually increased their reserves for loan losses — Fannie’s reserves today stand at $8.9 billion, and Freddie’s at $5.8 billion.
Other companies, like private mortgage insurers, have been quicker to identify large losses and have set aside much greater amounts. Fannie and Freddie have dribbled out bad news with each quarterly announcement, suggesting they may be trying to manage this process.
Finally, regulators are concerned that the companies may have mischaracterized their financial health by relaxing their accounting policies on losses, according to people familiar with the review. For years, both companies have effectively recognized losses whenever payments on a loan are 90 days past due. But, in recent months, the companies said they would wait until payments were two years late. As a result, tens of thousands of loans have not been marked down in value.
The companies have injected their own capital into pools of securities containing these loans, arguing that their new policies are helping more borrowers.
Under conservative accounting methods, changing these policies would not have any impact on the companies’ books. However, people briefed on the accounting inquiry said that Freddie Mac may have delayed losses with the change.
“We have just had to nationalize the two largest financial institutions in the world because of policy makers’ inaction,” said Josh Rosner, an analyst at Graham Fisher, an independent research firm in New York, and a longtime critic of the government-sponsored enterprises. “Since 2003, when these companies’ accounting came under question, policy makers have done nothing.”
Reporting was contributed by Stephen Labaton and Edmund L. Andrews in Washington; Jeff Zeleny from Terre Haute, Ind.; and Elisabeth Bumiller from Colorado Springs.
7 September 2008
China: Beyond the Bird's Nest
by Jennifer Barry, September 5, 2008
Print
I don’t usually follow the Olympics closely, but these Games were different. The 2008 Beijing Olympics were an event of great and unusual cultural, political, and economic significance to the world. Most commentary has naturally focused on the athletics, and I have not seen much serious analysis on these other topics. I decided to highlight the economic issues behind the Olympics.
In the press, the Beijing Games were repeatedly termed China’s “coming out party,” but I think that phrase trivializes what the nation has accomplished. China is no mere debutante dressed up for a ball, she is a powerful woman seeking global respect. She wants to regain the pride that was lost during the humiliation of the Opium War, when Britain not only forced China to pay for the illegal drugs she had destroyed, but also coerced her to give major territorial, legal and trade concessions.
The status of China is radically changed today. The nation has enormous stockpiles of money from its manufacturing might, and the larger-than-life spectacles in the opening ceremony give a small demonstration on the power of 1.3 billion people when they work toward a common goal. China does not merely have a dominant Olympic team, but it is the third country to have a successful manned spaceflight.
As Bob Costas pointed out in his interview of President Bush, America no longer has much leverage when it comes to pressuring the Chinese government. Much of the U.S. manufacturing base was outsourced to China years ago. America’s trade deficit so far in 2008 is approximately US $481 billion. Even the 35% drop in the U.S. Dollar Index since 2002, and the controlled increase in the yuan has not been enough to make most American exports competitive with Chinese products.
The U.S. economy is particularly vulnerable to a politically motivated sell-off of assets by a sovereign wealth fund, like the one run by China. According to a Congressional report released in January, “foreign investors now hold slightly less than 50% of the publicly held and publicly traded U.S. Treasury securities, 25% of corporate bonds, and about 12% of U.S. corporate stocks.” Overseas investors control over 44% of the U.S. national debt.
These dangers to the financial system are not just theoretical. Since China has approximately $1 trillion in dollar denominated assets, last year two officials threatened the “nuclear option” of dollar sales if the Bush Administration did not reduce the level of political pressure.
Then in August, Yu Yongding, the former advisor to the Chinese central bank, warned the Treasury Department not to let Freddie and Fannie fail. He stated that if “international investors are not compensated adequately, the consequences will be catastrophic,” implying retribution by China. The nation has been selling GSE bonds this summer, not trusting the implied backing of the U.S. government.
I believe the economic actions of the Chinese government demonstrate its attempt to be mindful of the past, both its pitfalls and its glories. While it won’t be bullied by other nations, the policy of economic decentralization shows it is trying to avoid the catastrophe of one misguided ruler sending the nation down the wrong path. Unbridled capitalism is bursting out all over the country under the slogan of Deng Xiaoping, “Poverty is not socialism. To be rich is glorious.” The ruling Communist Party could therefore justify liberalization of the economy without the political reform that one would expect to accompany it, as the Communists were not about to loosen their grip on power.
While China has incredible potential in its huge population and manufacturing base, it also faces huge challenges. In order to feed and provide jobs for over a billion people, China now suffers from air pollution, deforestation, lack of clean water and other signs of environmental damage. China is now a net importer of food and energy. Most of the rural residents are poor and uneducated, and unrest over ethnic and economic issues simmers in the background. All these issues could seriously derail the spread of prosperity.
However, one of China’s traditional strong suits is planning. If they make intelligent decisions on handling growth similar to their policy of economic liberalization, the country will have become the dominant power of the 21st century. On the other hand, another Cultural Revolution would be disastrous.
One of the reasons that commodities have declined so sharply is the mistaken belief that China must fall into a recession when the developed countries do. This is unlikely for several reasons. China's GDP grew 11.4% in 2007, so in order for a recession to occur (which requires negative growth), their economy would have to suffer a massive crash.
In addition, China restricted industrial activity this summer to lower pollution levels and save energy for the Beijing Olympics. These constraints contributed to the seasonal weakness in commodities, but the resumption of factories will lead to a jump in demand. The nation is still urbanizing and industrializing, so it has a backlog of infrastructure projects to complete which will require tons of base metals and energy.
Even if the West were to suffer a depression as bad as the Great Depression, 75% of the workforce would still be employed. If a sharp drop in demand occurred, China could still keep its population working by spending its current account surplus on developing the countryside, like FDR did with the Works Progress Administration in the 1930s. China is no longer dependent on income and goodwill from Western nations to keep its economy afloat.
The Chinese saw the 2008 Beijing Olympics as their opportunity to send a message to the world about their reemergence. They set the tone for their global interaction with themes of diversity, harmony, and openness. Chinese society is rapidly evolving and while it is not without flaws, their success at reinventing themselves has been breathtaking. Although nominally Communist, investment great Jim Rogers calls the Chinese the “best capitalists in the world.” China is becoming a new superpower, and must be taken seriously. Nations must decide if they will struggle against China's rising strength, or work in harmony with the Chinese.
Copyright © 2008 Jennifer Barry
I don’t usually follow the Olympics closely, but these Games were different. The 2008 Beijing Olympics were an event of great and unusual cultural, political, and economic significance to the world. Most commentary has naturally focused on the athletics, and I have not seen much serious analysis on these other topics. I decided to highlight the economic issues behind the Olympics.
In the press, the Beijing Games were repeatedly termed China’s “coming out party,” but I think that phrase trivializes what the nation has accomplished. China is no mere debutante dressed up for a ball, she is a powerful woman seeking global respect. She wants to regain the pride that was lost during the humiliation of the Opium War, when Britain not only forced China to pay for the illegal drugs she had destroyed, but also coerced her to give major territorial, legal and trade concessions.
The status of China is radically changed today. The nation has enormous stockpiles of money from its manufacturing might, and the larger-than-life spectacles in the opening ceremony give a small demonstration on the power of 1.3 billion people when they work toward a common goal. China does not merely have a dominant Olympic team, but it is the third country to have a successful manned spaceflight.
As Bob Costas pointed out in his interview of President Bush, America no longer has much leverage when it comes to pressuring the Chinese government. Much of the U.S. manufacturing base was outsourced to China years ago. America’s trade deficit so far in 2008 is approximately US $481 billion. Even the 35% drop in the U.S. Dollar Index since 2002, and the controlled increase in the yuan has not been enough to make most American exports competitive with Chinese products.
The U.S. economy is particularly vulnerable to a politically motivated sell-off of assets by a sovereign wealth fund, like the one run by China. According to a Congressional report released in January, “foreign investors now hold slightly less than 50% of the publicly held and publicly traded U.S. Treasury securities, 25% of corporate bonds, and about 12% of U.S. corporate stocks.” Overseas investors control over 44% of the U.S. national debt.
These dangers to the financial system are not just theoretical. Since China has approximately $1 trillion in dollar denominated assets, last year two officials threatened the “nuclear option” of dollar sales if the Bush Administration did not reduce the level of political pressure.
Then in August, Yu Yongding, the former advisor to the Chinese central bank, warned the Treasury Department not to let Freddie and Fannie fail. He stated that if “international investors are not compensated adequately, the consequences will be catastrophic,” implying retribution by China. The nation has been selling GSE bonds this summer, not trusting the implied backing of the U.S. government.
I believe the economic actions of the Chinese government demonstrate its attempt to be mindful of the past, both its pitfalls and its glories. While it won’t be bullied by other nations, the policy of economic decentralization shows it is trying to avoid the catastrophe of one misguided ruler sending the nation down the wrong path. Unbridled capitalism is bursting out all over the country under the slogan of Deng Xiaoping, “Poverty is not socialism. To be rich is glorious.” The ruling Communist Party could therefore justify liberalization of the economy without the political reform that one would expect to accompany it, as the Communists were not about to loosen their grip on power.
While China has incredible potential in its huge population and manufacturing base, it also faces huge challenges. In order to feed and provide jobs for over a billion people, China now suffers from air pollution, deforestation, lack of clean water and other signs of environmental damage. China is now a net importer of food and energy. Most of the rural residents are poor and uneducated, and unrest over ethnic and economic issues simmers in the background. All these issues could seriously derail the spread of prosperity.
However, one of China’s traditional strong suits is planning. If they make intelligent decisions on handling growth similar to their policy of economic liberalization, the country will have become the dominant power of the 21st century. On the other hand, another Cultural Revolution would be disastrous.
One of the reasons that commodities have declined so sharply is the mistaken belief that China must fall into a recession when the developed countries do. This is unlikely for several reasons. China's GDP grew 11.4% in 2007, so in order for a recession to occur (which requires negative growth), their economy would have to suffer a massive crash.
In addition, China restricted industrial activity this summer to lower pollution levels and save energy for the Beijing Olympics. These constraints contributed to the seasonal weakness in commodities, but the resumption of factories will lead to a jump in demand. The nation is still urbanizing and industrializing, so it has a backlog of infrastructure projects to complete which will require tons of base metals and energy.
Even if the West were to suffer a depression as bad as the Great Depression, 75% of the workforce would still be employed. If a sharp drop in demand occurred, China could still keep its population working by spending its current account surplus on developing the countryside, like FDR did with the Works Progress Administration in the 1930s. China is no longer dependent on income and goodwill from Western nations to keep its economy afloat.
The Chinese saw the 2008 Beijing Olympics as their opportunity to send a message to the world about their reemergence. They set the tone for their global interaction with themes of diversity, harmony, and openness. Chinese society is rapidly evolving and while it is not without flaws, their success at reinventing themselves has been breathtaking. Although nominally Communist, investment great Jim Rogers calls the Chinese the “best capitalists in the world.” China is becoming a new superpower, and must be taken seriously. Nations must decide if they will struggle against China's rising strength, or work in harmony with the Chinese.
Copyright © 2008 Jennifer Barry
6 September 2008
U.S. Plans to Seize Fannie and Freddie
By STEPHEN LABATON and ANDREW ROSS SORKIN
WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac, the mortgage-finance giants, that the government is preparing a plan to seize the two companies and place them in a conservatorship, officials and company executives briefed on the discussions said.
The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend on Friday at the office of the companies' new regulator. The executives were told that under the plan, they and their boards would be replaced, and their shareholders virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.
It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in United States history.
The drastic effort follows the bailout earlier this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees and the bulk of its assets were transferred to J.P. Morgan Chase, leaving shareholders with a nominal amount.
Under a conservatorship, most if not all of the remaining value of the common and preferred shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets.
The officials said that the executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen.
For months, administration officials have grappled with the steady erosion of the books of the two mortgage finance giants. A fierce behind the scenes debate among policymakers has considered whether to seize the companies or let them work out their problems.
But the declining housing and financial markets have apparently now forced the administration's hand. With foreign governments growing increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital, the administration apparently decided it would be better to act now rather than closer to the presidential election in two months.
Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the new legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared.
As their problems have deepened—and the marketplace has come to expect some sort of government rescue — both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr. Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies.
In issuing their quarterly financial statements last month, the two companies reported huge losses and predicted that home prices would fall more than previously projected.
The debt securities the companies issue to finance their operations are widely owned by foreign governments, pension funds, mutual funds and big companies.
Officials said the participants at the meetings included Mr. Paulson, Ben S. Bernanke, the chairman of the Federal Reserve, and James Lockhart, the head of both the old and new agency that regulates the companies. The companies were represented by Daniel H. Mudd, the chief executive of Fannie Mae, and Richard F. Syron, chief executive of Freddie Mac. Also participating was H. Rodgin Cohen, the chairman of the law firm Sullivan & Cromwell, who was representing Freddie.
Officials and executives briefed on the meetings said that Mr. Mudd and Mr. Syron were told that they would have to leave the companies.
Representatives of the two companies did not return telephone calls seeking comment.
The meetings reflected the reality that senior administration officials did not believe they had the luxury of waiting for some kind of financial tipping point, as happened with Bear Stearns, which was saved from insolvency last March by government intervention after its stock plummeted and lenders withheld their capital.
Instead, Mr. Paulson has struggled to navigate through three potentially conflicting goals—stabilizing the financial markets, making mortgages more widely available in a tightening credit environment, and protecting taxpayers from possibly enormous losses.
Publicly, administration officials have tried to bolster the companies because the nation's mortgage system relies on their continued ability to purchase mortgages from commercial lenders and pull the housing markets out of their slump.
But privately, senior officials have been critical of top executives at the companies, particularly Freddie Mac. They have raised concerns about major risks to taxpayers of a bailout of companies whose executives have received huge compensation packages. Mr. Syron, for instance, collected more than $38 million in compensation since he joined the company in 2003.
Although Mr. Syron promised regulators earlier this year that he would raise $5.5 billion from investors, he has repeatedly failed to make good on that promise — even as Fannie Mae raised more than $7 billion. Mr. Syron was slated to step down from the chief executive position last year, but that was delayed when his appointed successor, Eugene McQuade, chose to leave the company.
Freddie Mac has approached numerous people about the chief executive position, including Kenneth I. Chenault of American Express and Laurence D. Fink of BlackRock, both of whom said they did not want to be considered for the position.
Another contender has been David Vitale, a former banking executive, a former chief executive of the Chicago Board of Trade, and adviser to the Chicago public school superintendent. Mr. Vitale declined to comment on whether he had been offered or accepted a position at Freddie Mac.
With the possible removal of the top management and the board, it is no longer clear who would appoint the new management.
Mr. Paulson had hoped that merely having the authority to bail out the two companies, which Congress provided in its recent housing bill, would be enough to calm the markets, but if anything anxiety has been increasing. The clearest measure of that anxiety has been the gradually widening spread between interest rates on Fannie- or Freddie-backed mortgage securities and rates for Treasury securities, making home mortgages more expensive. The stock price of the companies has also plunged over the last year.
After stock markets closed on Friday, the shares of Fannie and Freddie plummeted. Fannie was trading around $5.50, down from $70 a year ago. Freddie was trading at about $4, down from about $65 a year ago.
With Fannie and Freddie guaranteeing about $5 trillion in mortgage-backed securities, and a big share of those securities held by central banks and investors around the world, Mr. Paulson appears to have decided that the stakes are too high to take any chances.
One challenge for Mr. Paulson is that the Treasury Department is required by the new law to obtain agreement from the boards of Fannie and Freddie on any kind of capital infusion, which means Mr. Paulson has to negotiate to some degree with the two mortgage companies.
The exception to that requirement is if the companies' regulator, Mr. Lockhart, determines that the companies are insolvent or deeply undercapitalized. In that event, the government would have the authority to change the companies' managements and go so far as to take the companies over.
Experts said that the longer the administration waited, the greater the potential risks and costs.
Charles Calomiris, a professor of economics at Columbia University's School of Business, said delaying a government rescue would only increase the risks and costs.
“The last thing you want to do is give a distressed borrower more time, because when people are in distress they tend to take a lot of risks,” Mr. Calomiris said. “You don't want zombie institutions floating around with time on their hands.”
Stephen Labaton reported from Washington and Andrew Ross Sorkin from New York. Edmund L. Andrews contributed reporting from Washington, and Eric Dash and Charles Duhigg from New York.
WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac, the mortgage-finance giants, that the government is preparing a plan to seize the two companies and place them in a conservatorship, officials and company executives briefed on the discussions said.
The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend on Friday at the office of the companies' new regulator. The executives were told that under the plan, they and their boards would be replaced, and their shareholders virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.
It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in United States history.
The drastic effort follows the bailout earlier this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees and the bulk of its assets were transferred to J.P. Morgan Chase, leaving shareholders with a nominal amount.
Under a conservatorship, most if not all of the remaining value of the common and preferred shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets.
The officials said that the executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen.
For months, administration officials have grappled with the steady erosion of the books of the two mortgage finance giants. A fierce behind the scenes debate among policymakers has considered whether to seize the companies or let them work out their problems.
But the declining housing and financial markets have apparently now forced the administration's hand. With foreign governments growing increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital, the administration apparently decided it would be better to act now rather than closer to the presidential election in two months.
Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the new legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared.
As their problems have deepened—and the marketplace has come to expect some sort of government rescue — both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr. Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies.
In issuing their quarterly financial statements last month, the two companies reported huge losses and predicted that home prices would fall more than previously projected.
The debt securities the companies issue to finance their operations are widely owned by foreign governments, pension funds, mutual funds and big companies.
Officials said the participants at the meetings included Mr. Paulson, Ben S. Bernanke, the chairman of the Federal Reserve, and James Lockhart, the head of both the old and new agency that regulates the companies. The companies were represented by Daniel H. Mudd, the chief executive of Fannie Mae, and Richard F. Syron, chief executive of Freddie Mac. Also participating was H. Rodgin Cohen, the chairman of the law firm Sullivan & Cromwell, who was representing Freddie.
Officials and executives briefed on the meetings said that Mr. Mudd and Mr. Syron were told that they would have to leave the companies.
Representatives of the two companies did not return telephone calls seeking comment.
