Today, April 15th, most
of us grudgingly settle our annual
obligations with the government tax authorities. But for how long will we
keep doing this? How long will we support the government's Ponzi scheme that
makes a mockery out of the monies we have annually contributed obediently to
our Social Security and Medicare accounts? What I am going to share with you
may make this a haunting question for you throughout the next taxation year.
I have been writing
extensively about the unregulated $605
Trillion Global Derivatives market along with the 'Extend
& Pretend' Program that has resulted in an explosive market rally
from the depths of the post financial crisis. Despite my reluctance, my
writings and research has forced me to some undeniable conclusions. Our
government is presently 'gaming' the US Tax Payer. Let me explain how.
Publication restrictions limit
the words and number of graphics I can use to take you through the sordid
details of what is being perpetrated; but for those that want to delve
deeper, please see Tipping Points.
A smoking gun is seldom found
at the scene of the crime. Instead the crime must be pieced together through
the linkage of clues. Clues build a case that is based on facts. Facts which
can convince a jury of our peers that 'beyond a reasonable doubt' we know how
and by whom a crime was carried out. Therefore I am not going to speculate. I
am simply going to lay out the facts of a series of suspicious clues for your
consideration that show we are being gamed.
I was an investor in Enron and
was on the earnings conference calls with Ken Lay, Jeff Shilling and Andrew
Fastow. I knew something was wrong with Enron's meteoric rise, but I couldn't
put my finger on it and consequently I lost money. I subsequently learned
during the collapse about the new world of offshore accounting and financial
instruments such as SPE's (Special Purpose Entities). How companies could
legally move debt off their asset ledger. A few years later, I again knew
something was terribly wrong as I watched housing prices explode and
witnessed kids buying McMansions and driving prestigious cars, with jobs that
didn't appear to be able to support this life style. I subsequently learned
during the financial crisis about the mysterious world of financial
instruments such as CDS, CDO, CLO et al and the vehicles such as SIV's
(Structured Investment Vehicles) that allowed banks and financial instruments
to circumvent capital requirements and move debt off their balance sheet. The
resulting Shadow Banking System flooded the global financial markets with
cheap, highly available credit to anyone that had a pulse.
I recently discovered and have
written about a whole new world of PPP/PPI, Novation Agreements and the
SPC (Structured Purpose Company) and how the $437 Trillion Interest Rate Swap
business has been broadly employed throughout Europe and the US at all levels
of governments: sovereign, state, city and local. It is now just beginning to
fill
the world courts with legal proceedings and financial entanglements. This
is yet another in my experience of witnessing ever increasing levels of
financial malfeasants.
What has been conspicuously
missing from all these examples is the world's biggest debtor.
Missing is the debtor with the
most incentive to take advantage of all these innovations and creative ways
to hide debt. Missing is the debtor most needing to finance ever increasing
expenditures. Surely this debtor is not so pure that they have forsaken what
was created in their own country because they saw the inherent risks, that
they alone took the high road that almost every country, state, city or local
government succumbed to. Of course we are talking about Uncle Sam here. The
person we pay our taxes to every year.
SUSPICIOUS CLUE #1 - PLUMMETING US MONEY SUPPLY
DESPITE QE (Quantitative Easing)
The chart above from Shadow Government Statistics is more
than a little alarming. The M3 money supply reporting is shown above, which
we all used to watch meticulously and was suddenly and suspiciously dropped
without explanation in March 2007. John Williams of Shadow Government
Statistics still rigorously tracks it. According to William's models it now
went negative. This is a major concern that the M3 slope has been heading
down since the 2008 financial crisis occurred, but a much bigger concern is
that it has now turned negative. This means money supply as measured by the
M3 is contracting. We also see that the narrower M2 measure is fast
approaching that critical event. This is huge news that is receiving little
attention since it is no longer published by the government. A few years ago
this news would have shaken financial markets.
