 Relation
Challenge & Gold
Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
Nov 20, 2008
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coverage of several smallcap companies positioned to rise during
the ongoing panicky attempt to sustain an unsustainable system
burdened by numerous imbalances aggravated by global village
forces. An historically unprecedented mess has been created by
compromised central bankers and inept economic advisors, whose
interference has irreversibly altered and damaged the world financial
system, urgently pushed after the removed anchor of money to
gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds,
and inter-market dynamics with the US Economy and US Federal
Reserve monetary policy.
A major challenge looms large
on the immediate horizon. The USEconomy must be reflated in order
to avoid collapse. Debts have become a crippling factor. Liquidation
of speculative trades coincides with economic retreat, and hedge
funds are under attack by their creditors (largely Wall Street
firms) while major companies shed workers by the tens of thousands.
When asked about economic prospects, a standard answer lately
of mine has been to observe important signals not of recession
but of potential disintegration. Almost all of the economic
data, almost all of the Fed regional reports, almost all of the
consumer sentiment indexes, almost all of the jobs data, almost
all of the housing foreclosure data, is negative. The most dangerous
and disgusting aspect of the current rescue initiatives is that
almost all Dept Treasury and USFed actions are not revealed via
any disclosure at all, nothing. Despite demands for transparency,
nothing is shared on detail. Corruption and fraud usually thrive
in such an environment.
Many clownish elite economists
seem to miss the point, when they overlook how bank insolvency
is much more the issue than liquidity. Big banks not only have
doubts as to their own solvency, but they dislike the credit
standing of many of their borrowers. So the challenge will be
to reflate the economy even as desired, to proceed with money
flowing into its credit centers, and to exploit how current loans
can be paid back with cheaper future money. Gold will thrive
in this environment, since a climax of a disaster, or a climax
of produced price inflation will benefit gold enormously. Both
scenarios are very favorable to gold and silver prices. Besides,
a default at the COMEX for both gold and silver seem highly likely,
with cracks forming in December, and outright highly publicized
defaults suffered in 1Q2008.
LENDERS NOT LENDING
Put aside for now the fact
that the big TARP bailout is not to be used to place vast sums
of money into the banking system to neutralize the deeply impaired
asset backed bonds. Paulson has a better use for the first $125
billion tranche of Congressional funds from the Troubled Assets
Relief Program. He enabled executive bonuses for the big banks
that make up the Federal Reserve banking system, by purchasing
their preferred stock. Almost 90% of doled money to banks equaled
the magnitude of executive bonuses, how bizarre! Was that his
plan? In fact, the Fed bank system has been privileged, while
their competitors have been denied. Most of the $125B went precisely
to the Fed member banks, the elite, as others were denied. THIS
IS THE VAST CONSOLIDATION MENTIONED IN MY PAST WORK. The crisis
is being used to eliminate competitors in a coordinated planned
manner, in direct alignment with the Fascist Business Model (along
with lack of transparency). Efficiency is not the goal, but preservation
of power. Imagine being a troubled bank not in the system, under
solvency strain. Your elite competitors put your bank in the
dust from official channels. The consolidation continues unabated.
The USFed itself has been working
on countless swap programs, thereby relieving much of the soured
bonds, taking them off the market, relegating them to special
'Garbage Cans' under management. The TARP money, so Paulson
claims, would be better devoted to the bank system by stock purchases,
since 12:1 leverage could be employed on bank assets. Well,
nice story, Hank, but executive bonuses usurped over 85% of the
new funds, to reward Wall Street firms for a fine year, one certainly
to go down in the annals. Paulson has given instructions to big
firms participating in the TARP fraud to acquire smaller banks,
NOT TO LEND, and thus assist the Federal Deposit Insurance Corp.
It insures bank deposits. See for instance the PNCbank buyout
of National City, well discussed. By acquisitions, bigger banks
have essentially spread their insolvency to the system at large,
much like a cancer. When heavy trims are called for, and new
planting is urgently needed, but no new trees will be grown in
this ass-backward environment. Failed financial fiascos continue
as zombies with huge capital appetites. Nowhere have funds been
set aside for lending. A strangulation process is underway, so
deep that one must ask if it is intentional. The Elite seem to
be killing the economy and absconding with federal funds before
the administration ends.