The meetings reflected the reality that senior administration officials did not believe they had the luxury of waiting for some kind of financial tipping point, as happened with Bear Stearns, which was saved from insolvency last March by government intervention after its stock plummeted and lenders withheld their capital.
Instead, Mr. Paulson has struggled to navigate through three potentially conflicting goals—stabilizing the financial markets, making mortgages more widely available in a tightening credit environment, and protecting taxpayers from possibly enormous losses.
Publicly, administration officials have tried to bolster the companies because the nation's mortgage system relies on their continued ability to purchase mortgages from commercial lenders and pull the housing markets out of their slump.
But privately, senior officials have been critical of top executives at the companies, particularly Freddie Mac. They have raised concerns about major risks to taxpayers of a bailout of companies whose executives have received huge compensation packages. Mr. Syron, for instance, collected more than $38 million in compensation since he joined the company in 2003.
Although Mr. Syron promised regulators earlier this year that he would raise $5.5 billion from investors, he has repeatedly failed to make good on that promise — even as Fannie Mae raised more than $7 billion. Mr. Syron was slated to step down from the chief executive position last year, but that was delayed when his appointed successor, Eugene McQuade, chose to leave the company.
Freddie Mac has approached numerous people about the chief executive position, including Kenneth I. Chenault of American Express and Laurence D. Fink of BlackRock, both of whom said they did not want to be considered for the position.
Another contender has been David Vitale, a former banking executive, a former chief executive of the Chicago Board of Trade, and adviser to the Chicago public school superintendent. Mr. Vitale declined to comment on whether he had been offered or accepted a position at Freddie Mac.
With the possible removal of the top management and the board, it is no longer clear who would appoint the new management.
Mr. Paulson had hoped that merely having the authority to bail out the two companies, which Congress provided in its recent housing bill, would be enough to calm the markets, but if anything anxiety has been increasing. The clearest measure of that anxiety has been the gradually widening spread between interest rates on Fannie- or Freddie-backed mortgage securities and rates for Treasury securities, making home mortgages more expensive. The stock price of the companies has also plunged over the last year.
After stock markets closed on Friday, the shares of Fannie and Freddie plummeted. Fannie was trading around $5.50, down from $70 a year ago. Freddie was trading at about $4, down from about $65 a year ago.
With Fannie and Freddie guaranteeing about $5 trillion in mortgage-backed securities, and a big share of those securities held by central banks and investors around the world, Mr. Paulson appears to have decided that the stakes are too high to take any chances.
One challenge for Mr. Paulson is that the Treasury Department is required by the new law to obtain agreement from the boards of Fannie and Freddie on any kind of capital infusion, which means Mr. Paulson has to negotiate to some degree with the two mortgage companies.
The exception to that requirement is if the companies' regulator, Mr. Lockhart, determines that the companies are insolvent or deeply undercapitalized. In that event, the government would have the authority to change the companies' managements and go so far as to take the companies over.
Experts said that the longer the administration waited, the greater the potential risks and costs.
Charles Calomiris, a professor of economics at Columbia University's School of Business, said delaying a government rescue would only increase the risks and costs.
“The last thing you want to do is give a distressed borrower more time, because when people are in distress they tend to take a lot of risks,” Mr. Calomiris said. “You don't want zombie institutions floating around with time on their hands.”
Stephen Labaton reported from Washington and Andrew Ross Sorkin from New York. Edmund L. Andrews contributed reporting from Washington, and Eric Dash and Charles Duhigg from New York.
Achilles Heel, Shock Wave, Transformation
by Jim Willie, CB. Editor, Hat Trick Letter | September 5, 2008
Something big this way comes. Events will center upon the arch-nemesis of gold, the USTreasury Bond. Market interference is too huge, for bonds, for bank stocks, for the entire financial sector. Banking system structures are too broken. The pillars of the USEconomy are all in deep trouble, with profound deficits and insolvency the rule of the day. See the USGovt federal deficit (growing fast), the trade deficit (chronically large), the housing negative equity (worsening gradually), and insolvent banks (worse each quarter, despite the denials). A massive shock wave is coming. In all likelihood plans are in place, with events already set in motion, as the plan is probably to be event driven. Their objective is to disable the US juggernaut, whose principal parts are a fraud centrifuge with numerous supporting mechanisms, and an aggressive military machine with key banking supporting mechanisms. In order to disable, derail, and bring a halt to abuse by the US leaders in banking, politics, commerce, and military, the foreigners (not just perceived enemies), have turned their attention to the Achilles Heel. Timing is critical, probably centered at the US presidential election, or events aligned for its distraction. Details on a possible scenario are to be found in the September Hat Trick Letter, which will be of a simpler more succinct format this month. Typical information flow and usual analysis seem out of place. Like with the US system of schools and business, the new year starts in September. This will be a strategic report.
Geopolitical risks have raised to crescendo levels, as powerful enemies are angry. Given false news reports, the United States leadership and population seem incredibly confident and complacent, a big risk. They fail to see the significance of events in Georgia and all along the Russian border. Be sure to know that the economic decline and faulty foundation found in numerous AngloSphere (US, UK, Australia, NZ, Ireland, even Canada) systems has a backlash coming, which will propel some of these nations into Third World status, or vassal positions under Chinese rule, even ignored backwaters.
GOLDEN NEMESIS IS VULNERABLE
A blowoff top appears evident in the USTreasury complex. The USEconomic recession is accelerating, with confirmation in the bond market. That statement might sound contradictory. An assumed 1.3% price inflation for Q2 was required in order to concoct a goofy story of 3% Gross Domestic Product growth. The US is in much worse shape than any major continental economy, bar none. If the phony GDP figure were believed, the S&P500 stock index would not be challenging at a multi-year breakdown. Press reporting of the USEconomy has grown more distorted than ever before to support the US system. In fact, the US financial system resembles a gigantic fraudulent syndicate ring system. The irony is that exported bond fraud in past years has been followed by tin-cupping this year so as to secure replenishment funds to stave off bankruptcy. Integrity of US financial firms is at rock bottom, inviting foreign reaction. My position is that JPMorgan stands at the center of the syndicate ring, starting with Enron involvement in 2000, extending to Cantor Fitzgerald involvement in Sept 2001, and now with Bank of Baghdad involvement in processing clandestine Afghan funds in clearinghouse operations. JPMorgan might be the center of the money laundering operations that have kept Wall Street banks afloat for years. Anyone with connections to financial officers to these firms considers this information to be basic.
This US structural system has a vital channel. The bankruptcy of America is the story of the year, as 2008 is the year the system breaks. The crowning blow is the exported bond fraud, its lack of prosecution within the US, and the exclusion of US banks and some corporations from the planned ‘Post-US World’ underway. Numerous summit level conferences where important commerce and banking agreements have been recently forged on several continents, all having excluded the United States from participation. Big movement is seen in the US bond market. Foreign central bank intervention has accelerated in the last several weeks. The 10-year TNote yield is at the 3.6% level after hue & cry of price inflation all through spring months. NO SURPRISE HERE! We might be seeing a double top failure in the long-term USTreasurys. The historical chart bears this out more clearly.
Along with a USTreasury rally has come a giant swap trend, as foreign wealth centers have traded out US Mortgage Agency bonds and into USTreasurys, adding to the blowoff top. Some foreign entities are openly requesting bailout redemption of impaired bonds. All corners seem to be hunkering down into USTBonds as a safe haven. The risk of an actual default in USTreasurys must be taken seriously, in view of upcoming intentions, however unwillingly executed, to nationalize everything under the sun inside the US landscape. The natural nemesis in financial markets for gold is the USTreasury Bond. New supply puts it at great risk. The printing press with raised lamination will produce huge USDollar output soon. Nationalization demands it. The consequent risk to the USDollar and USTreasury Bond is deep, profound, and stark!
FAILURES & STRESSES
As the USEconomic recession has taken grip, capital gains tax revenues and payroll income tax revenues are way down. Almost no specific story supports the growth story told. Even the export trade will be tripped up by global slowdown. The USGovt federal budget deficit will be enormous, even without the nationalization demands. The collection of sectors seeking imminent bailouts in the nationalization theme include Fannie Mae & Freddie Mac, General Motors and Ford, Wall Street banks, and some airlines. Add to that demand some staggering funding requirements for the Federal Deposit Insurance Corp (covering failed bank deposits) and the Pension Guarantee Fund (covering failed corporate pension funds), to raise strain to a crescendo. Did PIMCO actually hint they wanted a bailout too? Of course, never overlook the sacred military budget demands, never to be challenged or reduced, but always adding great USTBond supply.
During the past two decades, foreigners have accumulated gigantic USTBond holdings. Now finally, too many foreign enemies hold huge amounts of USTBonds, a risk my work has mentioned steadily. The US no longer controls its destiny. The risk to sovereignty has built to a point of recognition as capital sale replenishment deals abound, a frequent occurrence for big banks. The USDollar is rallying when its financial condition is imploding. The driving force for the deteriorating crippled US condition is the housing decline. Just today, more dreadful home foreclosure and delinquency data was released. The story of US relative strength is absurd on its face, and yet another important chapter in the US Economic Mythology treatise. Such a contradiction invites a reaction.
Watch the South Koreans not invest in either Lehman or Merrill Lynch, since they are not fools. Did Lone Star actually sue the Koreans so as to block this rescue effort? Look for one or both of these Wall Street crippled firms to fall into bankruptcy soon. The climate will change radically as a result. The end of the Q3 quarter is nigh, and admission of renewed larger bank losses is a cinch. They are nowhere near the end of their mortgage nightmare. Watch Citigroup and AIG for matching failures. The Credit Default Swap conflagration is located on the AIG doorstep. The sovereign risk to the United States is now overshadowed by a risk of pre-emptive financial attack from foreign locations. The point here is that a mountain of new USTreasury supply is guaranteed to come soon. The new supply flies in the face of rising price. The timing for a bond attack is soon possibly perfect. For years, nobody has questioned the USTBond as the only viable parking lot for surplus capital, the largest and most liquid market in the world. Times will change. Third World bonds do not flourish!
The price inflation front is another big risk for USTreasurys. A CPI over 5% for back to back months represents a threat, but it is allayed by dormant wages. Next year, many sharp analysts expect the US Consumer Price Index to top level 10% level. Already the jobless rate surpassed 6% in the US, amidst a strange admission. Recognized in the open was how the extension of state jobless benefits resulted in counting more of the jobless! The return of gold used as an inflation hedge will be realized soon. As trade friction grows with China, in Post-Olympics times, the US will be less the beneficiary to lower wages from globalization. Gold will be the ultimate safe haven vehicle soon.
THE PROVOKED BEAR
A scenario must be laid out for theories of discontinuous nonlinear events and solutions whose fallout will alter completely the global geopolitical chessboard. The September Hat Trick Letter will focus on this topic from numerous angles. The next global chapter will have the United States isolated into a ‘Glorified Third World’ surreal land. What many analysts fail to comprehend is that the current situation cannot continue, characterized by Third World finances, unspeakable bank fraud, and aggressive military behavior, whose mix is totally incongruous. Continuation of the status quo is untenable. The most recent events to upset the geopolitical balance in a state of constant flux is the attack by the US and Georgia forces against Russia, portrayed in opposite fashion. The US even had some help from allies on the battlefield, with dead soldiers behind the Russian lines held in freezer chests as bargaining chips and tangible proof. This all is avoided by the intrepid deceptive US press. To seek sanctions against Russia for its own defense seems ludicrous. The Russian bear has been goaded, poked, and provoked in a systematic fashion. It will respond. Behind the scenes, plans have been made. The USMilitary is funded increasingly by foreigners, many of whom are considered enemies. It is almost tragic that so-called trade partners at the beginning of this decade 2000 have turned into enemies. Russia and China will become uneasy essential allies, whose common trait will be their opposition to the United States. They each want a formal seat at Global Finance Minister Meetings, routinely denied. The fragile trade relationship that the US depends so critically upon hinges upon continued USTreasury Bond support. Do not consider it assured. The USTreasury Bond is the quintessential point of vulnerability to the entire US financial, economic, and military system. A pre-emptive attack against the USTBond must be taken seriously. That is the story that has come to my desk in recent weeks.
Europe is the key prize. The US is attempting to push Europe into a conflict with Russia, so that the Russian emerging giant does not forge closer ties with Europe, to the exclusion of the United States. The NATO accords have been twisted and dishonored, used as a US convenience. Some might argue that NATO is dead, remaining only as a sharp stick to poke Russia with. The Russian-German relationship is natural and historical. Even Catherine the Great from Russia was from German royal bloodlines. The Russian-European energy supply relationship is natural and efficient. President Putin, and now his sidekick Medvedev, have grand resource and energy deposit wealth, and full willingness to use it as a powerful weapon. They might soon exclude the US in the supply chain, in favor or China, all the while keeping the tap flowing to Europe. The German leaders seem to be talking honestly with Russians, but engaging in lipservice to the Americans, winking across the Urals in the process. The next stage of conflict is Ukraine, where more US color revolution meddling is deep. What many US tacticians fail to comprehend is that the USMilitary machine is on the verge of depletion (both troops & machinery), at a time when Russia has developed some key tactical superiority. The USMilitary is left with missiles, aircraft, and drones. See the anti-ship Sunburn and Onyx missiles in Russian control, each supersonic. The US Cruise missile is not. An attack on Iran, whether warranted or not, will immediately prompt a harsh and lethal financial counter-measure by Russia and its allies. The hapless US leaders are left to squirm and wonder who their allies are these days. Iran could be the grand trap.
THE GOLD ANGLE
Encircling the Big Bear has led to a powerful reaction, one that comes. It is planned, and awaits execution in an event-driven scenario. Quietly, physical demand for gold & silver has grown to monumental levels. Do not be deterred or distracted by the falling gold & silver prices. The price mechanism has totally broken, as supply is absent and vanishing. Since Russia, China, and the Arabs own so much gold, they are motivated to endorse the plan that comes, the plan in place, the plan that needs only the trigger events. Powerful foreign entities are increasingly angered by the price decline in gold, as US paperhanger conmen fraud kings have intervened to do harm to foreign savings accounts. Perhaps foreign entities will hatch an event, whose trigger remains unclear. Perhaps they will permit unwitting reckless US leaders to proceed down the path, where they continue to fall into traps, where doors continue to close behind them. In any newly established vacuum could quickly come new gold-backed currencies. Two are already planned, whose launch date is uncertain but clearly tied to the upcoming plan. The Arabs, Chinese, and Russians have accumulated gigantic reserves, much of which is held in the form of US$-based securities. These nations and peoples are not friends of the United States. Recent friendship has been a convenience for them and a trap for Americans. Arabs have an extremely uneasy alliance with Americans, who continue to trumpet their war against (Islamic) terrorism.
Big changes are coming. The euro currency will not continue in its present form for long. The Germans refuse to join fortunes with wrecked Latin southern nations. The split is sure to lift the euro remaining in the German corner and lift gold in the process from extreme disruption. When the plan is hatched and put into action, the extreme disruptions to the US Achilles Heel will lead to a historically unprecedented beneficial discontinuity that favors gold, since its paper-based bond alternative will have been relegated to the basement. The USTreasury Bond must soon reflect its Third World characteristics. The flipside of the American Peso (Dollar) is the USTreasury Bond. It is the feeder system to too much that cannot justifiably continue. So many dangerous assumptions are made by arrogant complacent folks. As a bright German colleague recently said to me, “People do not embrace change, but change will embrace people.” Change comes. If your stomach is not churning by recent events, you are not in possession of a stomach.
The gold & silver markets are downtrodden in a harsh correction, when their safe haven status is actually improving. Something is soon to erupt, and it will change the world, especially the United States. The gold & silver prices will suddenly find themselves at 50% to 100% above their current prices, after the upcoming planned pre-emptive event staged against the USTreasurys. As numerous US financial instruments are defaulting, one must examine the potential for USTreasury default. Some must wonder what attack could come about. Imagine a steady large batch of sell orders, of larger size than the recent buy orders from central banks. The sell orders are repeated each day. The USGovt would not permit its continuation and extremely damaging effects. Unwittingly, the central bankers have taught the powerful adversaries to the United States how to cripple the national financial structure.
Amidst profound changes soon to be forced upon the United States, the principal losers will be the USDollar &USTreasury Bond, with the big winners being gold & silver. Foreigners, some with newly forged alliances, are preparing for the next global chapter. That new era will NOT have the United States at the helm, or even at many tables for decision making. The US has earned through fraud, bullying, and arrogance a banishment. The US will be isolated and relegated to the backwaters, which can be properly the New Third World. It will be glorified by US leaders and US press. DO NOT SELL YOUR GOLD & SILVER. RATHER, TRY TO BUY SOME IN PHYSICAL FORM, IF YOU CAN FIND IT!!!
Something big this way comes. Events will center upon the arch-nemesis of gold, the USTreasury Bond. Market interference is too huge, for bonds, for bank stocks, for the entire financial sector. Banking system structures are too broken. The pillars of the USEconomy are all in deep trouble, with profound deficits and insolvency the rule of the day. See the USGovt federal deficit (growing fast), the trade deficit (chronically large), the housing negative equity (worsening gradually), and insolvent banks (worse each quarter, despite the denials). A massive shock wave is coming. In all likelihood plans are in place, with events already set in motion, as the plan is probably to be event driven. Their objective is to disable the US juggernaut, whose principal parts are a fraud centrifuge with numerous supporting mechanisms, and an aggressive military machine with key banking supporting mechanisms. In order to disable, derail, and bring a halt to abuse by the US leaders in banking, politics, commerce, and military, the foreigners (not just perceived enemies), have turned their attention to the Achilles Heel. Timing is critical, probably centered at the US presidential election, or events aligned for its distraction. Details on a possible scenario are to be found in the September Hat Trick Letter, which will be of a simpler more succinct format this month. Typical information flow and usual analysis seem out of place. Like with the US system of schools and business, the new year starts in September. This will be a strategic report.
Geopolitical risks have raised to crescendo levels, as powerful enemies are angry. Given false news reports, the United States leadership and population seem incredibly confident and complacent, a big risk. They fail to see the significance of events in Georgia and all along the Russian border. Be sure to know that the economic decline and faulty foundation found in numerous AngloSphere (US, UK, Australia, NZ, Ireland, even Canada) systems has a backlash coming, which will propel some of these nations into Third World status, or vassal positions under Chinese rule, even ignored backwaters.
