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The USGovt and financial system
is growing deep commitments to support dead entities. Their business models
have failed. They are bankrupt. Although with faulty business model, often
laced with fraud, they have been fully adopted by the USGovt and US Federal
Reserve. They are considered too big to fail. Or one should say, they are too
connected to the power structure, or they are too intertwined with explosive
financial devices, or one from their own tribe is running the Dept of
Treasury. Capitalism embraces the Darwinian principles bound by survival of
the fittest. The United State s bears absolutely no resemblance to such
principles anymore, at least at the upper corporate echelons. The system is
giving colossal support to zombie banks and soon zombie corporations. The
Wall Street banks continue to receive money without any restrictions
whatsoever, even grants after meetings held before dawn, but Detroit carmakers must produce a plan for reform. Under what
conditions did Citigroup receive untold billion$? Did they make concessions,
or just pull a string? Hidden motives abound, even for the Citigroup last
minute bailout.
The climax of this charade in
ass-backward policy will be the nationalization of the mortgage system. It is a fully
neglected problem, soon to need powerful aid in the nation’s largest
program in its history. Its prelude was the adoption of the Fannie Mae &
Freddie Mac couple, despite its well-known fraud, perhaps directly due to the
desire to cover its fraud. Foreigners like China demanded the USGovt backstop of the fat failed duo,
which gave the fraud kings political cover. The many foreign funds would have
continued to dump the F&F label bonds en masse without the official takeover.
Instead, they have shifted from USAgency Mortgage Bonds to USTreasury Bonds.
The US financial structure deeply invests in failure, and is
fully committed to the ruling elite, to the exclusion of the mainstream
public. Ever since Clinton appointed Robert
Rubin of Goldman Sachs to the post of Secy Treasury in 1992, the USEconomy
and US financial structure has suffered mortally wounds. That
decade of prosperity was stolen from Fort Knox, a major
piece to the Strong Dollar Policy having been the gold carry trade enacted by
Rubin. These insiders borrowed gold at a lease rate pushed down by Rubin, and
bought USTreasury Bonds. Since borrowing costs were the biggest component to
business profitability, economic growth ensued. Time revealed the gaping
wounds, however. Their actions over eight years resulted in a stock boom and
bust, a clear and loud signal at the end of their reign, of a failure soon
evident in a wrecked national financial foundation.
In the last year, clearly the
new business model is governed by reaction to failure that the Strong Dollar
Policy produced. The manufacturing base left town for Asia, starting in 2001. Again, thanks to Clinton for pushing the Chinese Most Favored Nation status. In the
first few years since its passage, $23 billion in US corporate investment was put in place inside China. At its peak, Wal-Mart owned 160 manufacturing
plants, in direct opposition to founder Sam Walton’s ‘Made in America’ slogan. The corporate titans sidestepped
higher US labor costs and
strict US labor unions by leaving the country in a grand
movement. The moron US economists hailed the move as a ‘Low Cost
Solution’ in typical wrong-footed fashion. They somehow overlooked that
much less employment in the United State s would have consequences rooted in debt
growth and foreign debt dependence. By year 2006, fully 60% of Chinese trade
surplus was derived from US corporate subsidiaries located in China, exporting products to the West. Here we are, stuck
in the present, as the great US consumer economy has virtually collapsed. The stewards
of the US money wellspring have decided to backstop or acquire
numerous failures. The preservation of jobs and the system itself is their
stated motive. Instead, they have guaranteed the failure and collapse of the
system, all in time. Viable enterprise is being denied capital, which has
been re-directed to failed enterprise. This fact has escaped the US economists, clearly the worst in the world.
GREAT JOKE, SAD TO BE
SO TRUE
Lawrence Livermore Laboratories has
discovered the heaviest element yet known to science. The new element, Governmentium
(symbol=Gv), has one neutron, 25 assistant neutrons, 88 deputy
neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312.
These 312 particles are held together by forces called morons, which
are surrounded by vast quantities of lepton-like particles called peons.
Since Governmentium has no electrons, it is inert. However, it can be
detected, because it impedes every reaction with which it comes into contact.
