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Pardon the brief and jumpy style, laced with more emotion than usual.
The events of the last few days have been remarkable, alarming, chaotic, and
surreal. Gonna attend the Toronto
gold show hosted by the Cambridge House this weekend. If you are there, grab
my arm and say hello. Let me know your perspective on the brewing crisis.
HEART ATTACKS & BANK
HOLIDAYS
The banking system breakdown is very far along, but still early.
Remember USFed Chairman Bernanke stated over a year ago that the mortgage
problem was contained. Try not to laugh. The bond crisis is absolute,
broad, deep, and all-inclusive, enough to kill the USTreasurys after it kills
the US
banking system. The heart attack signals are with the LIBOR spreads over
USTreasurys, the money market, the TED spread (Treasury versus EuroDollar),
and short-term USTreasurys. Charts resemble heart attacks and EKG
electro-cardiogram monitors. Many details appear in the October Hat Trick
Letter report just posted. The bank runs have begun in earnest. Nevermind the
big banks for a moment. The smaller ones are entering seizures. The small and
medium sized cities are also entering seizures. Here are two stories, one
about a city and another about the bank holiday coming.
This from a friend in Seattle:
“I was talking to my neighbor last night. He is in finance in the
county government, King County
(Seattle).
He said there are some very secretive budget talks being held, very hush,
hush. Apparently, the county has lost around $200 million of taxpayer
money in toxic paper investments, with huge implications on the budget.
He says he is not privy to the details, but he is taking a 10-day vacation
starting today, because he has nothing to do since everything is in flux.”
This from a friend in Atlanta with
strong banking connections: “Reliable word that Bank of America
branch managers just received a letter or memo from the USFed
instructing them to perhaps be ready for a one-week universal shut-down of
the banking system, including access to checking accounts, savings
accounts and credit cards. Reliable word has it that BofA bank branches
received a shipment of signs last week, reading “WE'RE SORRY, BUT DUE
TO CIRCUMSTANCES BEYOND OUR CONTROL, WE CANNOT BE OPEN AT THIS TIME.”
So the banks are in need of a respite, a break, a holiday. They need
to shore up their positions. Economists and bankers avoid revealing the consequences of
extended absence of short-term credit supply. Imagine all the supply chain
DELIVERY routes being interrupted for lack of short-term credit, certain to
interrupt the supply of food, gasoline, building materials, basic household
wares, simple hardware, and more. The short-term credit would certainly also
disrupt payroll streams for companies, inventory supply for retail chains,
durable goods purchases by consumers (like washing machines &
refrigerators), the maintenance of basic machinery (like cars, trucks,
computer, communications), even cash dispensed at ATMachines.
BAILOUT BILL PASSAGE
The Senate passed the Wall Street bailout bill, by a 3:1 majority.
Some sweeteners like tax cuts and raising the limit to $250k on individual
accounts for bank depositors helped. Some people might think that finally
the banking system can at last receive some meaningful fixes. Call me a
killjoy, but this will accomplish next to nothing as a banking system remedy.
It is more a paper seal to Wall Street corruption than to ANY solution. If
passed by the House, as is likely, it puts an epitaph on the American badge
of legitimacy. A decade of fraud has been underwritten, sanctioned, and
sealed. Even foreigners might smile at the new & improved bill. Their
impaired bonds can participate in the redemption process. The only trouble is
they might have to accept hot shiny USTreasury Bonds in return, of certain
questionable value.
Still the bill must be viewed as a giant paper net to catch a giant
locomotive train, one that derailed and then went over the mountainside cliff
500 meters above and is hurtling downward with acceleration. Gravity is a
bitch, and so is momentum! One should not doubt for a second that it will do
much to halt the downward trajectory. One should remember that debt
solutions accomplish nothing in providing remedy for debt abuse and damage
inflicted by broken debt contraptions. Nothing is fixed, only
accounts have been shifted and names have been changed. THE BANKING SYSTEM
PROCEEDS ALONG ITS OWN CLEARLY DEFINED PATHOGENESIS, with great momentum and
power, which no human devices can interrupt. The next shock will be why the
bill has not fixed the banking system as Mini-Fuhrer Paulson claimed it
would. The other next shock is why Wall Street will need another $700 billion
within a year. The other other next shock is how much the AIG and Fannie Mae
“INVESTMENTS” a la nationalization will each cost the USGovt
conglomerate an unexpected extra $trillion. The bailout yesterday enables
Wall Street executives to retire more comfortably, even as some seek asylum
or face exile.