GOLDEN NEMESIS IS VULNERABLE
A blowoff top appears evident in the USTreasury complex. The USEconomic recession is accelerating, with confirmation in the bond market. That statement might sound contradictory. An assumed 1.3% price inflation for Q2 was required in order to concoct a goofy story of 3% Gross Domestic Product growth. The US is in much worse shape than any major continental economy, bar none. If the phony GDP figure were believed, the S&P500 stock index would not be challenging at a multi-year breakdown. Press reporting of the USEconomy has grown more distorted than ever before to support the US system. In fact, the US financial system resembles a gigantic fraudulent syndicate ring system. The irony is that exported bond fraud in past years has been followed by tin-cupping this year so as to secure replenishment funds to stave off bankruptcy. Integrity of US financial firms is at rock bottom, inviting foreign reaction. My position is that JPMorgan stands at the center of the syndicate ring, starting with Enron involvement in 2000, extending to Cantor Fitzgerald involvement in Sept 2001, and now with Bank of Baghdad involvement in processing clandestine Afghan funds in clearinghouse operations. JPMorgan might be the center of the money laundering operations that have kept Wall Street banks afloat for years. Anyone with connections to financial officers to these firms considers this information to be basic.
This US structural system has a vital channel. The bankruptcy of America is the story of the year, as 2008 is the year the system breaks. The crowning blow is the exported bond fraud, its lack of prosecution within the US, and the exclusion of US banks and some corporations from the planned ‘Post-US World’ underway. Numerous summit level conferences where important commerce and banking agreements have been recently forged on several continents, all having excluded the United States from participation. Big movement is seen in the US bond market. Foreign central bank intervention has accelerated in the last several weeks. The 10-year TNote yield is at the 3.6% level after hue & cry of price inflation all through spring months. NO SURPRISE HERE! We might be seeing a double top failure in the long-term USTreasurys. The historical chart bears this out more clearly.
Along with a USTreasury rally has come a giant swap trend, as foreign wealth centers have traded out US Mortgage Agency bonds and into USTreasurys, adding to the blowoff top. Some foreign entities are openly requesting bailout redemption of impaired bonds. All corners seem to be hunkering down into USTBonds as a safe haven. The risk of an actual default in USTreasurys must be taken seriously, in view of upcoming intentions, however unwillingly executed, to nationalize everything under the sun inside the US landscape. The natural nemesis in financial markets for gold is the USTreasury Bond. New supply puts it at great risk. The printing press with raised lamination will produce huge USDollar output soon. Nationalization demands it. The consequent risk to the USDollar and USTreasury Bond is deep, profound, and stark!
FAILURES & STRESSES
As the USEconomic recession has taken grip, capital gains tax revenues and payroll income tax revenues are way down. Almost no specific story supports the growth story told. Even the export trade will be tripped up by global slowdown. The USGovt federal budget deficit will be enormous, even without the nationalization demands. The collection of sectors seeking imminent bailouts in the nationalization theme include Fannie Mae & Freddie Mac, General Motors and Ford, Wall Street banks, and some airlines. Add to that demand some staggering funding requirements for the Federal Deposit Insurance Corp (covering failed bank deposits) and the Pension Guarantee Fund (covering failed corporate pension funds), to raise strain to a crescendo. Did PIMCO actually hint they wanted a bailout too? Of course, never overlook the sacred military budget demands, never to be challenged or reduced, but always adding great USTBond supply.
During the past two decades, foreigners have accumulated gigantic USTBond holdings. Now finally, too many foreign enemies hold huge amounts of USTBonds, a risk my work has mentioned steadily. The US no longer controls its destiny. The risk to sovereignty has built to a point of recognition as capital sale replenishment deals abound, a frequent occurrence for big banks. The USDollar is rallying when its financial condition is imploding. The driving force for the deteriorating crippled US condition is the housing decline. Just today, more dreadful home foreclosure and delinquency data was released. The story of US relative strength is absurd on its face, and yet another important chapter in the US Economic Mythology treatise. Such a contradiction invites a reaction.
Watch the South Koreans not invest in either Lehman or Merrill Lynch, since they are not fools. Did Lone Star actually sue the Koreans so as to block this rescue effort? Look for one or both of these Wall Street crippled firms to fall into bankruptcy soon. The climate will change radically as a result. The end of the Q3 quarter is nigh, and admission of renewed larger bank losses is a cinch. They are nowhere near the end of their mortgage nightmare. Watch Citigroup and AIG for matching failures. The Credit Default Swap conflagration is located on the AIG doorstep. The sovereign risk to the United States is now overshadowed by a risk of pre-emptive financial attack from foreign locations. The point here is that a mountain of new USTreasury supply is guaranteed to come soon. The new supply flies in the face of rising price. The timing for a bond attack is soon possibly perfect. For years, nobody has questioned the USTBond as the only viable parking lot for surplus capital, the largest and most liquid market in the world. Times will change. Third World bonds do not flourish!
The price inflation front is another big risk for USTreasurys. A CPI over 5% for back to back months represents a threat, but it is allayed by dormant wages. Next year, many sharp analysts expect the US Consumer Price Index to top level 10% level. Already the jobless rate surpassed 6% in the US, amidst a strange admission. Recognized in the open was how the extension of state jobless benefits resulted in counting more of the jobless! The return of gold used as an inflation hedge will be realized soon. As trade friction grows with China, in Post-Olympics times, the US will be less the beneficiary to lower wages from globalization. Gold will be the ultimate safe haven vehicle soon.
THE PROVOKED BEAR
A scenario must be laid out for theories of discontinuous nonlinear events and solutions whose fallout will alter completely the global geopolitical chessboard. The September Hat Trick Letter will focus on this topic from numerous angles. The next global chapter will have the United States isolated into a ‘Glorified Third World’ surreal land. What many analysts fail to comprehend is that the current situation cannot continue, characterized by Third World finances, unspeakable bank fraud, and aggressive military behavior, whose mix is totally incongruous. Continuation of the status quo is untenable. The most recent events to upset the geopolitical balance in a state of constant flux is the attack by the US and Georgia forces against Russia, portrayed in opposite fashion. The US even had some help from allies on the battlefield, with dead soldiers behind the Russian lines held in freezer chests as bargaining chips and tangible proof. This all is avoided by the intrepid deceptive US press. To seek sanctions against Russia for its own defense seems ludicrous. The Russian bear has been goaded, poked, and provoked in a systematic fashion. It will respond. Behind the scenes, plans have been made. The USMilitary is funded increasingly by foreigners, many of whom are considered enemies. It is almost tragic that so-called trade partners at the beginning of this decade 2000 have turned into enemies. Russia and China will become uneasy essential allies, whose common trait will be their opposition to the United States. They each want a formal seat at Global Finance Minister Meetings, routinely denied. The fragile trade relationship that the US depends so critically upon hinges upon continued USTreasury Bond support. Do not consider it assured. The USTreasury Bond is the quintessential point of vulnerability to the entire US financial, economic, and military system. A pre-emptive attack against the USTBond must be taken seriously. That is the story that has come to my desk in recent weeks.
Europe is the key prize. The US is attempting to push Europe into a conflict with Russia, so that the Russian emerging giant does not forge closer ties with Europe, to the exclusion of the United States. The NATO accords have been twisted and dishonored, used as a US convenience. Some might argue that NATO is dead, remaining only as a sharp stick to poke Russia with. The Russian-German relationship is natural and historical. Even Catherine the Great from Russia was from German royal bloodlines. The Russian-European energy supply relationship is natural and efficient. President Putin, and now his sidekick Medvedev, have grand resource and energy deposit wealth, and full willingness to use it as a powerful weapon. They might soon exclude the US in the supply chain, in favor or China, all the while keeping the tap flowing to Europe. The German leaders seem to be talking honestly with Russians, but engaging in lipservice to the Americans, winking across the Urals in the process. The next stage of conflict is Ukraine, where more US color revolution meddling is deep. What many US tacticians fail to comprehend is that the USMilitary machine is on the verge of depletion (both troops & machinery), at a time when Russia has developed some key tactical superiority. The USMilitary is left with missiles, aircraft, and drones. See the anti-ship Sunburn and Onyx missiles in Russian control, each supersonic. The US Cruise missile is not. An attack on Iran, whether warranted or not, will immediately prompt a harsh and lethal financial counter-measure by Russia and its allies. The hapless US leaders are left to squirm and wonder who their allies are these days. Iran could be the grand trap.
THE GOLD ANGLE
Encircling the Big Bear has led to a powerful reaction, one that comes. It is planned, and awaits execution in an event-driven scenario. Quietly, physical demand for gold & silver has grown to monumental levels. Do not be deterred or distracted by the falling gold & silver prices. The price mechanism has totally broken, as supply is absent and vanishing. Since Russia, China, and the Arabs own so much gold, they are motivated to endorse the plan that comes, the plan in place, the plan that needs only the trigger events. Powerful foreign entities are increasingly angered by the price decline in gold, as US paperhanger conmen fraud kings have intervened to do harm to foreign savings accounts. Perhaps foreign entities will hatch an event, whose trigger remains unclear. Perhaps they will permit unwitting reckless US leaders to proceed down the path, where they continue to fall into traps, where doors continue to close behind them. In any newly established vacuum could quickly come new gold-backed currencies. Two are already planned, whose launch date is uncertain but clearly tied to the upcoming plan. The Arabs, Chinese, and Russians have accumulated gigantic reserves, much of which is held in the form of US$-based securities. These nations and peoples are not friends of the United States. Recent friendship has been a convenience for them and a trap for Americans. Arabs have an extremely uneasy alliance with Americans, who continue to trumpet their war against (Islamic) terrorism.
Big changes are coming. The euro currency will not continue in its present form for long. The Germans refuse to join fortunes with wrecked Latin southern nations. The split is sure to lift the euro remaining in the German corner and lift gold in the process from extreme disruption. When the plan is hatched and put into action, the extreme disruptions to the US Achilles Heel will lead to a historically unprecedented beneficial discontinuity that favors gold, since its paper-based bond alternative will have been relegated to the basement. The USTreasury Bond must soon reflect its Third World characteristics. The flipside of the American Peso (Dollar) is the USTreasury Bond. It is the feeder system to too much that cannot justifiably continue. So many dangerous assumptions are made by arrogant complacent folks. As a bright German colleague recently said to me, “People do not embrace change, but change will embrace people.” Change comes. If your stomach is not churning by recent events, you are not in possession of a stomach.
The gold & silver markets are downtrodden in a harsh correction, when their safe haven status is actually improving. Something is soon to erupt, and it will change the world, especially the United States. The gold & silver prices will suddenly find themselves at 50% to 100% above their current prices, after the upcoming planned pre-emptive event staged against the USTreasurys. As numerous US financial instruments are defaulting, one must examine the potential for USTreasury default. Some must wonder what attack could come about. Imagine a steady large batch of sell orders, of larger size than the recent buy orders from central banks. The sell orders are repeated each day. The USGovt would not permit its continuation and extremely damaging effects. Unwittingly, the central bankers have taught the powerful adversaries to the United States how to cripple the national financial structure.
Amidst profound changes soon to be forced upon the United States, the principal losers will be the USDollar &USTreasury Bond, with the big winners being gold & silver. Foreigners, some with newly forged alliances, are preparing for the next global chapter. That new era will NOT have the United States at the helm, or even at many tables for decision making. The US has earned through fraud, bullying, and arrogance a banishment. The US will be isolated and relegated to the backwaters, which can be properly the New Third World. It will be glorified by US leaders and US press. DO NOT SELL YOUR GOLD & SILVER. RATHER, TRY TO BUY SOME IN PHYSICAL FORM, IF YOU CAN FIND IT!!!
5 September 2008
Quotes of the month
by John Rubino
Gene Arensberg, Resource Investor
Everyone can look at the data and form their own conclusions. But when silver is in short physical supply, commanding injuriously high premiums and difficult to locate; when investors are piling into the silver ETF in droves, a 40% silver price plunge is not only not warranted, it smells.
It is difficult to imagine a legitimate reason that two U.S. banks could quickly and systematically amass a net short position on the COMEX which amounts to over a quarter of the entire action on that bourse. It will not be surprising at all if we learn that these two U.S. banks are taken to task by regulators for their actions. It will be even less surprising to learn that they have become the target of multi-billion dollar class action lawsuits by hungry lawyers representing silver investors everywhere.
Futures markets are supposed to answer the actual physical markets, not the other way around. In other words, futures markets are supposed to be a place where producers or large holders of a commodity can lay off price risk to speculators and thereby hedge against unforeseen adverse movements in the price of the commodity. Futures markets are definitely not supposed to be a place where a couple of well connected and well funded entities can bully the market with their own heavy handed trading.
If silver really was just taken down by a couple of very big U.S. banks to irrationally low levels, it won't be long before the laws of supply and demand reassert themselves. Got silver?
Frank Barbera, Gold Stock Technician
Even more to that point, we wonder at what point does an institution such as the Fed lose its credibility? At what point does an institution become irrelevant? The answer to that question is when events have taken on a life of their own, and when their words no longer have any real impact. We have fortunately not reached this point yet, but for all appearances seem to be heading in this direction at a rapid pace. The socialization of financial market bad debts has forced the Fed to act as the lender of last resort, placing its own balance sheet on the line for the ineptitudes which were sewn over so many years of the Greenspan Fed. How dare Mr. Greenspan comment on perils of the current collapse when he was the chief architect of the events now unfolding each and every week.
Bob Chapman, International Forecaster
Why should gold go down if the dollar goes up? If the dollar goes up substantially, that means the euro is going down substantially, so gold should be exploding in the Euro Zone. If anything, a weaker euro should be more supportive of gold than a weaker dollar as there are just as many euros out there as there are dollars now, and because the people of Europe are far more attuned to the uses and purposes of precious metals than are their US counterparts. We sure hope the people in the Euro Zone loaded up on precious metals, which are now skyrocketing in their currency as the euro has gone from 1.60 dollars to 1.50 dollars in rather rapid succession. All fiat currencies will continue to lose against gold, including the dollar, so it is time to load up on the bargains you have been so graciously gifted with by your evil government and the Wall Street fraudsters!!!
Another scheme that financial companies have employed during the crisis is to regularly reclassify assets from Level 2 to Level 3 and vice versa. Level 3 assets have no market so values have to be guessed. Level 2 assets are 'marked by model according to tangible data.' Ergo if you have a beneficial model you move assets from Level 3 to Level 2 to generate better marks and earnings.
Which leads us to JP Morgan - For most of the US financial crisis the media and pundits hailed JP Morgan as having a 'fortress-like balance sheet' even though it has over $80 trillion of derivatives. JP Morgan CEO Jamie Dimon has been portrayed as the Financial Wizard of Oz.
So for the past several months most investors and people assumed that JP Morgan somehow managed to avoid all the crappy paper and ancillary problems that plague the industry. One group that thought otherwise averred that the Bear Stearns bailout was engineered to help JP Morgan obfuscate its problems and borrow massively from the Fed without public concern.
But the revelation of a relatively miniscule $1.5B write-down has destroyed the illusion of JP Morgan's imperviousness to the financial mess. This has led analysts, investors and wise guys to re-examine JPM.
One disconcerting JPM fundamental is the amount of its Level 2 assets. An astute money manager alerted us that, "The market is obsessed with Level 3 assets levels but forgot to notice that of JPM's total $1.775 trillion in assets, $1.575 trillion are Level 2 or mark to model. The whole loan, MBS and Level 2 are what presents the real danger when the raters finally get there."
Gary Dorsch, Global Money Trends
Trading in foreign currencies is akin to judging a reverse beauty contest, and suddenly, the US-dollar's was looking a little less ugly than its peers.
Ambrose Evans-Prichard, Telegraph UK
My guess is that political protest will mark the next phase of this drama. Almost half a million people have lost their jobs in Spain alone over the last year. At some point, the feeling of national impotence in the face of monetary rule from Frankfurt will erupt into popular fury. The ECB will swallow its pride and opt for a weak euro policy, or face its own destruction.
What we are about to see is a race to the bottom by the world's major currencies as each tries to devalue against others in a beggar-thy-neighbor policy to shore up exports, or indeed simply because they have to cut rates frantically to stave off the consequences of debt-deleveraging and the risk of an outright Slump. When that happens - if it is not already happening - it will become clear that the both pillars of the global monetary system are unstable, infested with the dry rot of excess debt.
Gold bugs, you ain't seen nothing yet. Gold at $800 looks like a bargain in the new world currency disorder.
Bill Fleckenstein, Fleckenstein Capital
In any case, if we saw (as it appeared) heavy selling or short-selling in the futures market while demand for gold in the physical world was rising, that historically would be a very bullish development.
What does seem quite clear is that some portion of gold's weakness has been a function of the dollar's strength. The dollar's violent rally owes to folks' beliefs that the economy is improving in the U.S., that the Federal Reserve intends to raise interest rates and that the rest of the world economy is slowing down.
The rest of the world may in fact be slowing down. But our economy is not about to get better, and the Fed is not about to tighten rates. Just the thought of the Fed increasing rates is laughable.
Eric Janszen, iTulip
The current recession is more serious than all previous recessions since the early 1980s. This time inflation, unemployment, and a credit crunch are cutting into demand. Demand, in the economic sense, is the combined desire of consumers to spend and the availability of the cash they need to act on that desire. Recessions with declining demand tend to be self-reinforcing as falling demand leads to falling consumption leading businesses to reduce labor costs by laying off employees, leading to falling incomes and further reductions in demand.
Another unusual aspect of this recession is that traditional Keynesian techniques to stimulate demand by expanding credit through interest rates cuts is hobbled by a moribund housing market; housing has for decades been the primary mechanism for transmitting interest cuts to consumers by reducing a household's primary interest expense, their mortgage. The freed up money acts much like tax cut. Now, however, interest rates are rising, especially for those homeowners who took Greenspan's advice in 2005 and took out an adjustable rate mortgage when fixed rate mortgages were at 40 year lows, and tightening lending standards are cutting off home mortgage refinancing for millions.