A tiny amount of Governmentium can cause a reaction that would normally take
less than a second, to take from 4 days to 4 years to complete. Governmentium
has a normal half-life of 2 to 6 years. It does not decay, but instead
undergoes a reorganization in which a portion of the assistant
neutrons and deputy neutrons exchange places. In fact, Governmentium's mass
will actually increase over time, since each reorganization will cause more
morons to become neutrons, forming isodopes. This characteristic of
moron promotion leads some scientists to believe that Governmentium is formed
whenever morons reach a critical concentration. This hypothetical quantity is
referred to as critical morass. When catalyzed with money,
Governmentium becomes Administratium (symbol=Ad), an element that
radiates just as much energy as Governmentium, since it has half as many
peons but twice as many morons.
The above is not my original
creation, the rest is my addendum. If the above does not make you laugh as
much as cry inside, you aint human. The missing portion of the substance
known as corruptium, which leads to radiated energy into channels
almost entirely into the power source, once damaged heavily by exposure to
light, but now covered by czar tissue.
GUARD FROM CURRENCY
COMPETITION
The USEconomy is in the early
stages of disintegration, not yet recognized as such. The USFed is not
helping the system, but rather draining the system, in order to fund Wall
Street bailouts, to redeem its fraud, and to ward off foreigners in a global
dollar swap policy. The competitive currency devaluations are in full swing.
The competing currency war is best seen from the standpoint of official
interest rate by nations. Yesterday, desperate rate cuts were ordered atop
previous desperate rate cuts done on November 6. The Euro Central Bank cut
this time by 75 basis points to 2.5% (last time by 50 bpts). The Bank of
England cut this time by 100 basis points to 2.0% (last time by 150 bpts). Even
the central bank of Sweden cut by 175 basis points. The rate cuts one month
ago were a parade, a cavalcade of discredited bankers, who have increasingly
lost confidence of the public. The confusion on monetary policy is aided by
observation of the money supply figures, which are growing rapidly. The irony
in my mind is that the monumental money supply growth has not entered the
mainstream economy, but does not result in economic response, zero traction. The
reason is that the USFed has directed funds only to New York banks, thus feeding a black hole. The central bankers are
not asleep at the wheel as much as operating a machine with a built-in
breakdown mechanism after a few decades. Their time is up. The Gosbank board
is worth another view.
NEW LIGHT ON MOTIVE
TO EXTORT & DIVERT
Mr Mortgage is astute in
analyzing banks and balance sheets. He explains a prima facie motive for the
Czar Paulson confiscation of $125 billion, in the scrapping of the TARProgram
first tranche. See the article entitled “America’s Mark-to-Model Banking System
(revisited)” (CLICK HERE). He points out that everybody is focused on Level-3
assets, which are the obscure asset backed bonds veiled in price model
chicanery, loaded with leverage, but worthless beyond argument. The subprime
loans are laced within this level of asset, given cover by false AAA-ratings
and obscured by bond packaging, often structured with leverage. What has not
received with much publicity is that the Level-2 assets might result in
similar volume losses to banks, but not yet realized. They are loaded down by
Alt-A loan portfolios. To be assigned an Alt-A loan, a borrower must have
inconsistent records of income, typical of the self-employed, or have a
blotch in the credit history, like with a judgment against, or have
incomplete records required by bankers from their many unique situations. The
Level-2 assets are soon to explode onto the scene, with losses that in all
likelihood will eclipse the subprimes losses. Could it be that Czar Paulson
might have changed course on TARP fund usage when he realized that the US banking system is due for the next painful round of
crippling losses? He might know the US banks are zombies, surely not revived by a cover by a
tarp.
Details are in the article, with
analysis to be included in the December Hat Trick Letter report due out in
mid-December. Let it be clear that the Level-2 assets held by banks are much
larger in magnitude than the subprime loan portfolios, like 8x to 10x larger.
Wachovia is in possession of $160 billion in Level-2 assets on their
books, most likely dominated by Pay Option adjustable rate mortgages. A
mere 7.5% writedown in Level-2 assets on bank balance sheets would equal the
total writedowns by banks worldwide to date!!! Some argue without basis
that the Alt-A mortgages have a significantly lower default rate. NOT TRUE!
As of October 2008, serious delinquencies for Alt-A pools that include Option
ARMs averaged 20.3% for the 2006 vintage loans and 17.5% for the 2007
vintage, up from 16.9% and 12.2% six months ago, all according to Moodys. These
delinquency rates are equivalent to subprimes, and indicate equally high
defaults. Thus the volume of bank losses should be expected to be much bigger.