The demarcation from zero,
means the money supply is now contracting and therefore there is less money
available in circulation to buy such financial assets as US Treasury
securities. Since there is less money available, it should indicate that new
US Treasury bond offering would be facing lower prices and hence higher
yields. Minimally, we should be seeing pressures in the bid to cover ratios
in the US Treasury Auction. Surprisingly, we are not.
SUSPICIOUS CLUE #2 - US TREASURY AUCTION - Historic
Direct versus Indirect Bids
With a historic and massive
$1.6 Trillion of new US government debt to be financed in 2010, as tax payer
on the hook for this debt, we need to listen to what is concerning those that
participate in the critically important US Treasury Auction. Additionally, we
need to remember besides new debt we also have roll-over of existing debt.
The rollover debt is also huge because of government policy to shorten
maturity duration over the last few years. This policy was meant to keep debt
payments down by taking advantage of the lower shorter term rates. The US
Treasury on our behalf accepted the risk and gambled against interest rates
increasing. This was one way our elected officials hid the actual size of
growing fiscal imbalances from 'we, the tax payer'.
What we presently find in the
Treasury Auction is the professionals scratching their head and wanting to
know who the mysterious Direct Bidder is.
For those who don't understand
the world of Treasury Auctions, let me simplistically say there are a few key
measures we watch to determine the health of the US debt market. One is the
Direct to Indirect bids. Indirect Bids are the Dealer / Broker community.
They are the major players that make up the volume of the transactions and
who sell the debt securities in the open market. The Direct Bidders are
smaller players such as the public and foreign investors, amongst others who
want to avoid the broker/dealer fees and buy direct. From Suspicion #1 above,
we would expect to see volume falling off. Well it isn't,
The reason is that we have a
mysterious Direct bidder (or possibly more than one) taking up unprecedented
auction volume and thereby achieving acceptable bid to cover ratios, which
the market also watches closely.
Who this mysterious bidder is,
no one is being told. There is endless speculation because if they fail to
show up at the next auction, all hell will break lose. Someone has deep
pockets somewhere and for some reason is buying US Treasuries. This is
extremely convenient for the US government because it is presently keeping
interest rates down and not allowing the Auction to fail. Remember the panic
when people perceived the Greek auction bond offering would fail? This would be
a thermonuclear explosion in comparison.
If you still believe in the
tooth fairy, then you believe this sudden Direct Bidder emergence is not
suspicious. Meanwhile, the world cannot figure out why interest rates in
America haven't already vaulted higher. Most professionals are highly puzzled
and perplexed.
SUSPICIOUS CLUE #3
According to a report by
Bloomberg, "PIMCO's Bill Gross, who manages the world's biggest bond
fund, has reduced holdings of U.S. Government-related debt, while increasing
his holding of emerging market debt the most since 2008. According to a
report on the Newport Beach, California-based PIMCO's website, Gross has
reduced the proportion of U.S. government and related securities in the 219.7
Billion total return fund" (1). Separately, Gross said he was raising
cash. This means PIMCO is selling US Treasury securities. You can only
conclude they would not be the only major bond fund executing this strategy.
"Bonds have seen their
best days," Gross said in a March 25 interview with Tom
Keene on Bloomberg Radio. Pimco is advising investors to buy the debt
of countries such as Germany and Canada that have low deficits and corporate
securities with relatively high yields" ~ Bloomberg 04-14-10
Additionally, we read in the
latest US Treasury TIPS report China has trimmed its holdings of US Treasury
debt 1.3 percent or $11.5B in February, the fourth consecutive decline.
How could this obvious and
significantly weakened demand pressure not be reflected in the bond market?
Clearly, this is exactly what the professional indirect bidders are also
signaling with their bidding. Magically, the auction still comes off thanks
to the unknown tooth fairy. Who is this tooth fairy, what is their motivation
and most importantly how is it securing these levels of debt purchases? What
collateral may it possibly be pledging? (You will see in clue #6 that
collateral may be very important).
SUSPICIOUS CLUE #4 - DRAMATIC COMMERCIAL BANK LENDING
SPIKE
There appears to be mysteries
everywhere we look, just like the days of Enron, the US sub-prime housing
bubble and with Greek debt accounting.