Finally, a weak dollar since 2001 means "oil prices drive up the cost of everything that requires oil to grow, be dug up, blown, packed, scrubbed, crushed, shaken, warmed, cooled, pickled, packaged, processed, or moved - that is, everything on God's green earth including your own hair and the hot water you used to wash it this morning." The only way to reduce that impact short term is to use less oil. A recession will help, as long as the dollar doesn't fall faster than oil demand.
Jack Lifton, Resource Investor
As the 2008 political season nears its quadrennial crescendo and rock stars and war heroes are vying to be selected for the most militarily powerful job in the world it would seem that no one, certainly no politician, is willing to admit that America's world economic-leadership is eroding at an almost perceptible daily rate. Candidates, and office holders, remind us that each of the U.S. Navy's 12 carrier battle-groups is, by itself, more powerful than any other single nation's entire navy! Yet they fail to mention that we cannot build armoured ships or vehicles, small arms, artillery, armour piercing ammunition, missile guidance, night vision equipment, computers, displays, or, believe it or not, nuclear propulsion systems, or aircraft of any kind, civilian or military, without minor metals, such as the rare earths. Most of which we are now, 100%, dependent on nations unfriendly to America, which, notwithstanding their being unfriendly, already practice resource nationalism. Some of them, such as China, have already openly begun to restrict the export -- or utilization for items for export -- of key industrial minor metals, so as to reinforce their own self sufficiency in these materials.
Bob Moriarty, 321Gold
Homestake declined about 21% from the crash in late October 1929 through the end of that year, but through the entire decade of the 1930s Homestake was the highest gaining stock on the New York Stock Exchange. So, it's entirely possible the market could crash and gold stocks go up. At some point in time, people are going to recognize the precious metals stocks, not all metal stocks, are the safest place to be.
Doug Noland, Prudent Bear
It is not the nature of dislocated markets to let fundamentals get in the way of price movement. Markets, after all, live on fear and greed. Sinking energy prices and a short squeeze ignited U.S. stocks this week. And surging stock prices always entice the optimistic viewpoint, with many viewing runs in stocks and the dollar as confirmation that the worst of the financial and economic crisis is behind us. The bursting of the so-called Energy/Commodities Bubble is also viewed in positive light.
Yet if the key dynamic is instead a Bursting Leveraged Speculating Community Bubble, entirely different dynamics are now in play. Enormous short positions have built up, the vast majority as part of "market neutral," "quant" and myriad risk hedging strategies. If today's dislocation develops into a significant unwind of these positions, the market immediately then becomes vulnerable to a disorderly "melt-up" followed almost inevitably by a sharp reversal and disorderly decline. The unwind of bearish speculations and hedges would be a most problematic market development, unleashing a final bout of speculative excess and disorder that would set the stage for a major market crisis.
It is now clear that many within the leveraged speculating community have suffered huge losses over the past few weeks. For a "community" that was already suffering a difficult year, blowups in the popular energy, commodities and short dollar trades were a decisive backbreaker. Huge rallies in heavily shorted stocks and sectors have added further pain. One can now expect major redemptions at quarter and year-ends, a dynamic that likely ensures recent near-chaotic market conditions become the norm for awhile.
Jim Puplava, Financial Sense
The US Mint has suspended the production of US Eagles. I was told by one dealer this morning, checking with him, they're telling people delivery dates for silver Eagles won't be till January, February of next year. One dealer I was talking to said that they can't even get the plates - so what they were doing is they were ordering thousand ounce bars and they were melting the bars down to make one ounce coins because most people are buying either silver rounds - and I was told delivery dates right now are two months out. So this is August, probably late October. That's how scarce it is. So, the other thing is get your physical metals because there is a gross discrepancy and divergence between trying to drive down the paper market price of silver. One dealer told me in July his sales were up four fold last year; and this month alone, his sales are up eight fold. One dealer was telling me today that he had never seen anything like this in his lifetime. On this Friday I just bought a ton of silver and I've been told it's going to take two months to take delivery on that ton. And if the price goes lower, I'll buy another ton. I've got a couple of dealers who store my bullion for me until it's shipped overseas.
James Quinn, Wharton School, University of Pennsylvania
We have outsourced our savings to the emerging economies, along with our manufacturing jobs. The Chinese are saving the money we've paid them for flat screen TVs and the Middle Eastern countries are saving the money we've paid them for oil. You need savings in order to increase investment. The emerging markets are making the vast majority of the investments in the world. While the U.S. endlessly debates drilling and construction of nuclear plants (none built in U.S. since 1987) and oil refineries (none built in U.S. since 1977), China brought four oil refineries online in 2008 and plans to build 30 nuclear reactors in the next twelve years. The Asian Century has begun, but the U.S. has tried to keep up by using debt. It will not work. If anything, this has accelerated the shift of power to Asia.
Nouriel Roubini, RGE Monitor
Barron's: Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead?
Roubini: We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up. The taxpayer's bill is going to be huge. I estimate this financial crisis will lead to credit losses of at least $1 trillion and most likely closer to $2 trillion. When I made this analysis in February everybody thought I was a lunatic. But a few weeks later the International Monetary Fund came out with an estimate of $945 billion, Goldman Sachs (GS) estimated $1.1 trillion and UBS (UBS) $1 trillion. Hedge-fund manager John Paulson recently estimated the losses would be $1.3 trillion, and late last month Bridgewater Associates came up with an estimate of $1.6 trillion. So, at this point $1 trillion isn't a ceiling, it's a floor. And the banks, as I've said, have written down only about $300 billion of subprime debt. I think $2 trillion is too high, but the number will definitely be huge.
Franklin Sanders, Money Changer
Either this is the greatest silver and gold buying opportunity of all time, or the end of a bull market.
But it is NOT the end of a bull market. Time alone argues that. A bull market runs 10 - 20 years, and this one has run only 7, since 2001. Those who think silver & gold have fallen into the "bursting of the commodity bubble" completely misunderstand what drives them in the first place. Silver & gold are not commodities; they are money. When investors pile into silver & gold, it's not any commodity bubble forcing them there, but monetary demand. They aren't buying metals because they think all the Indian ladies are going to be wearing two nose rings instead of one this season, or that the American bourgeoisie will suddenly begin stockpiling sterling silver forks again.
They are buying metals because -- listen to this, get it straight once & forever -- they distrust fiat central bank currencies (or if you prefer, national currencies). The dollar is trash, the yen is trash, the euro is trash; all are equally insolvent, equally unbacked by anything expect a politician's or central banker's promise, which is not nearly as good as that of any madame at any bordello anywhere.
The dollar is rising? So, why? Did it become better, acquire more gold backing, solve its chronic balance of payments deficit last night? Come on. Did the euro get worse overnight? The yen? How much worse could it get? You are seeing competitive devaluations, all very much worked out collegially in advance by central bankers. Fundamentally meaningless.
What is NOT meaningless is that the Great Alternative Currencies, silver & gold, have long been advancing against ALL national currencies. All markets swing like pendulums, too far one way, then too far the other. Silver & gold prices became overbought -- a lot of people short dollars were long silver & gold. The dollar rallied, oil & commodities fell, sucking down silver & gold money. Look at the numbers. Even with gold down to $787.50 today, that's only a 21.5% correction, while always more volatile silver is down 37.4%. Friends, these are normal, not outlandish, corrections. Sober up.
Julian D. W. Phillips, Gold Forecaster
The huge gap between the value of gold and the value of money must narrow. Whether it is through the rise in the value of gold and silver or through the fall of the value of money dictates the future of the financial system. Either way, gold and silver will prove to be the safe-haven it has been since money was part of man's world. And the second half of this year is likely to be as dramatic as the first half but with a golden or silver sheen to it.
Steve Saville, Speculative Investor
Many people will be asking the question: why is the US$ rallying when its fundamentals are so terrible? From our perspective, however, a more reasonable question is: why has it taken so long for the US$ to rally against the euro given that the US$ is extremely under-valued relative to the euro and the euro's fundamentals are just as bad?
The answer, we think, is that the currency market has believed that the US Federal Reserve would be as 'easy' as it needed to be to help the banking system through its crisis, while the ECB would continue to focus on minimizing currency depreciation. We think the market was/is right to believe that the Fed will do whatever it takes to maintain the solvency of the major banks, but traders now appear to be coming around to the view that the ECB will also be loosening the monetary reins. Take away the interest-rate 'prop' and the euro suddenly becomes free to fall under the weight of its own over-valuation.
Mike Shedlock, Mish's Global Economic Trend Analysis
It's NEVER "practical" for the Fed, the SEC, Banks, CEOs in general, the FDIC, Congress, the Treasury Department, or the President to tell the truth. This is what it all boils down to: Somehow it's never "practical" to stop a drunken credit-financed orgy, yet when the party ends, it's never "practical" to discuss the consequences. In this case, the credit orgy lasted so long, and there were so many players, that the most important truth right now that needs open, honest discussion is that the entire US Banking System Is Insolvent.
Government stupidity is the most liquid of all assets, spreading everywhere at the slightest provocation. Look for more of it and you won't be disappointed.
James Turk, Freemarket Gold and Money Report
The time-bomb is ticking. The federal government is liquid because as its consolidated accounts state, it has "the power to print additional currency." And print it will for one simple reason. The federal government is insolvent. Its debt obligations far exceed its financial capacity to repay those debts without debasing the dollar. Eventually it will take one ounce of gold or so to buy the Dow Jones Industrial Average. At that time I will recommend selling gold and buying the DJIA to ride the next cycle. But the DJIA still has to lose about 90% of its price in terms of gold for that to happen.
Christopher Whalen, Institutional Risk Analyst
We're not sure who's going to win the presidency in November, but we are very sure that the safety and soundness of the nation's banking system is going to be an issue in this election - perhaps as prominent an issue as energy prices. Indeed, we think that the president-elect will be forced to meet with President George Bush and both men will ask the Congress to move on providing funding and new legal authority to backstop the FDIC. In the near-term Uncle Sam is going to be forced to get even more involved to head off a catastrophic contraction in the availability of credit to the private economy.
Jim Willie, Hat Trick Letter
The US banks are fast approaching the early warning season in early to middle September. They are required (Wall Street firms excluded) to come forward and provide guidance on their earnings, their balance sheet damage (called impairment, since sounds better), and their profits (nonexistent, as in extinct). Wall Street firms have almost no stock or bond issuance, no private equity packaging, so business is largely dominated by management of their demise, along with management of their propaganda messages that seem shrill lately. The US banks will in my estimation announce bigger Q3 losses than Q2. Their BS-stories continue since they are actively seeking cash to shore up balance sheets. Their mortgage related losses will be ongoing, but now those losses will be joined by prime mortgage losses, commercial loan losses, car loan losses, credit card losses, and more. The USGovt can claim the economy is in good shape, that exports are booming, but a grand disconnect has occurred. Something like 460 thousand jobs have been lost this year, and most job gains are on paper, from the Birth Death Model nonsense. More paper deception, this of the labor market. Consumers might spend less if they were keenly aware of US-based unemployment running over 14%. The steep decline in USGovt tax receipts testifies to a recession. Most statistics testify to recession, like the Leading Economic Indicators. Reverse gear for the USEconomy is bad news for the USDollar. And all the horrendous disasters coming from Fannie Mae and Freddie Mac acid pits cannot be good.
John Rubino
Gene Arensberg, Resource Investor
Everyone can look at the data and form their own conclusions. But when silver is in short physical supply, commanding injuriously high premiums and difficult to locate; when investors are piling into the silver ETF in droves, a 40% silver price plunge is not only not warranted, it smells.
It is difficult to imagine a legitimate reason that two U.S. banks could quickly and systematically amass a net short position on the COMEX which amounts to over a quarter of the entire action on that bourse. It will not be surprising at all if we learn that these two U.S. banks are taken to task by regulators for their actions. It will be even less surprising to learn that they have become the target of multi-billion dollar class action lawsuits by hungry lawyers representing silver investors everywhere.
Futures markets are supposed to answer the actual physical markets, not the other way around. In other words, futures markets are supposed to be a place where producers or large holders of a commodity can lay off price risk to speculators and thereby hedge against unforeseen adverse movements in the price of the commodity. Futures markets are definitely not supposed to be a place where a couple of well connected and well funded entities can bully the market with their own heavy handed trading.
If silver really was just taken down by a couple of very big U.S. banks to irrationally low levels, it won't be long before the laws of supply and demand reassert themselves. Got silver?
Frank Barbera, Gold Stock Technician
Even more to that point, we wonder at what point does an institution such as the Fed lose its credibility? At what point does an institution become irrelevant? The answer to that question is when events have taken on a life of their own, and when their words no longer have any real impact. We have fortunately not reached this point yet, but for all appearances seem to be heading in this direction at a rapid pace. The socialization of financial market bad debts has forced the Fed to act as the lender of last resort, placing its own balance sheet on the line for the ineptitudes which were sewn over so many years of the Greenspan Fed. How dare Mr. Greenspan comment on perils of the current collapse when he was the chief architect of the events now unfolding each and every week.
Bob Chapman, International Forecaster
Why should gold go down if the dollar goes up? If the dollar goes up substantially, that means the euro is going down substantially, so gold should be exploding in the Euro Zone. If anything, a weaker euro should be more supportive of gold than a weaker dollar as there are just as many euros out there as there are dollars now, and because the people of Europe are far more attuned to the uses and purposes of precious metals than are their US counterparts. We sure hope the people in the Euro Zone loaded up on precious metals, which are now skyrocketing in their currency as the euro has gone from 1.60 dollars to 1.50 dollars in rather rapid succession. All fiat currencies will continue to lose against gold, including the dollar, so it is time to load up on the bargains you have been so graciously gifted with by your evil government and the Wall Street fraudsters!!!
Another scheme that financial companies have employed during the crisis is to regularly reclassify assets from Level 2 to Level 3 and vice versa. Level 3 assets have no market so values have to be guessed. Level 2 assets are 'marked by model according to tangible data.' Ergo if you have a beneficial model you move assets from Level 3 to Level 2 to generate better marks and earnings.
Which leads us to JP Morgan - For most of the US financial crisis the media and pundits hailed JP Morgan as having a 'fortress-like balance sheet' even though it has over $80 trillion of derivatives. JP Morgan CEO Jamie Dimon has been portrayed as the Financial Wizard of Oz.
So for the past several months most investors and people assumed that JP Morgan somehow managed to avoid all the crappy paper and ancillary problems that plague the industry. One group that thought otherwise averred that the Bear Stearns bailout was engineered to help JP Morgan obfuscate its problems and borrow massively from the Fed without public concern.
But the revelation of a relatively miniscule $1.5B write-down has destroyed the illusion of JP Morgan's imperviousness to the financial mess. This has led analysts, investors and wise guys to re-examine JPM.
One disconcerting JPM fundamental is the amount of its Level 2 assets. An astute money manager alerted us that, "The market is obsessed with Level 3 assets levels but forgot to notice that of JPM's total $1.775 trillion in assets, $1.575 trillion are Level 2 or mark to model. The whole loan, MBS and Level 2 are what presents the real danger when the raters finally get there."
Gary Dorsch, Global Money Trends
Trading in foreign currencies is akin to judging a reverse beauty contest, and suddenly, the US-dollar's was looking a little less ugly than its peers.
Ambrose Evans-Prichard, Telegraph UK
My guess is that political protest will mark the next phase of this drama. Almost half a million people have lost their jobs in Spain alone over the last year. At some point, the feeling of national impotence in the face of monetary rule from Frankfurt will erupt into popular fury. The ECB will swallow its pride and opt for a weak euro policy, or face its own destruction.
What we are about to see is a race to the bottom by the world's major currencies as each tries to devalue against others in a beggar-thy-neighbor policy to shore up exports, or indeed simply because they have to cut rates frantically to stave off the consequences of debt-deleveraging and the risk of an outright Slump. When that happens - if it is not already happening - it will become clear that the both pillars of the global monetary system are unstable, infested with the dry rot of excess debt.
Gold bugs, you ain't seen nothing yet. Gold at $800 looks like a bargain in the new world currency disorder.
Bill Fleckenstein, Fleckenstein Capital
In any case, if we saw (as it appeared) heavy selling or short-selling in the futures market while demand for gold in the physical world was rising, that historically would be a very bullish development.
What does seem quite clear is that some portion of gold's weakness has been a function of the dollar's strength. The dollar's violent rally owes to folks' beliefs that the economy is improving in the U.S., that the Federal Reserve intends to raise interest rates and that the rest of the world economy is slowing down.
The rest of the world may in fact be slowing down. But our economy is not about to get better, and the Fed is not about to tighten rates. Just the thought of the Fed increasing rates is laughable.
Eric Janszen, iTulip
The current recession is more serious than all previous recessions since the early 1980s. This time inflation, unemployment, and a credit crunch are cutting into demand. Demand, in the economic sense, is the combined desire of consumers to spend and the availability of the cash they need to act on that desire. Recessions with declining demand tend to be self-reinforcing as falling demand leads to falling consumption leading businesses to reduce labor costs by laying off employees, leading to falling incomes and further reductions in demand.
Another unusual aspect of this recession is that traditional Keynesian techniques to stimulate demand by expanding credit through interest rates cuts is hobbled by a moribund housing market; housing has for decades been the primary mechanism for transmitting interest cuts to consumers by reducing a household's primary interest expense, their mortgage. The freed up money acts much like tax cut. Now, however, interest rates are rising, especially for those homeowners who took Greenspan's advice in 2005 and took out an adjustable rate mortgage when fixed rate mortgages were at 40 year lows, and tightening lending standards are cutting off home mortgage refinancing for millions.
Finally, a weak dollar since 2001 means "oil prices drive up the cost of everything that requires oil to grow, be dug up, blown, packed, scrubbed, crushed, shaken, warmed, cooled, pickled, packaged, processed, or moved - that is, everything on God's green earth including your own hair and the hot water you used to wash it this morning." The only way to reduce that impact short term is to use less oil. A recession will help, as long as the dollar doesn't fall faster than oil demand.