Lenders are not lending much.
Why should they? They are unsure of their own bank assets, since
no transparency yet exists on exotic lunatic bonds like certain
mortgage bonds and many CDO bonds derived from mortgages. If
a bank knows little about its actual solvency, then it will hesitate
to lend. The facilities to provide funds for banks to lend are
themselves still clogged and interrupted, despite what one might
hear about short-term lending signals having improved. The USFed
has stepped in also to help clear funds for both the asset backed
commercial paper arena and the money market funds arena. The
clogs and blockages are everywhere. Furthermore, lenders do not
often encounter worthwhile borrowers. The calculated risks seem
not so full of promise. Workers are losing jobs in record numbers,
even while assets for borrowers are losing measured value. Worse
still, new sources of bank loss are soon to hit, like credit
cards, car loans, and commercial mortgages. Commercial mortgage
AAA-rated bond spreads have doubled in just the last two or three
weeks! No asset backed bonds were sold in October, tied to credit
cards! Both ability to pay back is poor and posted collateral
is poor on new loan issuance. Lenders just say no, sometimes
even to people with good credit history. THE SPIGOTS ARE SOON
TO OPEN, OR AUTHORITIES WILL ATTEMPT SOON TO OPEN SUCH SPIGOTS,
WHICH WILL PROVIDE A FLOOD OF MONEY TO LEND. IT MIGHT OCCUR WITH
STRICT ORDERS TO LEND, WITH THE USGOVT AS THE LENDER BACKSTOP.
This would be great for gold, but ruinous for the USDollar.
DESTINATION OF NEW MONEY
Just where has all the new
money gone in the last several months of bailouts, rescues, backstops,
nationalizations, blank checks, and more? Plenty of money has
been created, of course of the counterfeit official variety off
the printing press. My reference here is to the USCongressional
funds made available that are sure to fall flat in Treasury auctions
in associated funding. Last week's auction, for instance, stunk
on ice, a real dud, fell on its face, and a harsh warning to
USGovt and USFed officials who hope for foreigners to step forward
and save our bacon with continued purchases of USTreasury Bonds.
THEY WILL NOT!
Actually, the ugly truth is
that the USFed has actively been REMOVING money from the system
in order to fund its swap facilities. See the chart below, which
is somewhat mindboggling. Balances have tripled in less than
one year. The image of Weimar Factor seems to come alive.
The USFed has actually drained vast amounts of money from the
mainstream USEconomy and its banking system in order to create
USTreasurys in sufficient volume to offer them to big banks in
swaps of soured and impaired mortgage bonds. Here is a fact.
In October alone, the volume of Cash Management Bills sold into
the bond market by the USFed totaled $515 billion, with another
$70 odd billion in the first week of November. That constitutes
a massive drain. The USFed is actually trying to fund the banks,
but to drain the economy, in order not to trigger price inflation.
INSTEAD, THEY ARE LIKELY TO SEE ECONOMIC RECESSION ACCELERATE
DOWNWARD, OR WORSE. My biggest concern is of economic disintegration.
When evidence confirms, the spigot will be turned on in a desperate
attempt.
Where is new money going? It
is pumping up bank stocks, replacing dead bonds on bank balance
sheets with USTreasurys, along with backstopping Fannie Mae and
AIG hemorrhages under official aegis. It is replenishing JPMorgan
in pre-dawn agreements before bankruptcy judges to the tune of
$138 billion under highly suspicious circumcisions. JPMorgan
must carve out its layers so it can continue funding the gold
suppression and USTreasury propping, if not their own massive
unreported credit derivative losses. They enjoy a pass on proper
accounting, due to national security nonsense. Their credit derivative
monster book grew during the late 1990 decade, when the sham
Strong Dollar Policy was in vogue under Robert Rubin direction.
Everything the guy touches turns to ruin, but he will pick the
next Treasury Secretary.
