 Gold
& Math on a Napkin
Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
Jan 25, 2008
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Bankers, Wall Street hucksters,
financial network commentators, and floating analysts seem to
have flunked basic arithmetic in grand fashion. Maybe they only
expose the next link in a long chain of deception, their apparent
expertise. One hears estimates of $200 billion on total mortgage
bond losses from the Secy of Inflation Ben Bernanke. One witnesses
the series of bond writedowns by Wall Street banks. One can read
of Wall Street economists like Jan Hatzius of Goldman Sachs,
who cites $400 billion in potential bond losses, a favorite figure
cited by other bankers. One is subjected to press anchors and
their simplistic echoes of bond losses. One is endlessly lectured
by highbrow analysts of the extent of bond damage. The trouble
is, they all cannot do simple arithmetic and observe the billboards
on mortgage bond indexes, fully available.
Put aside for a minute the
fact that the mortgage debacle in the United States is described
as a subprime loan problem. The entire gaggle of banker goons
and press parrots have their reasons for insisting on focusing
entirely on subprimes. It makes the problem more marginal, more
understandable, more excusable. Dumb lenders gave home loans
to bad borrowers. OK! Follow this path of incredibly easy math.
The total of all US$-based mortgage bonds is $10.4 trillion.
A conservative estimate of the prime mortgages within this giant
mass is $7 trillion. We all know it is more, so bear with my
lowball for argument sake. The prime mortgage bond index measures
an aggregate of prime rated bonds scattered across the beleaguered
fifty states, varying over loan size from large to medium to
small. The 'AAA' mortgage bond index has lost a whopping 30%,
a fact that continuously eludes the big bankers and their legion
of obsequious monitoring mavens. Simple math, within the
grasp of a 9-year old kid, results in prime mortgage losses amount
to at least $2.1 trillion. The kid might have trouble with all
the zeroes though, and even be confused by what a trillion is.
A trillion is a million millions.
The size of the subprime mortgages
in the United States is estimated at $1.4 trillion. The 'BBB'
mortgage bond index has lost 80% of its value. It too measures
an aggregate of such mortgage bonds across the US, of various
size loans. So subprime mortgage bonds have lost over $1.1 trillion.
If subprime bonds have lost a trillion$, why cannot supposed
experts estimate that the total asset backed bond losses to be
at least a cool trillion$? Add the two numbers from subprime
and prime together to reach a $3.2 trillion in their bond losses.
This total does not account for the middle tier 'Alt-A' mortgages,
no small sum either. That is probably close to another $1 trillion
in bond losses. Alt-A mortgages do not receive much attention.
They are essentially more subprime slime with a more obscure
name. Their decline rate for associated bonds is almost as horrible
as the subprimes. Even if they are omitted in the argument, the
point remains just as dire. This summer the avalanche of innovative
prime adjustable mortgages will be the wreckage to report. The
bonds have fallen in value, but the writeoffs have yet to make
the news. All in time.
DAMAGE SUMMARY ON A NAPKIN
Let's summarize in
plain bold letters so as to avoid any confusion. These comments
require plan language. Clear numbers are needed in clear statements.
PRIME MORTGAGE BOND LOSSES
AT LEAST $2 TRILLION
SUBPRIME MORTGAGE BOND LOSSES TOTAL OVER $1 TRILLION
THE TOTAL MORTGAGE BOND LOSSES ARE OVER $3 TRILLION
THE OFFICIAL ESTIMATES ARE WRONG BY A FACTOR OF 10 !!!
GOLD WILL SKYROCKET WHEN THESE NUMBERS ARE FINALLY REPORTED
So why are all the so-called
experts spouting about $200 billion in total bond losses? Why
are Wall Street economists talking about $400 billion in extensive
losses? A simple conclusion is that they prefer to lie and deceive,
as they defend their industry. Most savvy observers are hard
pressed to identify the last time Wall Street and their gaggle
of advertisement vehicles actually told the truth. When people
ask me why such a huge volume of lies is routinely told, my answer
is always the same. Check the advertisers of CNBC, Wall Street
Journal, Barrons, even Investors Business Daily.