Below is the just released
Federal Reserve report from FRED (Federal Reserve Economic Data) showing the
weekly loans and leases of US Commercial Banks. The highlighted spike is
$421.8 Billion dollars. It occurred in one week! We need to realize that
these are annualized rate numbers but it still compares in size to a monthly
US Treasury Auction for example.
The questions no one will
answer are:
1- Who borrowed this amount of
money?
2- What was it used for?
3- What Collateral was used to secure it? (You will see in clue #6 that
collateral may be very important).
SUSPICIOUS CLUE #5 - HISTORIC 10 YEAR INTEREST RATE
SWAP REVERSAL
Another mystery is found in
the Interest Rate Swap arena. Here we find a whole different set of
professionals also scratching their heads and wondering what has caused the
10 Year Swap spread to invert. This is highly unusual to say the least and
begs many questions that few have the answers to. I discussed the
significance and possible reasons for it extensively in Extend
& Pretend: Hitting the Maturity Wall. I will not speculate why in
this article, because we are only dealing with the facts in our clues in this
set of mysteries. I do however encourage you to read the broader context of
what hitting the maturity wall means and additionally what reverse gearing
means, laid out in Sultans
of Swap: Fearing the Gearing.
"The issuance of UST
debt is dwarfing Libor-related issuance. For example, we expect UST net
issuance to be $1.7T and net issuance of MBS to be zero. Thus, the relative
issuance of UST's vs. Libor-based products mainly accounts for the inversion
in swap spreads. This is a first sign of stress leading to higher UST yields
and is not to be missed." (3)
~ Morgan Stanley
SUSPICIOUS CLUE #6 - HISTORIC & UNPRECEDENTED
TRANSFER OF FUNDS
Another mystery and the one
that I personally find the most fascinating, is found in a US court legal
proceeding. This court case is one that absolutely no one in the mainstream
media wants to talk about. It is involves the transfer of $4.2 Trillion from
US Trust Funds to the US Treasury. Though the amounts seem preposterous they
are in fact the amounts of money the US Treasury would need as Collateral to
support the potential changing collateral requirements on Interest Rates
Swaps, if they were to approximate those held by Greece and other governments
who have participated in the $437T Interest rate Swap market. I encourage you
to read the letter to the New York Attorney General concerning this
complaint.
COMPLAINT
AN EXCERPT:
SUSPICIOUS CLUE #7 - GOLD MARKET MANIPULATION
CONFIRMED IN CFTC HEARINGS
For years now there have been
accusations floating around the web that the Gold market was being
manipulated. The GATA (Gold Anti-Trust Action) organization built a solid
case but it remained open to debate. That ended on March 25th in CFTC
hearings. Andrew Macguire, a whistleblower came forward to testify. It has
the web wheeling with interviews and articles. What is important to recognize
is now we have the facts that the physical gold (and silver) precious markets
are disconnected from their true values. It is being manipulated.
April
9 - Max Keiser at On The Edge interviews GATA
treasurer/secretary Chris Powell.
April
8 - Chris Waltzek at GoldSeek Radio interviews GoldMoney
founder and GATA consultant James Turk.
April 7 -
Ted Butler at SilverSeek: "A Time to Act."
April
7 - Eric King at King World News: Roundtable interview with
father and son independent traders Harvey and Lenny Organ and GATA
director Adrian Douglas.
April
7 - Huffington Post: Bill Murphy responds to Warren Mosler on
Gold Lending.
April
5 - Peter Brimelow at MarketWatch: "Paranoids have
enemies, radical gold bugs have Wall Street".
April
4 - Scott Smith at The Daily Bell interviews Bill
Murphy of GATA.
April
3 - Geena Paul at CommodttyOnline::"Will fraud lift
gold prices to $10.000/ounce?"
April
1 - Max Keiser reports on "CFTC, LBMA Incompetence, JP Morgan
Gold, Silver Manipulation "
March
31 - Eric King at King World News: Roundtable interview
with GATA board members Bill Murphy, Chris Powell and Adrian
Douglas.