Gee guys! Not only was the
giant diversion of funds to help bank stocks executed at doubled
the share prices, well documented by other analysts, but the
initiative has failed to help the bank stock index. See below.
The BKX index is scratching out new lows, perhaps a reflection
of the further abuse of TARP funds. Look for a target on the
BKX of 30 or lower. Bank executives have paid themselves bonuses,
after they drove their businesses into the graveyard with horrible
bond investments and sidetracked private equity deals. My personal
conjecture is that a huge amount of that infamous TARP money
has been quietly transferred over to the Plunge Protection Team,
for stock market index intervention and management. Too many
denials and ridicule have come to the contrary. Where denials
abound, lies are told, confirmed later.
NATURE OF USDOLLAR RALLY
The most common question to
cross my desk is why the USDollar is rallying so strongly, given
a severe stock decline and really bad economic news. Surely,
the answer must go in direct contradiction to any targeted investment
in the USEconomy, or to property purchases. Some money, according
to one source in Atlanta, seeks safe haven in US$ denomination,
like among Russian investors. He made reference to wealthy individuals.
The sums total the tens of billion$, maybe a little more, from
that region. Their financial markets are in disarray. Even some
European investors might seek the safety of the US$ as the euro
currency continues to correct downward. Middle East money might
seek safety also, as some disorder has entered their markets.
So perhaps safe haven might be the objective for as much as a
couple $100 billion or more. On the other side, a different source
from Toronto tells of numerous multi-billion$ exits of money
and investments from the US$-based system. Money is being repatriated
as an implosion is expected, or at least a palpable risk is perceived
in the United States during continued financial turmoil.
Contrast such numbers with
other sources moving in the opposite direction. Up to half the
hedge funds are under assault with many liquidations. Hundreds,
if not a few thousand, will ultimately fail and die. Once there
were 9000 hedge funds with over $1.6 trillion in managed investments.
Big numbers are involved, and price changes in numerous commodities
have been noted, from copper to crude oil. When their standard
spread trades are closed out, enormous sums of money are demanded
to buy back USTreasury Bonds that serve as anchor typically in
such trades. With $1600 billion under management, spanning from
New York City to London and elsewhere, and so much liquidation
in big markets, my guess is that several $100 billion are involved
into the beleaguered USDollar.
Also, we hear of tens of trillion$
in Credit Default Swap redemption payouts being made. To be sure,
they are handled on a net basis. The swap contract payouts pertained
to Lehman Brothers, Fannie Mae, and other giant firms. Truly
enormous numbers are involved. Confirmation of speculative trade
and CDSwap contract closeouts comes from the installed USDollar
Swap Facility, designed to meet that demand. The USFed is trying
to flood the world with USDollars. They have two major motives,
one openly understood, one privately hidden. They are enabling
the orderly payout of CDSwap contracts. They are supplying USTBonds
in proper volume to cover the many spread trades that are retired.
However, the USFed also is attempting ensure the globe is in
synch with a reflation initiative, and continued endorsement
of the USDollar as global reserve currency. In order to satisfy
contracts, USTBonds are thus "ACCEPTED" as valid legal
tender, if you will. That preserves the US$ as global reserve
currency. When reflation is attempted, all participants lose
together, as the USTBonds might lose some value when long-term
interest rates rise again.
The safe haven argument has
its place, but is grossly overstated in my estimation. Look at
ratios in magnitude and the closed spec trades and CDSwap payouts.
They seem to vastly overwhelm the safety seek to any US$ haven.
MANIPULATED MEASURES
Evidence has begun to enter
the picture that the LIBOR rate is being manipulated, and being
pulled down artificially. It is too crucial to be permitted to
remain high. The London Interbank Offered Rate is used worldwide
to calculate the interest rate on hundreds of billion$ in corporate
loans, mortgages, spread trades, countless other loan products,
and credit derivatives too. It is a wholesale borrowing rate
determined by 16 major banks, published by the British Bankers
Assn on a daily basis. The banking system has a vested interest
in keeping the LIBOR rate low, and thus to falsify it, in a manner
parallel to the Consumer Price Index kept low. A high LIBOR rate
means banks lack funds to lend, or distrust each other from either
past loans turning bad or new loans having poor prospects. Banks
are now apparently making fake LIBOR quotes on the grounds that
they wish not to be regarded as a credit risk, from which other
banks would then demand a premium in reaction, and their image
sure to suffer as well. Their bank stock and bond valuable would
also fall. Lies help lift value. LIBOR rates are used to set
adjustable rate mortgages across many nations.