They are almost all the same: big banks, brokerage houses, mutual
funds, mortgage lenders, and related firms, mostly of them headquartered
in New York City. By the way, not a single felony conviction
has stuck against a New York City defendant in court. All the
convictions are of non-club members roaming other regions. The
consequence of being beholden to such a chorus of advertisers
is lost objectivity, blatant bias, active deception, and comprehensive
obstruction to present the facts in a truthful light. Their message
has become simple. "Do not panic, wait it out, because
we are desperately trying to sell from our cratering portfolios."
The USGovt stimulus package
at $150 billion is being floated, replete with minor tax cuts,
and a puny amount of money doled to each households. This is
peanuts. Ben Bernanke is a bit late in living up to his name
of 'Helicopter Ben' actually. The name 'B-52 Ben' is in no way
deserved, not yet. Questions are asked if the USGovt fiscal plan
is enough. Of course not! The stimulus is ten times smaller than
required, because the estimated size of the problem is ten times
smaller than reality. Unless and until the authorities in charge
of this implosion of financially engineered tinkertoys get serious,
when a rescue package and resolution platform are designed and
put into action valued in the trillion$, they are urinating on
raging bonfires. The USFed has put a very small amount of money
into the banking system since August, under $20 billion net.
BIAS AMONG BANKERS
Without any doubt,
the Wall Street conmen and the clueless rookies running the US
Federal Reserve choose not to properly assess the problem. They
are totally unwilling to tell the public that the risk price
modeling system is being unraveled totally, that the mortgage
debacle has wrecked the banking system totally, that the USEconomy
is going to be dragged down in a tragedy. The USFed and even
the US Dept of Treasury are delighted to see a recession, since
it makes demand grow for USTreasurys. Therein lies a blatant
bias. These clowns talk a lot about transparency, when such spotlights
have exposed the banking system as insolvent. These charlatans
talk a lot about the virtues of home ownership, when they have
become agents to destroy life savings. A grotesque transfer of
wealth has taken place using mortgage bonds as the theft vehicle,
from the homeowners to the mortgage originators and mortgage
bond sales force, FROM FEES. Big investment institutions are
bag holders, like pension funds, insurance firms, hedge funds.
As USTBill yields decline, borrowing costs for the increasingly
bankrupt US book of business decline. Borrowing costs might become
a huge portion of the ongoing federal budget and its deficit.
The banking leaders much prefer
a recession to a big bout of price inflation. They have a destructive
policy at work, to prevent what they call 'Secondary Inflation
Effects' from taking root. In other words, they can tolerate
systemic price inflation in energy costs, material costs, service
costs, insurance costs, but heaven forbid any increase in wages.
They steer the system towards a Middle Class squeeze. Wages have
fallen by USGovt nitwit analyses by 4% to 5% since 2003 on an
inflation adjusted basis. So if realistic inflation adjustment
is used, employing the 7% to 10% CPI rise seen in the last few
years, the Middle Class has suffered a 20% to 25% wage crush
in real terms!
Those analysts who have been
forecasting severe problems do not receive proper credit. Instead,
they are criticized, disrespected, and called lucky. They are
even called part of the problem, as they contribute to the erosion
of confidence. My position is steadfast, consistent, and stern.
The US financial system embodies institutional dishonesty, fully
intertwined throughout the entire system. With each passing month,
another huge story of fraud is revealed. We need a new cable
television network just to track US financial fraud.
Today we were treated to yet
another deceptive home sales report. The December existing home
sales were down 2.2% in sequential sales. Yet, the home inventory
supply improved to only 9.6 months, down from 10.2 months in
November. Just how did inventory improve when sales continued
to decline? EASY, people are removing homes for sale, taking
their listing off multi-listing services, in response to a lousy
market. They hope for a better day, one which will not come.
The homes were not sold, so supply was reduced by decisions.
RESILIENT GOLD, SHINY TOO
Gold is resilient.
Its price has a fail-safe mechanism against declines. When gold
falls in price, the factors weighing it down are the same as
what forces central banks to cut interest rates. At the Vancouver
Gold Show on Monday, on stage my words were to watch gold bounce
back when the USFed made an interim rate cut in the next couple
days. My guess was given a 30% chance of occurrence. It happened
the next day! An argument was claimed that in several months,
the decline in the gold price toward 850 would be part of a uptrend
not even recognized for the one-day big selloff. My words at
the breakout session were to expect the gold price to rebound
with strength as soon as the USFed took responsive action, since
London bankers were making telephone calls now. And London guys
share the big power with other guys in Old Europe. The Swiss
uber-bankers are angry. They are taking back control. See Basel
2 bank rules and their changes.