Paulson must be aware of these
facts and figures. Instead of throwing Congressional funds into a black hole,
he enabled a selected diversion of funds to the member banks of the Federal
Reserve Bank system, an elite group of less than a dozen banks. For instance,
Wells Fargo is a major mortgage provider, yet was not doled out any
confiscated funds. In doing so, he enabled executive bonuses to be given whose
size is on par with those of last year, despite performance by executives
that resulted in the death of the Wall Street business. My forecast is for
three waves to hit US banks, of equal or INCREASING magnitude, from three
delineated risk levels. First was subprime, done. Next is Alt-A, in progress.
The last wave will be from conventional primes, sprinkled with car loans and
credit card losses.
The last wave of significant
bank losses will also include the commercial mortgages, whose bond spreads
reacted very badly to the Paulson confiscation and diversion for elite
benefit. The total volume of commercial mortgages is not very large by
comparison. However, the blight will be unmistakable, as office buildings
might go empty, and projects left incomplete. Notice the CMBX index rose over
300 basis points since late October alone. The commercial mortgage backed
bond index tells the tale of betrayal well. The news media does not. The
justification offered by Czar Paulson was that purchase of bank stocks
offered a 12x leverage to the big banks, enough to facilitate loans. Except
that privately, the banks were ordered not to lend to the public, but rather
to save funds for bank acquisitions like National City. Only in America can a group be responsible for
wreckage of the banking system, get away with rampant fraud with export, yet
its executive icon be put in charge of the rescues, relief efforts, and
dispensation of money. The system is broken. Those in charge of the solution
are actually making the situation worse.
STRANGE SIGNALS
Numerous onerous signals can be detected. One
must ignore the public statements of improvement. In past articles, the point
has been made that the US Federal Reserve has engaged in truly massive Cash
Management Bill sales, to the tune of several hundred billion$, with
$145 billion more between October 2 and 15 alone. THESE ACTIONS DRAIN THE
MAINSTREAM PRIVATE SECTOR OF BANK FUNDS, which is precisely the opposite of
what Chairman Bernanke claims. He is not flooding the system with liquidity,
but rather draining the system in order to subsidize the insolvent Wall
Street banks and broken major financial firms. Rob Kirby in private
conversations calls it suffocating a man in his living room by placing a bag
over his head, when the room is being injected by huge oxygen tanks. Mine is
to describe it as filling a vast swimming pool, by diverting water from the
neighborhood homes and businesses, then declaring the pool for aristocratic
usage only, except for certain peon individuals who are permitted to swim in
the shallow section wearing a giant hefty bag for a swim suit. In neither
example, is the person gaining benefit.
The USTreasury Bond credit
default swap used to trade at a cost of only 1 or 2 basis points. That
means the cost was 0.01% or 0.02%, translated to be $1000 or $2000 per $10
million of USTBonds. Nowadays, the CDSwap cost has risen to almost 50 basis
points, far higher than government debt for Germany, England, and France. Investors are taking out protection for the unthinkable, a USTreasury
default. The risk premiums for such protection have nearly doubled from
levels seen two months ago after the collapse of Lehman Brothers. Contrast
the USTBond insurance cost with some of the member states. CDS data on some
states: Michigan at 192 basis points, California at 165 bpts, Nevada at 164 bpts, New Jersey at 150 bpts, Ohio at 104 bpts. Foreign nation Slovakia has sovereign bond insurance cost at 150 bpts, by comparison.
Many dismiss the threat of a
USTreasury default, but they do so in blind faith. They ignore confirmation
signals, such as the in the 30-year USTreasury swap spread. It
has been negative for a few weeks. Some call this development inconceivable,
illogical, impossible. Yet it is the reality. The swap contract exchanges a
floating rate for a fixed rate, and pays a price to do so. Imagine paying a
small fixed amount to render an adjustable ARM mortgage loan with a fixed
rate, a similar concept. Some experienced analysts have interpreted this
as meaning that investors are somehow reckoning that they are more likely to
be redeemed on their USTBond investments by a private counter-party than by
the government itself! One can call this event the ‘proverbial
canary in the coalmine’ as a threat to the current system. Last week,
arguments were put forth that the central bank franchise concept is in danger
of demise. Evidence in the signals supports the view. Currency wars are
heating up, even as investors are anxious about fiat currencies in general,
and their offered debt securities. The Iceland situation rocked the system,
to be sure.
