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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.
Jim Willie CB
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