When the Europeans soon join
in the coerced rate cuts, the gold price will rise in Europe.
In a competing currency war, gold wins across the board since
they all devalue their currencies versus gold!!! The gold price
is back over 900 again, set to retest the 915 high. Notice the
mild 'Bull Hammer' signal evident this week, an incomplete week.
The intra-week lows have been erased. The reversal was bullish.
The Arabs and Asians would have come to rescue gold if not for
the USFed. Be totally assured that Goldman Sachs was buying gold
contracts on Monday, knowing full well that the USFed would make
an interim cut. Such are the benefits of the Fascist Business
Model. The rally is back, but my suspicion is the 915 gold price
will hold and a retest under 900 must be completed. The key here
is the Euro Central Bank. They can force a recession across the
Eurozone, or else join in the global price inflation engineering.
Debts cannot be permitted to grow out of control. A bank crush
cannot be permitted to spill over to the mainstream economies.
JUSTICE SERVED AND TO BE SERVED
The financial sector
to date has avoided felony charges, but not lawsuits. Regulators
have permitted untold fraud, sitting on their hands. Those committing
fraud have friends in the regulatory agencies, even the federal
prosecutor posts. The lawsuits might possibly bring some semblance
of justice to the big picture. Of course, the compromised USGovt
officials, the hapless USFed chairman, the omnipotent Goldman
Sachs henchmen, the sleazy hidden JPMorgan spooks, they might
deliver a message or phone call to some judges to interfere with
the lawsuit process. WE MIGHT JUST FIND OUT HOW ANGRY INDIVIDUAL
STATES ARE AT THE FEDERAL YESMEN AND CANCEROUS CONMAN NEW YORK
BANKERS. The nation is a collection of states, after all. The
federal government has usurped powers. The Manhattan Made Men
have sucked so much blood out of the living American corpse,
that the states might be in the process of fighting back. Watch
the Cleveland city lawsuit set against a dozen big banks for
a clue. The state of Ohio has been hard hit by home foreclosures.
The city mayor accuses the big banks of predatory practices and
worse. He likens them to organized crime. Wow! Finally an accurate
description. He might be in line for a car accident, or a heart
attack, or much missing funds in the city coffer, some smear.
For the longest time white
collar crime has been minimized and tolerated. Rob a store of
$500 with a gun and receive 10 years in prison. Rob a pension
fund of $500 million with a pen and not even be indicted, let
alone even be deemed in need of social isolation. Why are Wall
Street bankers not being indicted for fraud? Of course, it makes
sense. Because the banking system would collapse without their
beneficence and key role steering the economy. We all need their
guiding hands. And also, because they run the government prosecutor
agencies, a minor fact. In the last month, when watching the
debacle unfold, a mindboggling thought came. The criminals on
Wall Street are designing the solution. Why is that? Only in
America can perpetrators of fraud design solutions to the grotesque
problems they caused. Not only that, they will probably administer
the programs as part of the solutions, thus profit more. More
fraud will appear in the programs as well, just like with the
Hurricane Katrina relief program. Neither has the fraud been
prosecuted in the Hurricane programs nor the Wall Street bond
fraud. Watch the lawsuits, especially the class action suits.
Class actions are different, and involve federal courts, unlike
the individual cases. When an account holder challenges the
brokerage house, the case goes to compulsory arbitration with
a former brokerage firm official presiding, and very few wins
for more minions. Watch the class action lawsuits!!!
REALITY SINKING IN
As the situation becomes
more clear on the broad and deep extent of the wreckage, more
and more people will realize that my summertime forecast of a
$2 to $4 trillion bailout makes sense. They will trot out their
insane platform of a New Resolution Trust, built atop an acidic
cesspool of Fannie Mae and Freddie Mac. Some wonder why fresh
new platforms are not built, why fresh new banks are not erected
as the old fraud-ridden Wall Street banks are let go to liquidation
in bankruptcies. The answer is simple: liquidation of old
corrupt financial entities would require a complete accounting
of their mountain of credit derivatives, of their gold derivatives,
of their currency derivatives. The 1998 LongTerm Capital
Mgmt was not permitted to endure liquidations, since the powerful
men in suits did not want for gold to rise by $500 more per ounce,
exposing the Bank of Italy in its hidden leases to Wall Street
hedge funds. So the monetization papering over of the problems
will continue on a greater scale.