Jack Lifton, Resource Investor
As the 2008 political season nears its quadrennial crescendo and rock stars and war heroes are vying to be selected for the most militarily powerful job in the world it would seem that no one, certainly no politician, is willing to admit that America's world economic-leadership is eroding at an almost perceptible daily rate. Candidates, and office holders, remind us that each of the U.S. Navy's 12 carrier battle-groups is, by itself, more powerful than any other single nation's entire navy! Yet they fail to mention that we cannot build armoured ships or vehicles, small arms, artillery, armour piercing ammunition, missile guidance, night vision equipment, computers, displays, or, believe it or not, nuclear propulsion systems, or aircraft of any kind, civilian or military, without minor metals, such as the rare earths. Most of which we are now, 100%, dependent on nations unfriendly to America, which, notwithstanding their being unfriendly, already practice resource nationalism. Some of them, such as China, have already openly begun to restrict the export -- or utilization for items for export -- of key industrial minor metals, so as to reinforce their own self sufficiency in these materials.
Bob Moriarty, 321Gold
Homestake declined about 21% from the crash in late October 1929 through the end of that year, but through the entire decade of the 1930s Homestake was the highest gaining stock on the New York Stock Exchange. So, it's entirely possible the market could crash and gold stocks go up. At some point in time, people are going to recognize the precious metals stocks, not all metal stocks, are the safest place to be.
Doug Noland, Prudent Bear
It is not the nature of dislocated markets to let fundamentals get in the way of price movement. Markets, after all, live on fear and greed. Sinking energy prices and a short squeeze ignited U.S. stocks this week. And surging stock prices always entice the optimistic viewpoint, with many viewing runs in stocks and the dollar as confirmation that the worst of the financial and economic crisis is behind us. The bursting of the so-called Energy/Commodities Bubble is also viewed in positive light.
Yet if the key dynamic is instead a Bursting Leveraged Speculating Community Bubble, entirely different dynamics are now in play. Enormous short positions have built up, the vast majority as part of "market neutral," "quant" and myriad risk hedging strategies. If today's dislocation develops into a significant unwind of these positions, the market immediately then becomes vulnerable to a disorderly "melt-up" followed almost inevitably by a sharp reversal and disorderly decline. The unwind of bearish speculations and hedges would be a most problematic market development, unleashing a final bout of speculative excess and disorder that would set the stage for a major market crisis.
It is now clear that many within the leveraged speculating community have suffered huge losses over the past few weeks. For a "community" that was already suffering a difficult year, blowups in the popular energy, commodities and short dollar trades were a decisive backbreaker. Huge rallies in heavily shorted stocks and sectors have added further pain. One can now expect major redemptions at quarter and year-ends, a dynamic that likely ensures recent near-chaotic market conditions become the norm for awhile.
Jim Puplava, Financial Sense
The US Mint has suspended the production of US Eagles. I was told by one dealer this morning, checking with him, they're telling people delivery dates for silver Eagles won't be till January, February of next year. One dealer I was talking to said that they can't even get the plates - so what they were doing is they were ordering thousand ounce bars and they were melting the bars down to make one ounce coins because most people are buying either silver rounds - and I was told delivery dates right now are two months out. So this is August, probably late October. That's how scarce it is. So, the other thing is get your physical metals because there is a gross discrepancy and divergence between trying to drive down the paper market price of silver. One dealer told me in July his sales were up four fold last year; and this month alone, his sales are up eight fold. One dealer was telling me today that he had never seen anything like this in his lifetime. On this Friday I just bought a ton of silver and I've been told it's going to take two months to take delivery on that ton. And if the price goes lower, I'll buy another ton. I've got a couple of dealers who store my bullion for me until it's shipped overseas.
James Quinn, Wharton School, University of Pennsylvania
We have outsourced our savings to the emerging economies, along with our manufacturing jobs. The Chinese are saving the money we've paid them for flat screen TVs and the Middle Eastern countries are saving the money we've paid them for oil. You need savings in order to increase investment. The emerging markets are making the vast majority of the investments in the world. While the U.S. endlessly debates drilling and construction of nuclear plants (none built in U.S. since 1987) and oil refineries (none built in U.S. since 1977), China brought four oil refineries online in 2008 and plans to build 30 nuclear reactors in the next twelve years. The Asian Century has begun, but the U.S. has tried to keep up by using debt. It will not work. If anything, this has accelerated the shift of power to Asia.
Nouriel Roubini, RGE Monitor
Barron's: Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead?
Roubini: We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up. The taxpayer's bill is going to be huge. I estimate this financial crisis will lead to credit losses of at least $1 trillion and most likely closer to $2 trillion. When I made this analysis in February everybody thought I was a lunatic. But a few weeks later the International Monetary Fund came out with an estimate of $945 billion, Goldman Sachs (GS) estimated $1.1 trillion and UBS (UBS) $1 trillion. Hedge-fund manager John Paulson recently estimated the losses would be $1.3 trillion, and late last month Bridgewater Associates came up with an estimate of $1.6 trillion. So, at this point $1 trillion isn't a ceiling, it's a floor. And the banks, as I've said, have written down only about $300 billion of subprime debt. I think $2 trillion is too high, but the number will definitely be huge.
Franklin Sanders, Money Changer
Either this is the greatest silver and gold buying opportunity of all time, or the end of a bull market.
But it is NOT the end of a bull market. Time alone argues that. A bull market runs 10 - 20 years, and this one has run only 7, since 2001. Those who think silver & gold have fallen into the "bursting of the commodity bubble" completely misunderstand what drives them in the first place. Silver & gold are not commodities; they are money. When investors pile into silver & gold, it's not any commodity bubble forcing them there, but monetary demand. They aren't buying metals because they think all the Indian ladies are going to be wearing two nose rings instead of one this season, or that the American bourgeoisie will suddenly begin stockpiling sterling silver forks again.
They are buying metals because -- listen to this, get it straight once & forever -- they distrust fiat central bank currencies (or if you prefer, national currencies). The dollar is trash, the yen is trash, the euro is trash; all are equally insolvent, equally unbacked by anything expect a politician's or central banker's promise, which is not nearly as good as that of any madame at any bordello anywhere.
The dollar is rising? So, why? Did it become better, acquire more gold backing, solve its chronic balance of payments deficit last night? Come on. Did the euro get worse overnight? The yen? How much worse could it get? You are seeing competitive devaluations, all very much worked out collegially in advance by central bankers. Fundamentally meaningless.
What is NOT meaningless is that the Great Alternative Currencies, silver & gold, have long been advancing against ALL national currencies. All markets swing like pendulums, too far one way, then too far the other. Silver & gold prices became overbought -- a lot of people short dollars were long silver & gold. The dollar rallied, oil & commodities fell, sucking down silver & gold money. Look at the numbers. Even with gold down to $787.50 today, that's only a 21.5% correction, while always more volatile silver is down 37.4%. Friends, these are normal, not outlandish, corrections. Sober up.
Julian D. W. Phillips, Gold Forecaster
The huge gap between the value of gold and the value of money must narrow. Whether it is through the rise in the value of gold and silver or through the fall of the value of money dictates the future of the financial system. Either way, gold and silver will prove to be the safe-haven it has been since money was part of man's world. And the second half of this year is likely to be as dramatic as the first half but with a golden or silver sheen to it.
Steve Saville, Speculative Investor
Many people will be asking the question: why is the US$ rallying when its fundamentals are so terrible? From our perspective, however, a more reasonable question is: why has it taken so long for the US$ to rally against the euro given that the US$ is extremely under-valued relative to the euro and the euro's fundamentals are just as bad?
The answer, we think, is that the currency market has believed that the US Federal Reserve would be as 'easy' as it needed to be to help the banking system through its crisis, while the ECB would continue to focus on minimizing currency depreciation. We think the market was/is right to believe that the Fed will do whatever it takes to maintain the solvency of the major banks, but traders now appear to be coming around to the view that the ECB will also be loosening the monetary reins. Take away the interest-rate 'prop' and the euro suddenly becomes free to fall under the weight of its own over-valuation.
Mike Shedlock, Mish's Global Economic Trend Analysis
It's NEVER "practical" for the Fed, the SEC, Banks, CEOs in general, the FDIC, Congress, the Treasury Department, or the President to tell the truth. This is what it all boils down to: Somehow it's never "practical" to stop a drunken credit-financed orgy, yet when the party ends, it's never "practical" to discuss the consequences. In this case, the credit orgy lasted so long, and there were so many players, that the most important truth right now that needs open, honest discussion is that the entire US Banking System Is Insolvent.
Government stupidity is the most liquid of all assets, spreading everywhere at the slightest provocation. Look for more of it and you won't be disappointed.
James Turk, Freemarket Gold and Money Report
The time-bomb is ticking. The federal government is liquid because as its consolidated accounts state, it has "the power to print additional currency." And print it will for one simple reason. The federal government is insolvent. Its debt obligations far exceed its financial capacity to repay those debts without debasing the dollar. Eventually it will take one ounce of gold or so to buy the Dow Jones Industrial Average. At that time I will recommend selling gold and buying the DJIA to ride the next cycle. But the DJIA still has to lose about 90% of its price in terms of gold for that to happen.
Christopher Whalen, Institutional Risk Analyst
We're not sure who's going to win the presidency in November, but we are very sure that the safety and soundness of the nation's banking system is going to be an issue in this election - perhaps as prominent an issue as energy prices. Indeed, we think that the president-elect will be forced to meet with President George Bush and both men will ask the Congress to move on providing funding and new legal authority to backstop the FDIC. In the near-term Uncle Sam is going to be forced to get even more involved to head off a catastrophic contraction in the availability of credit to the private economy.
Jim Willie, Hat Trick Letter
The US banks are fast approaching the early warning season in early to middle September. They are required (Wall Street firms excluded) to come forward and provide guidance on their earnings, their balance sheet damage (called impairment, since sounds better), and their profits (nonexistent, as in extinct). Wall Street firms have almost no stock or bond issuance, no private equity packaging, so business is largely dominated by management of their demise, along with management of their propaganda messages that seem shrill lately. The US banks will in my estimation announce bigger Q3 losses than Q2. Their BS-stories continue since they are actively seeking cash to shore up balance sheets. Their mortgage related losses will be ongoing, but now those losses will be joined by prime mortgage losses, commercial loan losses, car loan losses, credit card losses, and more. The USGovt can claim the economy is in good shape, that exports are booming, but a grand disconnect has occurred. Something like 460 thousand jobs have been lost this year, and most job gains are on paper, from the Birth Death Model nonsense. More paper deception, this of the labor market. Consumers might spend less if they were keenly aware of US-based unemployment running over 14%. The steep decline in USGovt tax receipts testifies to a recession. Most statistics testify to recession, like the Leading Economic Indicators. Reverse gear for the USEconomy is bad news for the USDollar. And all the horrendous disasters coming from Fannie Mae and Freddie Mac acid pits cannot be good.
John Rubino
Hommel yelling about Silver
I do think that a lot of the finance games with silver no longer work in a bull market, that said, I think that the Perth Mint is run in a conservative manner.
Nadler, Kitco, Perth, Matthey; Sold Out!
($500 million silver default?!)
Silver Stock Report
by Jason Hommel, September 3, 2008
In an interesting twist, Jon Nadler posted a report by a blogger two days ago that I could mostly agree with.
http://www.kitco.com/ind/nadler/sep012008A.html
http://goldchat.blogspot.com/2008/08/fud-fear-uncertainty-doubt.html
The blog post is by an "industry insider," who tries to explain the "normality" of the shortages of silver and gold.
I also think it's normal for there to be shortages of silver and gold when inflation is raging out of control, and when the markets are manipulated, but I suppose we don't agree on reasons like that.
I left several comments on that blog, here:
https://www.blogger.com/comment.g?blogID=6089228851855763774&postID=7370174306249188090
My key question: If there is no shortage of actual silver, as opposed to only shortage of "investment silver", where can I go to buy that real actual silver? As of last night, there was no answer.
Today, a reply came, but no answer.
http://goldchat.blogspot.com/2008/09/jason-hommel-has-made-some-comments-to.html
The blogger works at Perth Mint, and writes:
"When I say that wholesale bars are available, it means in wholesale quantities. I cannot speak for Kitco, but I went upstairs and spoke to the Treasurer and he will do deals for a minimum of 20 tonnes of silver and 1 tonne of gold. Call Nigel Moffatt on (08) 9421 7403. Price will be on a deal-by-deal basis."
That's insane. Right downstairs, they often run out of 100 oz. bars, and reportedly have no 1000 oz. bars for sale.
Besides, that's a lie. Wholesale quantities in silver are 1 silver futures contract of 5000 ounces, which is about 1/6th of a tonne, not 20 tonnes!
Further, I note that Nigel did NOT say he would SELL 20 tonnes of silver. He only wants to "deal" in that, minimum. He probably needs to buy that much to pull his fat out of the fire, as I will explain below.
But first, people keep asking me "What's up with Jon Nadler, that guy who bashes metal, yet works for Kitco, who sells metal? I don't get it?"
Kitco runs a "pool" account where they hold the metal for investors, or in other words, they OWE precious metal to their clients.
Kitco also sells Perth Mint certificates, which also represents precious metal owed to clients.
Maybe that explains it?
Usually that's all I need to say to those who ask me, and the person replies, "Oh, of course. Thank you."
Perhaps that's one reason why Nadler posted the article by a Perth guy; they are connected, they both owe metal, and Perth uses Kitco, or Nadler specifically, as a mouthpiece.
If you click on Nadler's bio link at the top of any of his articles, it says that he may have helped government mints, like Perth, in the past:
"He has long-standing ties in the precious global metals community and has consulted on marketing and product development issues to government mints, precious metals retailers, as well as to trade and membership organizations, such as the World Gold Council."
Interestingly, Nadler boasts about his background in banking, and not just for a small banking outfit, but Bank of America, America's second largest bank!
"Jon established and managed several precious metals operations at major USA-based financial institutions (Deak-Perera, Republic National Bank, and Bank of America)."
Bank of America has the second largest derivatives position of all the Banks in America, right behind JP Morgan, at $28 trillion, yes, Trillion, with a T.
http://www.occ.treas.gov/ftp/deriv/dq207.pdf
And, Bank of America was a member of the Silver User's Association, a group devoted to the conflicting goals of keeping silver prices low and keeping silver available for users. Low prices create shortages, of course. And you can't buy silver at Bank of America, of course.
I don't think Jon Nadler is ignorant on purpose. I don't believe anyone can actually be that stupid on a regular basis, so the people who have repeatedly nominated him for the "Moron of the Year" award don't see the big picture. Instead, I give Nadler more credit than that. I think he's a human of somewhat higher intelligence than normal, but his wisdom score is extremely low. Either that, or he has a very high wisdom score, but he just works with black chaotic magic, instead of embracing the light of truth, or something like that. I think he has a clear agenda, he is actively making a war on gold and silver with his words, on a daily basis, and he is paid to do that.
There are more key connections I must reveal, based on reports from out of Australia about two weeks ago.
The Perth Mint owns 40% of AGR Matthey, in Australia.
AGR Matthey supposedly was using some of Perth's silver and gold that backs the Perth Mint silver certificate program, that is sold by Kitco.
Proof: The Perth Mint's annual report discloses the precious metal loan to AGR Matthey, as I reported previously.
"The $880 million of precious metals deposited by Perth Mint Depository clients (note 17) was used in operations by Gold Corporation as inventory ($381 million - Note 8b) with the balance in the refining operations of AGR Matthey (Note 8a).
http://www.perthmint.com.au//documen...ort 2007.pdf
p. 81, bottom
I never took a class in deciphering "Ogre-speak", and certified accountants can't decipher Perth's annual report either, but did Perth Mint mean to say or imply that AGR Matthey has "the balance" between $880 million and $381 million, which would be about $500 million worth of gold and silver backing the certificate program?
Wait, that's not the shocking part, I'm getting to it.
Here's the bombshell shocker:
AGR Matthey closed their silver operations! There is no news of this item, it's only available at the Kitco chat boards directly!
https://www.kitcomm.com/showthread.php?t=21325
Two of my readers reported the same thing. AGR Matthey offices closed. What?? Why?!
AGR Matthey supposedly has all this gold and silver on loan from Perth Mint's certificate program with which to operate and conduct operations, to enable them to have metal for use in refining operations, so that they can take those abundant 1000 oz. bars, and make them into 100 oz. bars, and sell metal to the public, and now, during a time of record demand from the public, when little old me can sell 25 bars at a $4.01 premium to the spot price, when AGR Matthey should be well funded, with plenty of metal, and capable of making a killing on manufacturing bars with their own top industry and famous and desired trademark, they decide to close up shop?
What??!!
Their story makes no sense. It make more sense that they have been operating at a loss for years, and used up the loan of precious metal in operations years ago (a loan that would have been fantastic to have during a bear market in metals, which, if you used accounting gimmicks right, you could say that the loan was brining in "profits", but not in a bull market). So, most likely, the managers recognize that they cannot buy more metal today, and cannot get the metal back to pay back the growing metal loan. It makes more sense that as the silver market is manipulated down, when inflation is raging, and when investors are all buying, and not selling, that they cannot source metal from the public anymore, and so they have closed up shop for that reason.
So, look, AGR Matthey's closure of silver operations might have been a $500 million precious metals default to Perth Mint in the last two weeks. No wonder the Perth Mint wants to deal in 20 tonnes of silver minimum, which would still only be about $10 million worth. (20 tonnes x 32,151oz/tonne = 643,020 oz. x $13? = $8.3 million!)
But hey, I'm sure someone like Nadler can be hired to say things like "move along", "nothing to see here", the business was "just not profitable". Really! Ya think?
If silver is abundant, why can't AGR Matthey use their ($500 million?) pool of abundant and borrowed metal to make 100 oz. bars to sell to the public at a premium, and just buy more abundant 1000 oz. bars with the profits and make a killing?!
I believe that this is the first major "hidden" default, or emerging default, that has the potential to cause the bankruptcy of the Perth Mint, and/or bankruptcy and/or silver default at the COMEX, if they are not all bankrupt already.
The closing of AGR Matthey calls into question the validity of the entire Perth Mint certificate program, and Kitco, and Nadler.
I think Perth Mint certificate holders should either be investigating, or redeeming their certificates for real physical metal, while they still can.
It appears as if the Perth Mint took my advice a few months ago, and bought at least some silver at higher prices to make available to people, to calm down the constant stream of reports of delays of 2 months. But now, it appears as if things are much, much, much worse than a mere 2 month delivery delay.
It seems as if Perth's 2 month delay has turned into Johnson Matthey's 2 month delay!