Here is where the deception,
shenanigans, and chicanery enter the LIBOR picture. Some of the
money granted (gifted by Congress via Czar Paulson) to the big
US banks in the last few weeks was lent to London banks, in particular
by JPMorgan and Citigroup. This is NOT free-flowing lending at
work. Money moved with a purpose. London banks are given political
cover to say they have money to lend, did not borrow at their
firm, but could have, and the rate would have been lower. Thus
they submit via the honor system a lowball rate for LIBOR calculation,
that has little bearing on reality. Details are shown in
the November Hat Trick Letter, already posted.
The 3-month LIBOR chart tells
a story. It came down from over 4.8% to 2.25% from brute force
and manipulation, and has stabilized near the lower figure. The
fact that 30-year fixed mortgage rates are still stuck at or
near 6.0% is testimony that LIBOR is not a true reflection of
market reality. LIBOR rates have come way down, but ARMortgage
rates have not much. Such mortgage rates are still higher than
a year ago, despite all the exceptional efforts by the USFed
and empty talk of federal loan assistance.
This chart shows the ratio
of this short-term LIBOR versus the 3-month USTBill yield, now
the commonly used spread trade viewed to reveal government guaranteed
bonds versus commercially available borrowed funds. This correctly
exhibits the strain to private sector lending, out of step with
the government guaranteed bonds. A longstanding ratio range between
1.5x and 2.0x range on yields has been shattered. It now stands
at way above 10x, even 15x. Banks distrust each other, and with
good reason. Thus the private sector is not benefiting from
lower official rates, as EXTREME DISTRESS continues. Banks
still hide their crippled assets from their balance sheets, and
lie on their earnings statements. The economies are not sharing
the benefit of cheaper borrowing costs. Banks, however, struggle
to realize the benefit of lower official short-term rates, if
they reside outside the den of corruption closely located to
the USGovt. Inside that den, banks make money by swapping to
the USFed itself.
COMPETITION FOR CAPITAL
One should expect expert economists
to object to the devotion of money to failed enterprises, whether
big banks or major firms like AIG, or to a major icon industrial
giant like General Motors. Instead, they parrot on and on like
politicians. Do economists have to preserve votes from the public?
The competition for capital will become an important topic
of debate before long. Precious funds are already being wasted
on failed Wall Street firms, and on undeserved executive bonuses.
Deaths for companies are being decided, not by the marketplace,
but by a czar. Where will money come from to fund vast wind farms,
or new gasoline refineries, or the infrastructure projects once
promoted? Where will money come from to fund hybrid vehicle ownership?
Too much money is now chasing failure so that jobs are preserved.
Too much money is now redeeming failed financial vehicles, giving
their elite owners a second chance. Too much money is now supplying
labor unions that have essentially strangled their carmaker parent
firms. Sure, many labor union agreements were made in full faith,
in an era when price inflation was properly recognized. Now labor
unions are starting to exert a serious pinch, after years of
passing bargaining agreement concessions into retiree benefits.
The labor wage for the Detroit 3 carmakers is still an order
of magnitude higher than other industrial labor wages, like double.
But that is changing.
The greater point is that
the USGovt and USFed are together organizing and channeling vast
sums of money into unproductive centers of the USEconomy, where
failure abounds. Nowhere
will money be available for new ideas, when 30% of car loan and
home loan applicants are denied even with good credit. The USEconomy
is about to suffer major seizures, since success and competence
are no longer rewarded. Instead, connection to power and sprawling
size are rewarded. US economists are predictably silent, since
they are predictably incompetent, compromised, and too closely
associated with the elite think tanks. Job loss will accelerate
in coming months. Two stories that struck me were 53k job layoffs
planned by Citigroup, and 20% of the Sun Microsystems workforce
to be laid off. General Motors continues to cut jobs and close
plants. The supply chain, including distribution lines inside
the country and overseas to the country, is another story altogether.