News items are growing uglier
by the day. The second biggest bank in France, Société
Générale announced a $7.1 billion loss from a rogue
bond trader involved in fraud. Was blame put on one man instead
of putting their entire bank management under scrutiny? They
join in the Hall of Shame the firms Sumitomo, Barings, and Kidder
Peabody in lax trading oversight. Ford Motors announced a 54
thousand job cut, at a time when USGovt officials claim the economy
is still expanding. Not to worry! The Qatar government has decided
to put $15 billion of cash into twelve ailing US and European
banks. Why do they do that? Simply because many US & Euro
banks are insolvent, a nice word for bankrupt.
The bond insurers are the big
story these days. Ambac was downgraded by the debt rating agencies
last Friday. MBIA, ACA Capital and a small gaggle of bond insurers
are sitting on a mountain of dead credit default swaps. One day
we might awaken to learn that those who thought they had a profit
from credit default swaps are actually holding nothing, since
the counter-party is dead as a doornail. If only we could arrange
counter-party risk holders to reside on the planet Mars, outside
our system. A credit default swap is an insurance contract against
$10 million in debt securities, such as mortgage bonds or corporate
bonds. As distress is felt, the bond loses value while the swap
rises in value. The 50% annual rise in the credit derivative
volume of outstanding contracts owes mainly to the burgeoning
growth in credit default swaps. As mortgage loans flooded
the banking system, and their bonds flooded the credit market
system, some measure of insurance was taken out. Too bad pay
days on those insurance claims will be absent. Watch the municipal
bonds insured by Ambac and MBIA. They might be forced into sales
by institutions soon, or else just permit the munis to run naked
without insurance at all. Some cities and towns might order huge
budget cuts.
The USDollar money supply is
growing at alarming rates, sure to go much higher. The gold price
rises with this growing supply, now clocking a 15% annual rate.
The biggest story among central bankers right now is how the
Euro Central Bank is being coerced to cut rates. We are watching
the quintessential 'Competing Currency Wars' with a series of
competitive currency devaluations to ensue. The Canadians relieved
their loonie rise by cutting rates. The Bank of Canada will cut
more. The British relieved their sterling rise by cutting rates.
The Bank of England will cut more. My January Gold & Energy
Hat Trick Letter contains a very important forecast on the British
banks, sterling currency, and economy. The EuroCB is mired in
internal confrontations. The Germans remain hawks against price
inflation, with vivid memories of Weimar times. The French advocate
rate cuts, led by Sarkozy. In time, the EuroCB will cave in from
the currency war. The US Federal Reserve cut the official interest
rate by 75 basis points, a forecasted call made on stage by me
on Monday at the Vancouver Gold Show. Now pressure is extreeeeme
on the EuroCB to cut also, or else suffer from a euro currency
vaulting over 150. Bond yield spreads favor the euro too much.
The tougher the Europeans act against price inflation, the more
serious damage their economies will suffer from a high currency
rendering harm to exporters. Unlike the USEconomy, the Eurozone
economy has a hefty trade surplus on the order of $10 billion
per month. The USFed remains well behind the curve. With a 2-year
TBill yield at 2.2% (it was under 2.0%), and the Fed Funds at
3.5% now, the USFed is still behind the curve. Their rate cuts
will not affect the USEconomy for some time, maybe six to nine
months. The stock market likes the news, but corporate profits
are sure to decline badly.
THE UPSHOT OF THE COMPETITIVE
CURRENCY DEVALUATIONS IS THAT GOLD WILL RISE IN EACH ECONOMY
WHOSE BANKERS EXECUTE INTEREST RATE CUTS. THAT MEANS ALL OF THEM,
WITH THE EUROPEANS BEING THE LAST.
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Jan 24, 2008
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
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Jackass
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Trick Letter
Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
by the limitations of economic credentials. Visit his website
at www.GoldenJackass.com. For personal questions
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