The irony of the lifted depositor insurance is that big financial
conglomerates can now raid the private accounts worth over $100k now, with
government coverage in the bankruptcy courts. The October Hat Trick Letter contains some multi-sided evidence of
USFed open license to use subsidiary accounts toward the aid of liquidity
strains. What constantly leaves me shaking my head is how intelligent people
continue to attribute fair spirited motives to the system, when it resembles
a crime syndicate more each year. The reason why it resembles one is that it
IS a crime syndicate operating under the USGovt roof. There are three crime
syndicates operating under the USGovt roof, the others identified in the
report this month. Each has had a profound financial effect on the nation, as
in killing its host.
One can make a fine balanced and credible argument that the Fannie Mae
bailout package represented an aggregate parallel of the simple Trenton
New Jersey home loan fraud. The
parallels are argued, with conclusion being the USGovt bailout was tantamount
to abandonment by the mafia gangsters, who walked away from the $250k loan on
the $50k crack house dilapidated property. Parallels are disturbing, as Wall
Street and USGovt players fill out the example carried to the aggregate. The
other Fannie Mae fraud is the simple bond certificate counterfeit, just plain
paper printing without bother of Wall Street involvement. That fraud helped
to run up the total Fannie Mae fraud past the $1 trillion mark. Given the
sleazy guys who ran Fannie Mae, and all the protection run for it by
politicians averse to reform, the fraud was quite easy. Who would want to
question a shiny Fannie bond, a device which powered the great housing boom?
FDIC AS NEW I-BANK RAIDER
A new role seems to have come to the Federal Deposit Insurance Corp. They
are the newest brokers on Wall Street, the new investment bankers, raiders
true to the name. They do not protect depositors any more than
Christopher Cox at the SEC protects stock investors. The FDIC has minimal funds,
most likely co-mingled with the USTreasury anyway, just like the Social
Security Trust Fund. The measly $45 billion lying around in the FDIC fund
would not cover more than one or two decent sized banks, or one Washington
Mutual or one Wachovia. So what does Sheila Bair do in response? She defends
Wall Street, avoids liquidation by dead banks, and steers them to the
JPMorgan chop shop and slaughterhouse. A great arbitrage results, as JPMorgan
obtains bond assets for nothing, and can sell them to a stupid captive
customer, us taxpayers.
In doing so, several things happen:
1)
JPMorgan obtains the entire corporate asset kit
& kaboodle for next to nothing
2)
deposits are used to help the JPM asset ratios
3)
bond assets can be sold to the USGovt bailout fund
4)
senior bond holders for the dead banks are screwed,
receiving a pittance
5)
dangerous credit derivatives are placed in the JPM
Garbage Can
6)
the Wall Street Consolidation Plan continues.
The Big 3 Banks are JPMorgan, Citigroup, and Bank of America. Just how
on earth can Citigroup even consider acquiring Wachovia? Buy it with what?
Citigroup is insolvent. That does not stop the Wall Street firms from
spreading their cancer. Besides, King Cox has a plan, to remove ‘Mark
to Market’ asset accounting rules. Poof! The US
banks are solvent again. Only trouble is they become Walking Zombies. Couple
this desperate policy change with short stock restrictions, and the Third
World Finances label fits even better, from lack of credibility. The new Wall
Street I-Bank is on the scene. The modern FDIC might make Michael Milken
proud, the junk bond king from Drexel Burnham. By the way, he only served two
of his ten years in prison. Wall Street does have its privilege. The Wall
Street investment bank model is dead & buried, with the door slamming
shut by Goldman Sachs changing its coat to read bank holding company.