The other connection and warning that must be made now, is about Johnson Matthey, because AGR Matthey is one of their divisions.
http://www.matthey.com/about/locations.htm
Johnson Matthey, of course, is the largest silver refiner in the U.S., and was 8-10 weeks behind on orders for 100 ounce silver bars, and in the last week or so, stopped taking orders for silver. Matthey has a capacity of manufacturing 300-400 bars per week. 7th Grade Math warning: 400 bars x 100 oz.. each x 10 weeks = 400,000 ounces of silver = 12 tonnes, that JM is behind, backordered.
Interesting that that amount is just under the "minimum deal size" of 20 tonnes as Nigel said at Perth.
COMEX contracts are for 5000 ounces, or about 1/6th of a tonne. Why not just take delivery of 120 contracts Nigel?
But wait, if 20 tonnes is the minimum deal size, does that mean that Perth does not buy any silver when investors buy certificates for less than that, after all, that's their minimum deal size!?
So, it's not we silver investors who need to take delivery of the COMEX contracts. We silver investors already placed the orders. It's them, the companies who owe silver to the investors, who need to take delivery, and apparently cannot.
Johnson Matthey's primary distributor is AMARK. Amark is the largest bullion trader in the U.S. Amark is out of all silver products, so they are essentially "out of business" with a "shut down" silver division too, until they get silver.
Most other major dealers deal direct with Johnson Matthey, or Amark.
Here is another major shocker that I just heard today. CNI Numismatics, at golddealer.com, who is one of the most trusted silver dealers of which I know, verifies and confirms this overall story with a shocker admission from Johnson Matthey.
JM told CNI that JM is "ramping down" production of 100 ounce bars!!!
What? JM is backlogged 8-10 weeks, and refusing orders to try to catch up, yet is "RAMPING DOWN production"? That confirms the AGR Matthey shut down. And that can only mean one thing. There is a shortage of 1000 oz. bars or any other form of silver to make into 100 ounce bars.
This is why there is a shortage, world wide. The largest silver providers can't find enough silver to provide it. And this is why the shortage is denied by those in that camp. Their businesses may well be at risk right now, and the worst lot of them are in desperate need of you to send them money now to wait for silver that has an indefinite wait time attached.
KITCO NOTICE ADMITS THEY WANT TO DEFRAUD YOU BY HOLDING YOUR MONEY POTENTIALLY FOREVER, AND IF YOU ASK FOR A REFUND, THEY WILL CHARGE YOU EXTRA.
IMPORTANT NEW NOTICE: Demand for bullion products has increased significantly in recent days. As a result, we may experience delays in supply and possibly delays in processing and shipping by our vaults. We apologize for this inconvenience and will do everything in our power to service your orders as quickly as possible. While cancellation fees still apply, prices are guaranteed regardless of the length of the delay. We remain committed to providing you the best service no matter what market conditions prevail.
Don't fall for it. Not now.
Be careful out there. Defaults are either ongoing, or imminent.
If you want to help break these guys, there's one key way to do it. Make sure you buy and sell your silver at an ever increasing premium over their "spot" price or paper price. As that starts to happen, the paper hedging contracts cannot be used to purchase silver from the public, because the public's silver will cost too much. And if the paper system cannot provide enough silver either, then their game is over.
We are closer than ever to a major explosion in the silver price. In fact, it's already begun in the premiums for "walking silver" as opposed to "paper silver". What's "walking silver"? The stuff you can walk out of the store with!
Sincerely,
Jason Hommel
Nadler, Kitco, Perth, Matthey; Sold Out!
($500 million silver default?!)
Silver Stock Report
by Jason Hommel, September 3, 2008
In an interesting twist, Jon Nadler posted a report by a blogger two days ago that I could mostly agree with.
http://www.kitco.com/ind/nadler/sep012008A.html
http://goldchat.blogspot.com/2008/08/fud-fear-uncertainty-doubt.html
The blog post is by an "industry insider," who tries to explain the "normality" of the shortages of silver and gold.
I also think it's normal for there to be shortages of silver and gold when inflation is raging out of control, and when the markets are manipulated, but I suppose we don't agree on reasons like that.
I left several comments on that blog, here:
https://www.blogger.com/comment.g?blogID=6089228851855763774&postID=7370174306249188090
My key question: If there is no shortage of actual silver, as opposed to only shortage of "investment silver", where can I go to buy that real actual silver? As of last night, there was no answer.
Today, a reply came, but no answer.
http://goldchat.blogspot.com/2008/09/jason-hommel-has-made-some-comments-to.html
The blogger works at Perth Mint, and writes:
"When I say that wholesale bars are available, it means in wholesale quantities. I cannot speak for Kitco, but I went upstairs and spoke to the Treasurer and he will do deals for a minimum of 20 tonnes of silver and 1 tonne of gold. Call Nigel Moffatt on (08) 9421 7403. Price will be on a deal-by-deal basis."
That's insane. Right downstairs, they often run out of 100 oz. bars, and reportedly have no 1000 oz. bars for sale.
Besides, that's a lie. Wholesale quantities in silver are 1 silver futures contract of 5000 ounces, which is about 1/6th of a tonne, not 20 tonnes!
Further, I note that Nigel did NOT say he would SELL 20 tonnes of silver. He only wants to "deal" in that, minimum. He probably needs to buy that much to pull his fat out of the fire, as I will explain below.
But first, people keep asking me "What's up with Jon Nadler, that guy who bashes metal, yet works for Kitco, who sells metal? I don't get it?"
Kitco runs a "pool" account where they hold the metal for investors, or in other words, they OWE precious metal to their clients.
Kitco also sells Perth Mint certificates, which also represents precious metal owed to clients.
Maybe that explains it?
Usually that's all I need to say to those who ask me, and the person replies, "Oh, of course. Thank you."
Perhaps that's one reason why Nadler posted the article by a Perth guy; they are connected, they both owe metal, and Perth uses Kitco, or Nadler specifically, as a mouthpiece.
If you click on Nadler's bio link at the top of any of his articles, it says that he may have helped government mints, like Perth, in the past:
"He has long-standing ties in the precious global metals community and has consulted on marketing and product development issues to government mints, precious metals retailers, as well as to trade and membership organizations, such as the World Gold Council."
Interestingly, Nadler boasts about his background in banking, and not just for a small banking outfit, but Bank of America, America's second largest bank!
"Jon established and managed several precious metals operations at major USA-based financial institutions (Deak-Perera, Republic National Bank, and Bank of America)."
Bank of America has the second largest derivatives position of all the Banks in America, right behind JP Morgan, at $28 trillion, yes, Trillion, with a T.
http://www.occ.treas.gov/ftp/deriv/dq207.pdf
And, Bank of America was a member of the Silver User's Association, a group devoted to the conflicting goals of keeping silver prices low and keeping silver available for users. Low prices create shortages, of course. And you can't buy silver at Bank of America, of course.
I don't think Jon Nadler is ignorant on purpose. I don't believe anyone can actually be that stupid on a regular basis, so the people who have repeatedly nominated him for the "Moron of the Year" award don't see the big picture. Instead, I give Nadler more credit than that. I think he's a human of somewhat higher intelligence than normal, but his wisdom score is extremely low. Either that, or he has a very high wisdom score, but he just works with black chaotic magic, instead of embracing the light of truth, or something like that. I think he has a clear agenda, he is actively making a war on gold and silver with his words, on a daily basis, and he is paid to do that.
There are more key connections I must reveal, based on reports from out of Australia about two weeks ago.
The Perth Mint owns 40% of AGR Matthey, in Australia.
AGR Matthey supposedly was using some of Perth's silver and gold that backs the Perth Mint silver certificate program, that is sold by Kitco.
Proof: The Perth Mint's annual report discloses the precious metal loan to AGR Matthey, as I reported previously.
"The $880 million of precious metals deposited by Perth Mint Depository clients (note 17) was used in operations by Gold Corporation as inventory ($381 million - Note 8b) with the balance in the refining operations of AGR Matthey (Note 8a).
http://www.perthmint.com.au//documen...ort 2007.pdf
p. 81, bottom
I never took a class in deciphering "Ogre-speak", and certified accountants can't decipher Perth's annual report either, but did Perth Mint mean to say or imply that AGR Matthey has "the balance" between $880 million and $381 million, which would be about $500 million worth of gold and silver backing the certificate program?
Wait, that's not the shocking part, I'm getting to it.
Here's the bombshell shocker:
AGR Matthey closed their silver operations! There is no news of this item, it's only available at the Kitco chat boards directly!
https://www.kitcomm.com/showthread.php?t=21325
Two of my readers reported the same thing. AGR Matthey offices closed. What?? Why?!
AGR Matthey supposedly has all this gold and silver on loan from Perth Mint's certificate program with which to operate and conduct operations, to enable them to have metal for use in refining operations, so that they can take those abundant 1000 oz. bars, and make them into 100 oz. bars, and sell metal to the public, and now, during a time of record demand from the public, when little old me can sell 25 bars at a $4.01 premium to the spot price, when AGR Matthey should be well funded, with plenty of metal, and capable of making a killing on manufacturing bars with their own top industry and famous and desired trademark, they decide to close up shop?
What??!!
Their story makes no sense. It make more sense that they have been operating at a loss for years, and used up the loan of precious metal in operations years ago (a loan that would have been fantastic to have during a bear market in metals, which, if you used accounting gimmicks right, you could say that the loan was brining in "profits", but not in a bull market). So, most likely, the managers recognize that they cannot buy more metal today, and cannot get the metal back to pay back the growing metal loan. It makes more sense that as the silver market is manipulated down, when inflation is raging, and when investors are all buying, and not selling, that they cannot source metal from the public anymore, and so they have closed up shop for that reason.
So, look, AGR Matthey's closure of silver operations might have been a $500 million precious metals default to Perth Mint in the last two weeks. No wonder the Perth Mint wants to deal in 20 tonnes of silver minimum, which would still only be about $10 million worth. (20 tonnes x 32,151oz/tonne = 643,020 oz. x $13? = $8.3 million!)
But hey, I'm sure someone like Nadler can be hired to say things like "move along", "nothing to see here", the business was "just not profitable". Really! Ya think?
If silver is abundant, why can't AGR Matthey use their ($500 million?) pool of abundant and borrowed metal to make 100 oz. bars to sell to the public at a premium, and just buy more abundant 1000 oz. bars with the profits and make a killing?!
I believe that this is the first major "hidden" default, or emerging default, that has the potential to cause the bankruptcy of the Perth Mint, and/or bankruptcy and/or silver default at the COMEX, if they are not all bankrupt already.
The closing of AGR Matthey calls into question the validity of the entire Perth Mint certificate program, and Kitco, and Nadler.
I think Perth Mint certificate holders should either be investigating, or redeeming their certificates for real physical metal, while they still can.
It appears as if the Perth Mint took my advice a few months ago, and bought at least some silver at higher prices to make available to people, to calm down the constant stream of reports of delays of 2 months. But now, it appears as if things are much, much, much worse than a mere 2 month delivery delay.
It seems as if Perth's 2 month delay has turned into Johnson Matthey's 2 month delay!
The other connection and warning that must be made now, is about Johnson Matthey, because AGR Matthey is one of their divisions.
http://www.matthey.com/about/locations.htm
Johnson Matthey, of course, is the largest silver refiner in the U.S., and was 8-10 weeks behind on orders for 100 ounce silver bars, and in the last week or so, stopped taking orders for silver. Matthey has a capacity of manufacturing 300-400 bars per week. 7th Grade Math warning: 400 bars x 100 oz.. each x 10 weeks = 400,000 ounces of silver = 12 tonnes, that JM is behind, backordered.
Interesting that that amount is just under the "minimum deal size" of 20 tonnes as Nigel said at Perth.
COMEX contracts are for 5000 ounces, or about 1/6th of a tonne. Why not just take delivery of 120 contracts Nigel?
But wait, if 20 tonnes is the minimum deal size, does that mean that Perth does not buy any silver when investors buy certificates for less than that, after all, that's their minimum deal size!?
So, it's not we silver investors who need to take delivery of the COMEX contracts. We silver investors already placed the orders. It's them, the companies who owe silver to the investors, who need to take delivery, and apparently cannot.
Johnson Matthey's primary distributor is AMARK. Amark is the largest bullion trader in the U.S. Amark is out of all silver products, so they are essentially "out of business" with a "shut down" silver division too, until they get silver.
Most other major dealers deal direct with Johnson Matthey, or Amark.
Here is another major shocker that I just heard today. CNI Numismatics, at golddealer.com, who is one of the most trusted silver dealers of which I know, verifies and confirms this overall story with a shocker admission from Johnson Matthey.
JM told CNI that JM is "ramping down" production of 100 ounce bars!!!
What? JM is backlogged 8-10 weeks, and refusing orders to try to catch up, yet is "RAMPING DOWN production"? That confirms the AGR Matthey shut down. And that can only mean one thing. There is a shortage of 1000 oz. bars or any other form of silver to make into 100 ounce bars.
This is why there is a shortage, world wide. The largest silver providers can't find enough silver to provide it. And this is why the shortage is denied by those in that camp. Their businesses may well be at risk right now, and the worst lot of them are in desperate need of you to send them money now to wait for silver that has an indefinite wait time attached.
KITCO NOTICE ADMITS THEY WANT TO DEFRAUD YOU BY HOLDING YOUR MONEY POTENTIALLY FOREVER, AND IF YOU ASK FOR A REFUND, THEY WILL CHARGE YOU EXTRA.
IMPORTANT NEW NOTICE: Demand for bullion products has increased significantly in recent days. As a result, we may experience delays in supply and possibly delays in processing and shipping by our vaults. We apologize for this inconvenience and will do everything in our power to service your orders as quickly as possible. While cancellation fees still apply, prices are guaranteed regardless of the length of the delay. We remain committed to providing you the best service no matter what market conditions prevail.
Don't fall for it. Not now.
Be careful out there. Defaults are either ongoing, or imminent.
If you want to help break these guys, there's one key way to do it. Make sure you buy and sell your silver at an ever increasing premium over their "spot" price or paper price. As that starts to happen, the paper hedging contracts cannot be used to purchase silver from the public, because the public's silver will cost too much. And if the paper system cannot provide enough silver either, then their game is over.
We are closer than ever to a major explosion in the silver price. In fact, it's already begun in the premiums for "walking silver" as opposed to "paper silver". What's "walking silver"? The stuff you can walk out of the store with!
Sincerely,
Jason Hommel
Kicking The Debt Habit Cold Turkey
Kurt Kasun
September 3, 2008
Things are about to get really bad. Rotating bubbles are now becoming rotating sector recessions as the positive feedback loops, created as money and credit growth ballooned over the last 25 years, have reversed and are now becoming negative feedback loops. I expect to see those 25 years of excesses to dramatically unwind over the course of the next few years. The evaporation of paper wealth will be breathtaking. A "buy on the dips" mentality has been replaced by "sell on the rallies." Declining house values will further hinder the finance sector which will impede the real economy, causing asset prices to further plunge. The tipping point for debt creation's positive impact has been reached and we can expect economic convulsions similar to what a drug addict experiences after kicking the habit "cold turkey."
"The credit crunch is morphing from an American-centered financial crisis into a global economic crisis," according to David Bowers of Absolutely Strategy. The policy of creating more money than could be put to productive use in the real economy that allowed rising asset prices would more than compensate for a lack of ‘real' wage gains in the real economy and for consumers to continue to borrow and spend more than they earn at an accelerating pace failed once the excess money began to flow to commodities rather than to real estate or stock prices.
Growth is now demonstrably slowing in all parts of the world. Central Banks around the world will be embarking on a campaign of lowering their interest rates. Participants in the US stock market, fresh off an artificially trumped up GDP restatement (trumped up due to the stimulus package and severe understatement of the GDP deflator), will take a while to realize that gains in the dollar are due to relative underperformance of other currencies and a massive liquidity contraction. The gains will be short-lived and will result in pain and agony as those investors are lured into another bear trap that will reveal itself once much of the sidelined money comes back into the market.
The fall in commodity prices will be wrongly interpreted as a reason for the economy to rebound and for stocks to rally. While the dollar will likely continue to rise over the short term it is ultimately destined to suffer the same disastrous fate as the other fiat currencies of the world. After the sucker's rally has run its course over the next few weeks or so, the reality of an unserviceable and un-payable debt overhang will set in and the second wave of financial calamity will ensue. This time around it will be the result of the effects emanating from the negative feedback loop coming from the real economy.
Scott Bugie of Standard & Poor's writes that the second phase of credit crunch could be severe: "The credit crunch is entering a second, 'post-subprime' phase where banks' loan books deteriorate more rapidly and capital-raising efforts might become harder, says Scott Bugie, credit analyst at Standard & Poor's. Loan book deterioration is starting to hit a wider array of financial institutions, as credit losses migrate from subprime into other sectors of household finance, such as credit cards, Alt-A and prime mortgages, and auto loans well into 2009,' he says.
Other mainstream economists are have also been sounding the warning trumpets: "The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come," according to Professor Ken Rogoff who was chief economist at the IMF from 2001 to 2004 and who now teaches at Harvard. He goes on to say, "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one - one of the big investment banks or big banks."
In 2002 Dr. Marc Faber, author of the GloomBoomDoom Report and highly-sought guest for CNBC and Bloomberg TV, wrote a book titled, Tomorrow's Gold-Asia's Age of Discovery. Those who read the book and followed Faber's investment advice to invest in commodities and Asian and other emerging market equities have significantly outperformed those who primarily invested in US stocks (tech, consumer and financials). But Faber had recently cautioned against this "short dollar trade" as it had become stretched and crowded. He presciently warned investors late last year. More recently, referring to commodities, he said "Prices have made a peak...Whether that is a final peak or an intermediate peak followed by higher prices, we don't know yet. It could go lower."
He echoed similar sentiments in a Bloomberg TV interview this morning. I found his most recent market commentary, issued on August 20, 2008 titled, "Contracting Global Liquidity," quite compelling. He uses several charts to demonstrate how liquidity is contracting, the dollar is strengthening, commodities are declining, and what the relationships that exist between them predict for the future. He writes:
"In sum, credit growth and liquidity are contracting, a vicious economic downturn is about to unfold (China could surprise on the downside and put additional pressure on commodity prices) and asset markets are still high by historical standards and, therefore, remain vulnerable. I would use equity rallies as a selling opportunity and further weakness in gold as a buying opportunity for long term holders with significant cash and cash flows."