March
30 - Eric King at King World News: Independent trader and
"whistleblower" Andrew Maguire and Adrian Douglas of
GATA discuss the CFTC-sponsored public hearings on position limits in metals
futures trading.
March 25 - Bill
Murphy's statement to the CFTC.
March 25 - Adrian
Douglas's discussion of the Ponzi-like gold trading on the London Bullion
Market Exchange to the CFTC.
March
23 - GATA board member Adrian Douglas release "smoking
gun" report on manipulation of the gold and silver markets.
When President Richard Nixon
took the US off the gold standard in 1971, the US dollar officially became a
fiat currency. There are no longer any limits to how much money and credit
the US government can issue. However, the practical limiting factor would be
the level of inflation associated with this money printing. The price of gold
would reflect these actions because the US dollar was no longer pegged to it.
For the expansion of money
supply to occur at ever increasing degrees, then gold prices would need to be
controlled or it would affect the bond market and bond yields. We have come
full circle and end up back at the bond auction as previously discussed.
Therefore, these recent
developments in the precious metals market are critically important.
The reason for it likely
occurring now is because of the levels of gold derivatives speculation
presently occuring. The underlying physical gold is disconnected from the
paper trading of gold. For some time now physical gold (if you can actually
take receipt of it) trades at higher prices than the paper representing it.
There are 100 to one volumes of derivatives presently trading to the actual
value of physical gold. As Jeffrey Christian, Founder of the CPM Group and
publisher of the Annual Gold Yearbook testified
at the CFTC hearings, these are the same levels of physical to derivatives as
seen in the currency and treasury markets. This suggests gold & silver
are actually financial assets as opposed to simply commodity assets. This is
why their control is integral to controlling bond yields.
You can't control gold prices
without the successful implementation of the Gibson
Paradox which brought Larry Summers to the forefront of useful academics
from which the banking industry sponsored him as US Treasury Secretary. When
Larry Summers joined Robert Rubin at the US Treasury, the gold manipulation speculation
began.
SUMMARY
I can quite easily string all
these 'clues' together into a very sound and convincing argument of
specifically what is transpiring here. However, I am not going to do that
because it would be considered speculation and additionally would make this
article much too long. Instead, I will leave that to you shrewd reader as we
wait and watch for further clues. They will surely be evident to the watchful
eye. For those who wish to speculate I encourage you to check out my
analysis, complete with block diagrams at Tipping Points.
If you never saw the collapse
of Enron coming, nor saw the financial crisis coming, nor saw the European
PIIGS crisis coming, let me point out that you now have all the clues
available for you to see something of horrendous proportions coming. Like
these events previously, we likely will learn about a whole new set of
financial instruments built upon the already long list of financial engineering
acronyms we have come to learn about.
This is not some board game
like the old kids' "CLUE" game where we discover it was Professor
Plum, in the Library with a Candlestick. This is however a game that the
government is playing with our money. Remember, this is both our money and
our debt obligations they are obligating on our behalf. We will be asked to
pay through our future taxes.
What is coming may change your
perspective towards paying the dramatic increases in your taxes that are also
coming in the very near (post mid-term elections) future.
CAVEAT EMPTOR
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in the Extend & Pretend series: Commentary
SOURCES:
(1) 04-14-10 PIMCO's
Gross Lowers U.S. Debt Holding Benzinga
(2) 04-14-10 Pimco
Boosts Holdings of Emerging Debt Bloomberg
(3) 03-27-10 Are
Banks Getting Crushed Due To Negative Swap Spreads & The $154T
IR-Derivative Market? Zero Hedge
(4) 04-07-10 Nearly
half of US households escape fed income tax Yahoo News
(5) 03-25-10 Jeff
Christian's CFTC Testimony
(6) 04-15-10 China
trims holdings of US Treasurys by 1.3 pct Associated Press
The last Extend & Pretend
article: EXTEND
& PRETEND - Manufacturing a Minsky Melt-Up