The group likely to initiate lawsuits is the senior bond holders to
the broken banks. They should have entered an orderly procedure led by the
FDIC. They face ruin when they should salvage something. The FDIC sets up
banks to be raped. The label of pimp is too generous and connotes too much
respect. To think that Sheila Bair at the FDIC is being praised for her
leadership lately is enough to make a bond holder vomit. These mergers are
nothing but disguised ‘Chop Shop’ rapes. At least the FDIC
receives fees. JPMorgan donated $1.9 billion to the FDIC cause. By the time
the dust clears after the locomotive crashes, three giant hollow monoliths
were be standing, a tribute to Manhattan,
in the Big 3 Banks. Their glass and aluminum fittings might be in much better
shape than the World
Trade Center
though. It is doubtful that they possess any gold bullion in basement vaults.
Let’s hope the third of these buildings does not suffer a structural
sympathy, only to collapse.
LOOMING TIME BOMBS
Clearly they are AIG with its raft of Credit Default Swaps, and Fannie
Mae with its raft of mortgages and their bonds. Fannie also has a scad of
Interest Rate Swaps. As explained in past Hat Trick Letter reports, the
quarterly bills payable to JMPorgan and Goldman Sachs might be considerable
on these swaps. The USGovt swallowed two really big ugly hairy hungry
tapeworms, that will possibly each cost an extra $1 trillion in unplanned
expenses. Actually, my guess is the figure might be conservative. A year
ago, when clowns like Bernanke and harlots on Wall Street were estimating the
entire mortgage fiasco would result in $100 to $200 billion losses, my figure
was $1.5 to $2.0 trillion. As the time bombs go off, they will do so in dribs
& drabs, actually giant dribs & giant drabs. The costs will take
esteemed senators in the august body of the USCongress off guard.
An interesting thought came to me tonight as the Senate Bailout Bill
was written. Actually, more sinister than interesting. The Fannie bill, the
AIG bill, and the Wall Street omnibus bill might have been greased by private
bribes. Imagine the hefty $138 billion paid to JPMorgan by the USFed,
ostensibly from counterfeit Dept of Treasury hotmoney, during the Lehman
Brothers failure and confusion, approved by Bankruptcy Court judge James Peck
in Manhattan,
all executed in pre-dawn during the weekend. Sorry, wanted to paint the
background accurately but succinctly. If the 74 senators were each given $2
million in a basic traditional bribe, located safely in a Cayman
Island account, then
the total cost to JPMorgan would only be $148 million, in the neighborhood of
1 part in 1000 on that disgusting under-the-table handout of $138 billion. It
makes good business sense in a day and age when rules mean nothing, when
preserving the system is paramount, especially when BS bylines can be spouted
about helping the common man.
RUN ON BANKS, RUN ON BONDS
Those talking perpetual campaign managers known as USCongressional
members, they like to talk about “the fact of the matter” a lot,
as thought they have some innate ability to recognize facts. Here are some
facts. A broad and deep run is occurring on US
banks, small, medium, large. Banks rely upon deposits and bank equity (stocks
and bonds) to supply themselves with capital. The bank runs strip banks from
their ability to continue operations, at a time when their stocks have
cratered. Stock price declines of over 70% and 80% are common, the norm, not
the exception. Insolvency plus illiquidity means bankruptcy, without
benefit of time extensions. As Meredith Whitney (the intrepid bank
analyst from Oppenheimer) said in a recent interview, “There are a
ton of regional banks that also face a similar predicament.” She
correctly forecasted much bank distress, and expects a flood of FDIC activity
to deal with failing banks.
Europeans have also lost
respect for the US
financial leadership, public statements having been made by the German
Finance Minister Peer Steinbrueck to the effect that the United
States has lost its geopolitical leadership
mantle. A powerful reversal in investment flow endangers the US
bond markets. Private flow of money resulted in the movement of
$92.9 billion out of the US
in July, after $46.8 billion entered the nation in June. A
profound new trend is in place, whereby the three major continents of North
America, Europe, and Asia are bringing home
money. With a US
budget deficit easily eclipsing the $1 trillion mark this coming year,
demands for USTreasury sales will be left wanting, as USTBonds will be left
on the table. The money printing machines will be the main recourse, as US$
monetary inflation will enter at least one and maybe two new gears in higher
usage.