Faber has an enviable track record over the long, intermediate and shorter term. Not many investment strategists can boast of getting the market right over these three terms. He is an open-minded contrarian who is not afraid to change his views. He was way in front of the investment community predicting the rise of China and commodity prices six years ago. He correctly wrote that the US currency and stock markets would relatively outperform others last year. And he got the April-May S&P 500 rally to 1440 right also.
The one longer-term trend Faber appears to have the most confidence in is the "long gold/short the DJIA" trade that has been working, despite the recent pullback, since 2001. Over the intermediate term he is a looking for what can be described as nothing less than a US stock market crash, perhaps by the end of this year.
Rather than the US markets leading the rest of the world higher, the evidence points toward the rest of the world leading US markets lower. The global slowdown had begun in earnest. The US is now more dependent on world growth than the world is reliant upon the US. This is especially true since the US consumer is seeing his credit cut off and US banks and financial institutions suffer the effects of the second wave of the credit crunch. Once the relief rally has run its course and investors see that the US economic rebound has not staying power and only worn out consumers trying to pay off 25 years of accumulated debt, the dollar will rejoin the ranks of the other fiat currencies and resume its decline versus the price of gold.
September 3, 2008
Things are about to get really bad. Rotating bubbles are now becoming rotating sector recessions as the positive feedback loops, created as money and credit growth ballooned over the last 25 years, have reversed and are now becoming negative feedback loops. I expect to see those 25 years of excesses to dramatically unwind over the course of the next few years. The evaporation of paper wealth will be breathtaking. A "buy on the dips" mentality has been replaced by "sell on the rallies." Declining house values will further hinder the finance sector which will impede the real economy, causing asset prices to further plunge. The tipping point for debt creation's positive impact has been reached and we can expect economic convulsions similar to what a drug addict experiences after kicking the habit "cold turkey."
"The credit crunch is morphing from an American-centered financial crisis into a global economic crisis," according to David Bowers of Absolutely Strategy. The policy of creating more money than could be put to productive use in the real economy that allowed rising asset prices would more than compensate for a lack of ‘real' wage gains in the real economy and for consumers to continue to borrow and spend more than they earn at an accelerating pace failed once the excess money began to flow to commodities rather than to real estate or stock prices.
Growth is now demonstrably slowing in all parts of the world. Central Banks around the world will be embarking on a campaign of lowering their interest rates. Participants in the US stock market, fresh off an artificially trumped up GDP restatement (trumped up due to the stimulus package and severe understatement of the GDP deflator), will take a while to realize that gains in the dollar are due to relative underperformance of other currencies and a massive liquidity contraction. The gains will be short-lived and will result in pain and agony as those investors are lured into another bear trap that will reveal itself once much of the sidelined money comes back into the market.
The fall in commodity prices will be wrongly interpreted as a reason for the economy to rebound and for stocks to rally. While the dollar will likely continue to rise over the short term it is ultimately destined to suffer the same disastrous fate as the other fiat currencies of the world. After the sucker's rally has run its course over the next few weeks or so, the reality of an unserviceable and un-payable debt overhang will set in and the second wave of financial calamity will ensue. This time around it will be the result of the effects emanating from the negative feedback loop coming from the real economy.
Scott Bugie of Standard & Poor's writes that the second phase of credit crunch could be severe: "The credit crunch is entering a second, 'post-subprime' phase where banks' loan books deteriorate more rapidly and capital-raising efforts might become harder, says Scott Bugie, credit analyst at Standard & Poor's. Loan book deterioration is starting to hit a wider array of financial institutions, as credit losses migrate from subprime into other sectors of household finance, such as credit cards, Alt-A and prime mortgages, and auto loans well into 2009,' he says.
Other mainstream economists are have also been sounding the warning trumpets: "The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come," according to Professor Ken Rogoff who was chief economist at the IMF from 2001 to 2004 and who now teaches at Harvard. He goes on to say, "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one - one of the big investment banks or big banks."
In 2002 Dr. Marc Faber, author of the GloomBoomDoom Report and highly-sought guest for CNBC and Bloomberg TV, wrote a book titled, Tomorrow's Gold-Asia's Age of Discovery. Those who read the book and followed Faber's investment advice to invest in commodities and Asian and other emerging market equities have significantly outperformed those who primarily invested in US stocks (tech, consumer and financials). But Faber had recently cautioned against this "short dollar trade" as it had become stretched and crowded. He presciently warned investors late last year. More recently, referring to commodities, he said "Prices have made a peak...Whether that is a final peak or an intermediate peak followed by higher prices, we don't know yet. It could go lower."
He echoed similar sentiments in a Bloomberg TV interview this morning. I found his most recent market commentary, issued on August 20, 2008 titled, "Contracting Global Liquidity," quite compelling. He uses several charts to demonstrate how liquidity is contracting, the dollar is strengthening, commodities are declining, and what the relationships that exist between them predict for the future. He writes:
"In sum, credit growth and liquidity are contracting, a vicious economic downturn is about to unfold (China could surprise on the downside and put additional pressure on commodity prices) and asset markets are still high by historical standards and, therefore, remain vulnerable. I would use equity rallies as a selling opportunity and further weakness in gold as a buying opportunity for long term holders with significant cash and cash flows."
Faber has an enviable track record over the long, intermediate and shorter term. Not many investment strategists can boast of getting the market right over these three terms. He is an open-minded contrarian who is not afraid to change his views. He was way in front of the investment community predicting the rise of China and commodity prices six years ago. He correctly wrote that the US currency and stock markets would relatively outperform others last year. And he got the April-May S&P 500 rally to 1440 right also.
The one longer-term trend Faber appears to have the most confidence in is the "long gold/short the DJIA" trade that has been working, despite the recent pullback, since 2001. Over the intermediate term he is a looking for what can be described as nothing less than a US stock market crash, perhaps by the end of this year.
Rather than the US markets leading the rest of the world higher, the evidence points toward the rest of the world leading US markets lower. The global slowdown had begun in earnest. The US is now more dependent on world growth than the world is reliant upon the US. This is especially true since the US consumer is seeing his credit cut off and US banks and financial institutions suffer the effects of the second wave of the credit crunch. Once the relief rally has run its course and investors see that the US economic rebound has not staying power and only worn out consumers trying to pay off 25 years of accumulated debt, the dollar will rejoin the ranks of the other fiat currencies and resume its decline versus the price of gold.
The Death of Capitalism. Not Yet but Close. Financial Tsunami Incoming
"At what point shall we expect the approach of danger? By what means shall we fortify against it? Shall we expect some transatlantic military giant to step the Ocean, and crush us at a blow?
Never! All the armies of Europe, Asia and Africa combined, with all the treasure of the earth in their military chest; with a Bonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years.
At what point, then, is the approach of danger to be expected? I answer, if it ever reach us it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we will live through all time, or die by suicide."
Abraham Lincoln January 27, 1838
Bill Gross seems to be a smart and decent man. He is a savvy bond trader but like most traders he often 'talks his book' when speaking publicly.
And he is afraid. He is afraid of what he sees behind the scenes in the markets, as one of the largest holders of US debt, public and private. His words are a reflection of how bad it must be behind the facade of calm appearance. Bill Gross is a sincere voice of a probable victim coming out of a business sector most recently devoted to manipulation and deception.
Capitalism is sick, perhaps on its death bed. It has not been conquered from abroad by a competing ideology, jealous of its great success. It is slowly being strangled by the crony capitalists and a rogue financial sector out of control.
Crony capitalists do not want any part of free markets. They loathe them, run from them, seek to undermine them at every turn. Their intent is always and everywhere to create monopolies, sinecures for themselves, to wield inordinate power to keep what they win and give the public what they lose. They manipulate through words, and bribery, and deception.
Yes, Fannie and Freddie debt must be supported, with a haircut perhaps, because of the 'implicit guarantee' which was extended for years by the Congress. We cannot afford to default on anything that so closely resembles sovereign debt.
But 'buying assets' with public monies without reforming the system feeds the problem and makes the eventual solution more severe.
The Resolution Trust is a fee and commission generating machine for the same group that caused the problems. Receivership, investigation, orderly liquidation, position limits and transparency in commodity markets, a restoration of the laws created after the Crash and Great Depression to restrain reckless and fraudulent banking are essential to a genuine solution to these serial bubbles and financial Ponzi schemes.
It is what we do when no one is looking, or when you are under duress, or frightened, that takes the measure of our character.
We will stand free or we will fall. But if we fall it will be by our own hand and a lack of resolve, a reluctance to put aside our fears and prejudices and greed that are used to play us for fools and face the facts, and listen to the truth. When the banks make us an offer they think that we cannot refuse, we will be at the crossroads and will decide what we wish to be: slaves or free men. Yes, it really is that simple.
"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."
Thomas Jefferson
U.S. Must Buy Assets to Prevent `Financial Tsunami,' Gross Says
By Jody Shenn
September 4, 2008 08:43 EDT
Sept. 4 (Bloomberg) -- The U.S. government needs to start buying assets to stem a bourgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.
A process of ``delevering,'' where banks are shrinking and cutting off lending, is sapping demand for loans, bonds, stocks and commodities, driving down prices of assets of even ``impeccable quality,'' Gross said. The decline may continue until the government steps in as a buyer, he said.
``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross of Newport Beach, California-based Pacific Investment Management Co. said in commentary posted on the firm's Web site today. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''
The government should be used to support not only mortgage finance providers Fannie Mae and Freddie Mac, but also ``Mom and Pop on Main Street U.S.A.,'' through subsidized home loans issued by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.
Pimco, sovereign wealth funds and central banks are reluctant to participate in new capital raising by financial companies after losing money on more than $400 billion of investments, Gross said. (and that's the money quote - Jesse)
Never! All the armies of Europe, Asia and Africa combined, with all the treasure of the earth in their military chest; with a Bonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years.
At what point, then, is the approach of danger to be expected? I answer, if it ever reach us it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we will live through all time, or die by suicide."
Abraham Lincoln January 27, 1838
Bill Gross seems to be a smart and decent man. He is a savvy bond trader but like most traders he often 'talks his book' when speaking publicly.
And he is afraid. He is afraid of what he sees behind the scenes in the markets, as one of the largest holders of US debt, public and private. His words are a reflection of how bad it must be behind the facade of calm appearance. Bill Gross is a sincere voice of a probable victim coming out of a business sector most recently devoted to manipulation and deception.
Capitalism is sick, perhaps on its death bed. It has not been conquered from abroad by a competing ideology, jealous of its great success. It is slowly being strangled by the crony capitalists and a rogue financial sector out of control.
Crony capitalists do not want any part of free markets. They loathe them, run from them, seek to undermine them at every turn. Their intent is always and everywhere to create monopolies, sinecures for themselves, to wield inordinate power to keep what they win and give the public what they lose. They manipulate through words, and bribery, and deception.
Yes, Fannie and Freddie debt must be supported, with a haircut perhaps, because of the 'implicit guarantee' which was extended for years by the Congress. We cannot afford to default on anything that so closely resembles sovereign debt.
But 'buying assets' with public monies without reforming the system feeds the problem and makes the eventual solution more severe.
The Resolution Trust is a fee and commission generating machine for the same group that caused the problems. Receivership, investigation, orderly liquidation, position limits and transparency in commodity markets, a restoration of the laws created after the Crash and Great Depression to restrain reckless and fraudulent banking are essential to a genuine solution to these serial bubbles and financial Ponzi schemes.
It is what we do when no one is looking, or when you are under duress, or frightened, that takes the measure of our character.
We will stand free or we will fall. But if we fall it will be by our own hand and a lack of resolve, a reluctance to put aside our fears and prejudices and greed that are used to play us for fools and face the facts, and listen to the truth. When the banks make us an offer they think that we cannot refuse, we will be at the crossroads and will decide what we wish to be: slaves or free men. Yes, it really is that simple.
"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."
Thomas Jefferson
U.S. Must Buy Assets to Prevent `Financial Tsunami,' Gross Says
By Jody Shenn
September 4, 2008 08:43 EDT
Sept. 4 (Bloomberg) -- The U.S. government needs to start buying assets to stem a bourgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.
A process of ``delevering,'' where banks are shrinking and cutting off lending, is sapping demand for loans, bonds, stocks and commodities, driving down prices of assets of even ``impeccable quality,'' Gross said. The decline may continue until the government steps in as a buyer, he said.
``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross of Newport Beach, California-based Pacific Investment Management Co. said in commentary posted on the firm's Web site today. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''
The government should be used to support not only mortgage finance providers Fannie Mae and Freddie Mac, but also ``Mom and Pop on Main Street U.S.A.,'' through subsidized home loans issued by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.
Pimco, sovereign wealth funds and central banks are reluctant to participate in new capital raising by financial companies after losing money on more than $400 billion of investments, Gross said. (and that's the money quote - Jesse)
1 September 2008
Firestorm Erupts Over U.S. Banks' Gold, Silver Shorting
Got Gold Report – Firestorm Erupts Over U.S. Banks' Gold, Silver Shorting
By Gene Arensberg
01 Sep 2008 at 03:13 AM GMT-04:00
A very few and very large banks seemed to have positioned very well ahead of the plunge in prices for gold and silver, but in the process they may have bought more than they bargained for – possible class-action lawsuits.
HOUSTON (ResourceInvestor.com) -- An internet firestorm erupted over an August 5 report issued by the Commodities Futures Trading Commission (CFTC) which report revealed an unprecedented exponential one-month spike higher in short positions in gold and silver futures reported by two U.S. banks in silver and three U.S. banks in gold. Investors and bullion dealers may band together to seek legal recourse against the thus far unnamed banks.
In that CFTC report it surfaced that those few banks took the huge net short positions in gold and silver futures just ahead of the largest and harshest fall in prices for gold and silver since the Great Gold Bull began in 2001 – 2002. The Got Gold Report covered it from the silver point of view earlier this week.
Sucker Punched
Speculation in the metals community since the issue was first raised by silver analyst Ted Butler on August 22 has centered around whether the few banks acted principally to profit by their own downward trading pressure after taking the extremely large short positions, or if those very large net short positions could have been legitimate positions put on as offsetting hedges to other over-the-counter trading positions, swaps and derivatives held by the very large banks.
Subsequent work done by independent analysts point to specific banks as the most likely actors responsible for the immense short positions. As examples, (and there are more), Rob Kirby of Kirby Analytics in Toronto opined that the action is likely the work of the U.S. Federal Reserve in concert with J. P. Morgan Chase in an August 25 piece on FinancialSense.com. Tom Szabo of Silveraxis.com researched FDIC Quarterly Banking Profiles and Call Reports and concluded the most likely “usual suspects” were J.P. Morgan Chase and HSBC. Investors keenly interested in this subject will want to read Rob and Tom’s comments carefully.
Since we’ve already looked specifically at silver in the previous Got Gold Report, this report looks closer at the gold positioning. The three unnamed U.S. banks went from holding long positions for 538,100 ounces of gold in July to holding short positions for 8,222,800 ounces one month and four days later. That’s a huge change in positioning for just three trading entities. (From $448 million dollars worth long to $6.8 billion dollars worth short if we value gold at $830.) Just below is what it looks like on a graph.
Note: The graph only includes the net short positions of the three to five U.S. banks for the 24-month period shown. The CFTC report also shows participation by non-U.S. banks, but this analysis focuses strictly on the U.S. bank positioning. For the last seven months of data there were only 3 U.S. banks included in this CFTC report.
At the very least it is obvious that these three banks evidently saw in advance that gold and silver were about to plunge off a cliff in price and positioned in advance of it perfectly. At worst these few banks sucker punched gold and silver investors by taking such overwhelmingly large short positions as to literally crush those metals markets with the weight of their own trading.
CFTC Says “No Manipulation” in May
In response to persistent public concerns about market manipulation, in May of this year, the CFTC Division of Market Oversight issued its Report on Large Short Trader Activity in the Silver Futures Market. The 16-page executive summary of that report can be found here. The report concludes that the silver market is not manipulated and cites as evidence that, according to the commission: “There is no observable relationship between short-futures-trader concentration levels and silver prices.”
Perhaps if there was no observable relationship between short-futures-trader concentration prior to that report there is now as of the August 5, 2008 CFTC Bank Participation in Futures Markets report.
Again, according to the CFTC, between July 1 and August 5, 2005 three U.S. banks went from being 5,381 contracts net long COMEX gold futures to being 82,228 contracts net short. During the exact same period the total collective commercial net short positioning reported in the CFTC Commitments of Traders Reports (COT) went from 227,027 contracts on July 1 to 198,917 contracts net short on August 5. So, if we are to believe the COT reports, these three U.S. banks were layering on 82,228 net short positions in gold futures at the very same time that the commercial net short positioning was going DOWN 28,110 contracts.
From July 1 to August 5, 2008 these unnamed three U.S. banks went from being net long gold futures to overwhelmingly net short and over 41.34% of all the commercial net short positions. What did they know and when did they know it? (And, did they also put out special “market short calls” to their most valued customers at the time?)
For instant comparison, below is a snapshot of the gold market for the past three months.
We can probably assume that the bulk of the three banks' net short positions were put on in the early part of July as gold neared $950.
Regardless of whether or not the very large bank short positions are letter-of-law legal (and we’ll leave it up to others to determine that) they are almost certainly spirit-of-law aberrant. The sheer size and concentration of so large a unidirectional positioning from so few entities certainly raises legitimate questions and concerns about the metals futures markets and their roles in legitimate price discovery in the U.S. commodities markets. Especially since the action on the paper-contract-dominated spot cash market prices for gold and silver caused shortages for physical metal in the physical markets the futures markets are supposed to “answer to.”
Questions and Possible Legal Action
A few questions for those looking at this in depth: Why did three U.S. banks suddenly switch from being long gold to so overwhelmingly short gold (and silver) in one month? Where do these bank’s short positions show up in the regular commitments of traders reports? (Hint: They apparently don’t.) If these U.S. bank’s net short positions are not contained in the commercial category, then where are they? Which banks have the ability to sell that many contracts short on the COMEX without running afoul of the position limits and anti-manipulation checks put in place by the CFTC and enforced by the SEC?