Lack of short-term credit is a major problem, as letters of credit
for shippers are often unwanted. My position on economic forecast
is still much more tilted toward possible disintegration than
just a garden variety recession.
GOLD WINS WITH EITHER OUTCOME
Scenario A: The USEconomy suffers
a strong recession. Many distribution lines are interrupted.
Job losses continue into the millions. Many retail chains close
down. These are already in progress. So imagine for the scenario
that they all worsen. Commodity and material prices stabilize,
and maybe rise. A big myth is out there, that claims commodity
prices are down since the basic demand is down from a recession.
That is only partly true. Prices are down predominantly since
the USDollar has artificially enjoyed a prop from the financial
markets, on liquidity of speculation and redemption of credit
derivatives.As those processes slow, the USDollar will seek its
proper value. That is much less, like 30% lower to start. Prices
will then rise for things like food and gasoline and utility
bills. Under this scenario, where the USEconomy suffers mightily,
even becomes something of a wasteland, the USDollar might be
replaced. Under this destruction scenario, with or without
that replacement (forced in shame), gold will be a refuge of
stored value, as industry falters and debt collapses further.
Scenario B: The vast Reflation
Initiative succeeds. Somewhere the maestros and wizards succeed
in engineering a revival of price inflation, as is their newfound
goal. The destruction of the USEconomy is averted, except that
hidden is the detrimental effect of price inflation. Wages might
rise a little, but not enough. Asset prices like in the stock
market improve, but not enough to keep pace with inflation. Corporations
avert bankruptcy, but their profit margins are still damaged.
The ultimate hedge against the systemic price inflation will
be gold. This trend will continue, even as credit derivative
accidents occur from higher rates, discussed in the upcoming
Hat Trick Letter report. Massive price inflation will be the
plan, the goal, the intention. INFLATE OR DIE will become the
mantra on a global scale. The rise in the gold price, the
longstanding time-honored inflation hedge, will be tolerated,
as a system ill.
My forecast is that the USDollar
will be replaced anyway, especially given the current meetings
by major USTBond creditors. The G20 Meeting last weekend was
an orchestrated sideshow. It opened Pandora's Box however,
as Germans in attendance have made firm formal rational demands.
The movement is afoot to force profound change. A difficult,
if not impossible, task comes for foreign bankers. They must
separate themselves from the USDollar and USTreasury, its tradable
vehicle. If they do not, then their economic and financial systems
will be dragged down with the United States. The USFed executed
on a gambit in recent weeks. They distributed hundreds of billion$
to foreign central banks. The hidden objective is to force foreigners
to engage the great Reflation Initiative when the trigger is
pulled, when the corner is turned, when the signal is given.
Foreigners so far have taken that bait, but they might have an
exit plan, if they are working closely with those who seem in
charge: the Germans, Russians, Chinese, and Arabs.
Foreigners will soon realize
that it is in the best interest of their nations to use their
vast FOREX and USTBond reserves, to bring down their domestic
currencies in exchange rate. They must enter the race of being
among the initial group to use their USTBonds, to use their USAgency
Mortgage Bonds, or suffer huge loss later. China has announced
usage of US$-based bonds in a stimulus plan of gigantic proportions,
the smart choice. Right now, the USTreasury Bill principal value
is artificially high. Right now, the USDollar valuation is artificially
high. THUS RECENT TREASURY AUCTIONS HAVE BEEN DISMAL FROM
OVERPRICING. Foreigners can only expect their USTBond holdings
to fall in value from here. The
recent moves by the Saudis, the Iranians, and other nations to
expand their gold holdings is another trend certain to gain ground.
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Nov 19, 2008
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
Willie Archives
website:
Golden
Jackass
subscribe: Hat
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
about subscriptions, contact him at JimWillieCB@aol.com.
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