THE RISK LIES WITH HIGHER
USTBOND YIELDS OFFERED, OR LOWER USDOLLAR
EXCHANGE RATES FORCED. Either way, foreign US$-based bondholders face big
losses. The nationalization demands will quickly force the issue of
USTreasury Bond default. Bear in mind that
now 52.7% of USTreasury debt is held by foreigners, and that proportion is
fast rising. At yearend 2007, a hefty $9.4 trillion in US$-based securities
were in foreign hands, as in liquid assets, easily divested. Risk to
foreigner reserve accounts grows. They recognize their risk of becoming
bagholders of greatly damaged debt paper. Amidst this pressure and isolation, the US Federal
Reserve might simply resign its contractor position with the USCongress.
After all, their balance sheet is decimated. It is not unlimited. It does
have creditors.
The gold price will
respond, as the USDollar faces a trashing. On the other side of this storm,
characterized paradoxically as a USDollar rally at a time of truly devastated
fundamentals, the USDollar will get trashed. To this end, a shocking
admission came from New York City
mayor Michael Bloomberg. He is a bit of a maverick,
speaking his mind. He actually stated, “The next cause for
concern in the battered US
economy is whether there will be buyers abroad for the nation’s
billions in debt.”
USDOLLAR AT RISK, USFED
RATE CUTS SOON
◄ The USDollar is at extreme high risk. Since its
bounce in July, behavior is erratic, volatile, and fully dependent upon
central banks and market rule changes. The US$
money supply had been steadily growing at a 15% growth rate, give or take.
Expect it to surpass 20% soon, and the US$
to reflect the debased currency from a flood of supply. The United
States will be the first nation to cut
interest rates, from desperation financially and economically. Other nations
will eventually follow, but not right away. The effect few talk about regarding
the mammoth nationalization and bailouts underway is the powerful jump
in price inflation, along with currency debasement. Both are
inevitable, sure to lift the gold price in powerful steps. The isolation of
the US
in geopolitical circles, the utter shock at failed leadership witnessed the
world over, the widely perceived national bankruptcy will translate into
shunned USTreasury auctions and outright divestment of US$-based assets. The
only buyers will be central banks. The USDollar is at very very very high
risk of serious declines, exactly like the US
stock markets.
A trump factor has entered the room. THE USDOLLAR & GOLD WILL SOON
RESPOND TO THE FAILURE OF THE US
FINANCIAL SYSTEM, WHICH COULD QUICKLY RESULT IN NATIONAL EMERGENCY, BANK
HOLIDAY CLOSURES, AND TOTAL FRUSTRATION BY BANK LEADERS, AS NOTHING SUCCEEDS.
The Wall Street bailout bill fixes nothing in bank system structure and
integrity and function, as problems remain intact tragically. The United
States controls the world reserve currency
in the USDollar. In Hat Trick This late summer, my analysis stated that gold
must make a difficult transition from an anti-US$ trade to a hedge against
monetary inflation, a hedge against realized price inflation, and a hedge
against geopolitical risk, even a national US banking collapse. Some movement
has been made on the transition from the tunnel vision anti-US$ trade. One
should keep focus on how the US
official lending rate at 2.0% is more than 3% below the current suppressed
Consumer Price Inflation rate. So money is actually free for those who can
access that rate.
The USDollar increasingly is being defended by market interference
mechanisms of the worst and most egregiously shameful order, such as a)
restrictions to short financial stocks, even though they are insolvent and
more illiquid by the week, b) calls to eliminate ‘Mark to
Market’ accounting of bank assets, and c) the trusty Plunge
Protection Team devices used to prop up stocks, bonds, and the US$ itself. The major currencies are all at risk actually. One
contact with international connections recently wrote me, “The US$
will drop to 2.00 against the EUR not before long. And then the EUR will
crash shortly thereafter.” Many fine analysts expect the USDollar
to suffer a severe markdown as the recent US nationalizations and bailouts
are fully digested. Their forecasts would coincide with the notion that the
USTreasury Bond suffers a severe market interruption like a suspension or
possible default, but then later the euro is victimized by new global
gold-backed currencies. This is a very possible scenario.
THE HAT TRICK LETTER
PROFITS IN THE CURRENT CRISIS.
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Jim Willie CB
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