At least one group of investors in California is incensed enough about the bank’s positioning and their apparent manhandling of market prices to look into the possibility of a class action lawsuit. A representative of the group contacted this reporter (and others) and plans to enlist the support of a Los Angeles based law firm there. If they go forward and keep this report informed, we’ll report the details here in future reports.
Something’s Gone A Kilter?
Interestingly, remember that on July 1, 2008 the commercial net short positioning for all large commercial traders on the COMEX for gold (LCNS) amounted to 227,027 contracts. It was quite high relatively speaking. By August 5, 2008 the LCNS had actually declined to 198,917 contracts. So, as these three U.S. banks were layering on 87,609 new short contracts in gold futures (to come up to 82,228 contracts net short themselves) the collective commercial net short positions of all commercial traders were falling, not rising.
Apparently these three U.S. banks were going very much against the tide in gold futures at the time in other words. Below is a graph which shows all the collective commercial net short positioning for gold on the COMEX.
Gold closed on July 1 at $939.68. During the month that followed gold began its precipitous decline and by August 5 it was down to $874.35, a drop of $65.33 or 7%. Normally as gold declines we tend to see a reduction in commercial net short positioning on the COMEX. As the price of gold gets cheaper, there is usually less motivation for commercials to take the short side of gold contracts. But in this case, as gold was plunging the LCNS was merely easing lower. (It has fallen sharply since August 12, though.)
Is it a coincidence that these two or three U.S. banks took such huge short positions in gold and silver not very long after Federal Reserve Chairman Ben S. Bernanke spoke publicly about the weak dollar? (A very rare event, but it occurred in the same week in June that Treasury Secretary Paulson and President Bush both came out and jawboned the dollar higher.)
Did J. P. Morgan Chase, the same bank that the Federal Reserve turned to in the “rescue” of Bear Stearns, act on behalf of the Fed to knock the legs out from under the gold and silver markets while simultaneously supporting the U.S. dollar? If so, is that a legitimate function of a U.S. bank to perform on behalf of its central bank?
One school of thought holds that propping up a fiat currency in order to maintain public confidence is indeed a legitimate function of the Department of Treasury from time to time. Indeed, Mr. Bernanke’s predecessor in office is widely credited for having said so in the past.
The jury is still out as to exactly who did what and how much, largely because the evidence is still murky and difficult to obtain and analyze, but nevertheless a body of evidence is building which supports those who think that’s what just happened. What is not yet crystal clear is whether or not it’s over. For now.
On the Sunny Side
The good news for gold investors is that the LCNS has since retreated back to lower levels now that gold has sold off so harshly. As of this past Tuesday (8/26) COMEX commercial’s positioning had fallen to 121,919 contracts net short. That’s not all that much higher than the LCNS August low point in 2007 of 91,994 contracts net short which occurred on August 21 of 2007. (Technically, the LCNS nadir for 2007 occurred on January 9 at 81,674, but that was with gold then at $613.00.)
In fact, since the LCNS peaked on July 15 at a whopping 246,577 contracts net short (a near record) it has fallen 124,658 to just 121,919 contracts net short as of Tuesday, August 26. That’s the lowest LCNS since August 28, 2007 (98,864) and a drop in commercial net short positions of 50.56%.
Perhaps even more importantly, the LCNS as compared to the total open interest on the COMEX (LCNS:TO) has “improved” considerably over the past few weeks. On July 15 the collective commercial net short positioning represented a very high 50.95% of all open contracts on the COMEX. As of this past Tuesday (8/26) it had plunged to just 32.02%.
Although above last year’s nadir, the LCNS:TO is certainly in much more “bullish” territory than it was just a month ago.
Physical Metal Scarce
As silver and gold investors lick their wounds from the recent harsh plunges in the prices of precious metals, one focus is tuned to the extraordinarily large price drops which seemed to ignore a growing scarcity of physical supplies.
By almost all accounts available on the web as of this week, the paper futures contract dominated spot price has disconnected from the popular physical silver and gold bullion markets. To most investors it seems odd indeed that the spot price has moved so far down that bullion dealers are forced to charge double digit percentage premiums for some silver bullion products and up to 5% premiums for gold bullion items. That’s if customers can actually find a dealer that has any products in stock to sell.
Bullion dealers also report a very dramatic drop in scrap purchases over the past several weeks. “I’m only buying about $50,000 a week in scrap now,” says one Houston dealer. “Last month I was buying more than $150,000 of scrap per week and more,” he added.
Gold ETF Investors Holding
Investors have largely held onto their gold ETF holdings as well. In fact, over the past week gold holdings at SPDR Gold Shares [GLD] remained flat at 651.37 tonnes of gold bars held by its custodian in London.
Apparently larger holders of gold ETFs are content to ride out this price storm or add to their long-term holdings, because gold holdings for gold ETFs have not been reduced all that much compared to the drop in metal prices.
The authorized market participants for GLD have to add shares to the trading float and increase the amount of gold held when buying pressure is significantly stronger than selling pressure. The reverse occurs when there is more selling pressure than buying pressure.
Bottom Line
While it is clear that a very few banks seem to have positioned very well in advance of this most recent example of a hot-money exodus in gold and silver, it is also pretty clear that ETF holders and most investors apparently decided it was a good buying opportunity. Both gold and silver are certainly more attractive than they were just one month ago price wise.
That doesn’t mean they can’t test even lower prices, they certainly can, especially if the few futures-playing giant banks stomp their leviathan boots on the neck of the paper-contract-dominated spot market again. We have to believe they won’t though. Not anytime soon anyway. Not unless they intend on feeding a different kind of bear. The grizzlies known as heavy-hitting class action lawyers. … Got gold?
Got Gold Report Charts:
Silver Graphs. Please see the 1-year silver graph and the 2-year weekly version for this report’s technical and expanded market commentary on the graphs themselves.
Gold Charts. Please see the 1-year daily chart for gold and the 2-year weekly version for context as well as this report’s technical and market commentary on the charts themselves.
Gold Indexes. Please see the 9-month daily HUI chart and the 3-year weekly HUI chart for context and this report’s commentary on the graphs themselves.
HUI:Gold Ratio. Please see the one-year daily HUI/Gold ratio chart and the 2-year weekly HUI/Gold version for context and this report’s commentary on the graphs themselves.
U.S. Dollar. Please see the 1-year daily USD chart and the 2-year weekly USD version for this report’s technical and market commentary on the charts themselves.
We apologize if some of this reporting seems a bit technical, but the fund managers and seasoned traders that read this report really do prefer it that way.
That’s it for this special offering of the Got Gold Report. Until next time, as always, MIND YOUR STOPS.
link
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The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a long position in iShares Silver Trust, SPDR Gold Shares and holds various long positions in mining and exploration companies.
By Gene Arensberg
01 Sep 2008 at 03:13 AM GMT-04:00
A very few and very large banks seemed to have positioned very well ahead of the plunge in prices for gold and silver, but in the process they may have bought more than they bargained for – possible class-action lawsuits.
HOUSTON (ResourceInvestor.com) -- An internet firestorm erupted over an August 5 report issued by the Commodities Futures Trading Commission (CFTC) which report revealed an unprecedented exponential one-month spike higher in short positions in gold and silver futures reported by two U.S. banks in silver and three U.S. banks in gold. Investors and bullion dealers may band together to seek legal recourse against the thus far unnamed banks.
In that CFTC report it surfaced that those few banks took the huge net short positions in gold and silver futures just ahead of the largest and harshest fall in prices for gold and silver since the Great Gold Bull began in 2001 – 2002. The Got Gold Report covered it from the silver point of view earlier this week.
Sucker Punched
Speculation in the metals community since the issue was first raised by silver analyst Ted Butler on August 22 has centered around whether the few banks acted principally to profit by their own downward trading pressure after taking the extremely large short positions, or if those very large net short positions could have been legitimate positions put on as offsetting hedges to other over-the-counter trading positions, swaps and derivatives held by the very large banks.
Subsequent work done by independent analysts point to specific banks as the most likely actors responsible for the immense short positions. As examples, (and there are more), Rob Kirby of Kirby Analytics in Toronto opined that the action is likely the work of the U.S. Federal Reserve in concert with J. P. Morgan Chase in an August 25 piece on FinancialSense.com. Tom Szabo of Silveraxis.com researched FDIC Quarterly Banking Profiles and Call Reports and concluded the most likely “usual suspects” were J.P. Morgan Chase and HSBC. Investors keenly interested in this subject will want to read Rob and Tom’s comments carefully.
Since we’ve already looked specifically at silver in the previous Got Gold Report, this report looks closer at the gold positioning. The three unnamed U.S. banks went from holding long positions for 538,100 ounces of gold in July to holding short positions for 8,222,800 ounces one month and four days later. That’s a huge change in positioning for just three trading entities. (From $448 million dollars worth long to $6.8 billion dollars worth short if we value gold at $830.) Just below is what it looks like on a graph.
Note: The graph only includes the net short positions of the three to five U.S. banks for the 24-month period shown. The CFTC report also shows participation by non-U.S. banks, but this analysis focuses strictly on the U.S. bank positioning. For the last seven months of data there were only 3 U.S. banks included in this CFTC report.
At the very least it is obvious that these three banks evidently saw in advance that gold and silver were about to plunge off a cliff in price and positioned in advance of it perfectly. At worst these few banks sucker punched gold and silver investors by taking such overwhelmingly large short positions as to literally crush those metals markets with the weight of their own trading.
CFTC Says “No Manipulation” in May
In response to persistent public concerns about market manipulation, in May of this year, the CFTC Division of Market Oversight issued its Report on Large Short Trader Activity in the Silver Futures Market. The 16-page executive summary of that report can be found here. The report concludes that the silver market is not manipulated and cites as evidence that, according to the commission: “There is no observable relationship between short-futures-trader concentration levels and silver prices.”
Perhaps if there was no observable relationship between short-futures-trader concentration prior to that report there is now as of the August 5, 2008 CFTC Bank Participation in Futures Markets report.
Again, according to the CFTC, between July 1 and August 5, 2005 three U.S. banks went from being 5,381 contracts net long COMEX gold futures to being 82,228 contracts net short. During the exact same period the total collective commercial net short positioning reported in the CFTC Commitments of Traders Reports (COT) went from 227,027 contracts on July 1 to 198,917 contracts net short on August 5. So, if we are to believe the COT reports, these three U.S. banks were layering on 82,228 net short positions in gold futures at the very same time that the commercial net short positioning was going DOWN 28,110 contracts.
From July 1 to August 5, 2008 these unnamed three U.S. banks went from being net long gold futures to overwhelmingly net short and over 41.34% of all the commercial net short positions. What did they know and when did they know it? (And, did they also put out special “market short calls” to their most valued customers at the time?)
For instant comparison, below is a snapshot of the gold market for the past three months.
We can probably assume that the bulk of the three banks' net short positions were put on in the early part of July as gold neared $950.
Regardless of whether or not the very large bank short positions are letter-of-law legal (and we’ll leave it up to others to determine that) they are almost certainly spirit-of-law aberrant. The sheer size and concentration of so large a unidirectional positioning from so few entities certainly raises legitimate questions and concerns about the metals futures markets and their roles in legitimate price discovery in the U.S. commodities markets. Especially since the action on the paper-contract-dominated spot cash market prices for gold and silver caused shortages for physical metal in the physical markets the futures markets are supposed to “answer to.”
Questions and Possible Legal Action
A few questions for those looking at this in depth: Why did three U.S. banks suddenly switch from being long gold to so overwhelmingly short gold (and silver) in one month? Where do these bank’s short positions show up in the regular commitments of traders reports? (Hint: They apparently don’t.) If these U.S. bank’s net short positions are not contained in the commercial category, then where are they? Which banks have the ability to sell that many contracts short on the COMEX without running afoul of the position limits and anti-manipulation checks put in place by the CFTC and enforced by the SEC?
At least one group of investors in California is incensed enough about the bank’s positioning and their apparent manhandling of market prices to look into the possibility of a class action lawsuit. A representative of the group contacted this reporter (and others) and plans to enlist the support of a Los Angeles based law firm there. If they go forward and keep this report informed, we’ll report the details here in future reports.
Something’s Gone A Kilter?
Interestingly, remember that on July 1, 2008 the commercial net short positioning for all large commercial traders on the COMEX for gold (LCNS) amounted to 227,027 contracts. It was quite high relatively speaking. By August 5, 2008 the LCNS had actually declined to 198,917 contracts. So, as these three U.S. banks were layering on 87,609 new short contracts in gold futures (to come up to 82,228 contracts net short themselves) the collective commercial net short positions of all commercial traders were falling, not rising.
Apparently these three U.S. banks were going very much against the tide in gold futures at the time in other words. Below is a graph which shows all the collective commercial net short positioning for gold on the COMEX.
Gold closed on July 1 at $939.68. During the month that followed gold began its precipitous decline and by August 5 it was down to $874.35, a drop of $65.33 or 7%. Normally as gold declines we tend to see a reduction in commercial net short positioning on the COMEX. As the price of gold gets cheaper, there is usually less motivation for commercials to take the short side of gold contracts. But in this case, as gold was plunging the LCNS was merely easing lower. (It has fallen sharply since August 12, though.)
Is it a coincidence that these two or three U.S. banks took such huge short positions in gold and silver not very long after Federal Reserve Chairman Ben S. Bernanke spoke publicly about the weak dollar? (A very rare event, but it occurred in the same week in June that Treasury Secretary Paulson and President Bush both came out and jawboned the dollar higher.)
Did J. P. Morgan Chase, the same bank that the Federal Reserve turned to in the “rescue” of Bear Stearns, act on behalf of the Fed to knock the legs out from under the gold and silver markets while simultaneously supporting the U.S. dollar? If so, is that a legitimate function of a U.S. bank to perform on behalf of its central bank?
One school of thought holds that propping up a fiat currency in order to maintain public confidence is indeed a legitimate function of the Department of Treasury from time to time. Indeed, Mr. Bernanke’s predecessor in office is widely credited for having said so in the past.
The jury is still out as to exactly who did what and how much, largely because the evidence is still murky and difficult to obtain and analyze, but nevertheless a body of evidence is building which supports those who think that’s what just happened. What is not yet crystal clear is whether or not it’s over. For now.
On the Sunny Side
The good news for gold investors is that the LCNS has since retreated back to lower levels now that gold has sold off so harshly. As of this past Tuesday (8/26) COMEX commercial’s positioning had fallen to 121,919 contracts net short. That’s not all that much higher than the LCNS August low point in 2007 of 91,994 contracts net short which occurred on August 21 of 2007. (Technically, the LCNS nadir for 2007 occurred on January 9 at 81,674, but that was with gold then at $613.00.)
In fact, since the LCNS peaked on July 15 at a whopping 246,577 contracts net short (a near record) it has fallen 124,658 to just 121,919 contracts net short as of Tuesday, August 26. That’s the lowest LCNS since August 28, 2007 (98,864) and a drop in commercial net short positions of 50.56%.
Perhaps even more importantly, the LCNS as compared to the total open interest on the COMEX (LCNS:TO) has “improved” considerably over the past few weeks. On July 15 the collective commercial net short positioning represented a very high 50.95% of all open contracts on the COMEX. As of this past Tuesday (8/26) it had plunged to just 32.02%.
Although above last year’s nadir, the LCNS:TO is certainly in much more “bullish” territory than it was just a month ago.
Physical Metal Scarce
As silver and gold investors lick their wounds from the recent harsh plunges in the prices of precious metals, one focus is tuned to the extraordinarily large price drops which seemed to ignore a growing scarcity of physical supplies.
By almost all accounts available on the web as of this week, the paper futures contract dominated spot price has disconnected from the popular physical silver and gold bullion markets. To most investors it seems odd indeed that the spot price has moved so far down that bullion dealers are forced to charge double digit percentage premiums for some silver bullion products and up to 5% premiums for gold bullion items. That’s if customers can actually find a dealer that has any products in stock to sell.
Bullion dealers also report a very dramatic drop in scrap purchases over the past several weeks. “I’m only buying about $50,000 a week in scrap now,” says one Houston dealer. “Last month I was buying more than $150,000 of scrap per week and more,” he added.
Gold ETF Investors Holding
Investors have largely held onto their gold ETF holdings as well. In fact, over the past week gold holdings at SPDR Gold Shares [GLD] remained flat at 651.37 tonnes of gold bars held by its custodian in London.
Apparently larger holders of gold ETFs are content to ride out this price storm or add to their long-term holdings, because gold holdings for gold ETFs have not been reduced all that much compared to the drop in metal prices.
The authorized market participants for GLD have to add shares to the trading float and increase the amount of gold held when buying pressure is significantly stronger than selling pressure. The reverse occurs when there is more selling pressure than buying pressure.
Bottom Line
While it is clear that a very few banks seem to have positioned very well in advance of this most recent example of a hot-money exodus in gold and silver, it is also pretty clear that ETF holders and most investors apparently decided it was a good buying opportunity. Both gold and silver are certainly more attractive than they were just one month ago price wise.
That doesn’t mean they can’t test even lower prices, they certainly can, especially if the few futures-playing giant banks stomp their leviathan boots on the neck of the paper-contract-dominated spot market again. We have to believe they won’t though. Not anytime soon anyway. Not unless they intend on feeding a different kind of bear. The grizzlies known as heavy-hitting class action lawyers. … Got gold?
Got Gold Report Charts:
Silver Graphs. Please see the 1-year silver graph and the 2-year weekly version for this report’s technical and expanded market commentary on the graphs themselves.
Gold Charts. Please see the 1-year daily chart for gold and the 2-year weekly version for context as well as this report’s technical and market commentary on the charts themselves.
Gold Indexes. Please see the 9-month daily HUI chart and the 3-year weekly HUI chart for context and this report’s commentary on the graphs themselves.
HUI:Gold Ratio. Please see the one-year daily HUI/Gold ratio chart and the 2-year weekly HUI/Gold version for context and this report’s commentary on the graphs themselves.
U.S. Dollar. Please see the 1-year daily USD chart and the 2-year weekly USD version for this report’s technical and market commentary on the charts themselves.
We apologize if some of this reporting seems a bit technical, but the fund managers and seasoned traders that read this report really do prefer it that way.
That’s it for this special offering of the Got Gold Report. Until next time, as always, MIND YOUR STOPS.
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The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a long position in iShares Silver Trust, SPDR Gold Shares and holds various long positions in mining and exploration companies.
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