Former Harvard University endowment fund
investment manager, now PIMCO co-executive, Mohammed El-Erian frequently
offers an opinion. He believes US bank officials are making big errors by
attacking problems one item at a time, as opposed to treating the problems in
an aggregate fashion, from a systemic approach. He makes a key point: A
flight to liquidity is occurring, not a flight to quality or a flight to
safety, as a global phenomenon takes place toward vast liquidations. He
is a system wonk, never forget. He also claims the bank system is again
functioning because of the TARP equity purchases at a premium, and placement
of funds directly into capital structure. He must not have noticed that over
85% of the TARP funds in the initial tranche went to executive bonuses to select
Fed Reserve banks.
The laws of Supply & Demand
have not gone away. Yet we have grand disparities to pressure
price structures. A) The supply of USTreasury Bonds is huge, yet yields are
low and price is high. That is ass backwards. B) The creation of truly vast
sums of USDollars is huge, needed to pay for the bond swaps, bailouts,
stimulus packages, and nationalizations. Yet the USDollar index rises, due to
liquidations and payouts. That is ass backwards. C) The demand for physical
gold and silver is huge, motivated by crisis, yet their prices are determined
by corrupt paper pricing systems. That is ass backwards. Soon, all three
stresses on price structures will be addressed. A strange day occurred on
Monday. Gold was down hard, the euro currency was down a little, but the
pound sterling was down 500 bpts. Some attributed it to lousy economic news
in England. Not completely so! Another factor might be at work. A clearer
perception of a struggling UK Economy would not take down the gold price. My
sources tell of possible shipments of gold from England to the US-based
COMEX, in order to satisfy gold demands for delivery. It is hard to verify.
Time will tell.
REACTION TO
DISINTEGRATION
If you do not believe the claim
of economic disintegration, you have not been paying attention to the many
USEconomic signals. The housing prices continue down in an accelerated speed.
The Case Shiller September decline for 20 cities was 17.4%, still rising
monthly. The home foreclosures continue to grow at a monstrous pace, with no
letup. The various regional Fed reports such as the Empire State, the Philly Fed, the Richmond Fed, along with the ISM manufacturing and ISM service
indexes are not indicating recession. They are indicating collapse, falling
far lower than even keeled 50 levels. My preference is to label it as
DISINTEGRATION. When the credit lines are interrupted, when the USFed is
acting as the main bank to fund non-lending hamstrung banks, those credit
lines are not just broken, but favored toward the insiders, the system is
dysfunctional. When short-term credit is hampered, distribution channels are
interrupted for necessities that keep an economy running. Letters of credit
for shippers are routinely refused when US banks are involved. Consumers
finally have fallen down, the indefatigable US consumer, the engine of the
world economy. Give me a break! They never were the engine of global growth. They
were the lopsided lamb which spent household equity, burning the furniture
figuratively, to fund Asian industrial expansion, not to mention the Asian
foreign reserve funds. A bonfire to burn home equity is far from an engine,
the only thing in common being combustion.
The Asian sovereign wealth funds
grew in lockstep with the insanity of manifested US consumer mentality. In
the same manner, the Persian Gulf sovereign wealth funds (and private sheik
accounts) grew from oil revenues. Never have consumer sentiment measures been
so low. To heck with claims of economic depression risk. The palpable risk is
for disintegration. The USFed, with its drainage of private sector bank
capital to fund Wall Street bond swaps, almost guarantees the slide into
disintegration. AS THE SYSTEM DEGRADES FURTHER IN ITS STRUCTURAL INTEGRITY, A
PANICKY RESPONSE IS ALMOST ASSURED TO PRODUCE INFLATION FAST. Gold &
silver will respond.
RELUCTANT
NATIONALIZATION OF MORTGAGES
The national situation will
continue to degrade. With New York bankers hogging the trough, the rest of
the herd with lesser pedigree is starving. Only after objections to the TARP
confiscation and theft has the USFed installed new programs to address Asset
Backed Commercial Paper and other pools such as for car loans and credit
cards. They must realize that they are strangling the entire USEconomy. In
time a panic climate will set in. A turning point is coming for reflation. Slowly,
the banking officials and legislators will realize that the ultimate source
of the problem for the USEconomy is falling home prices, foreclosures, and
the straightjacket that homeowners find themselves with negative home equity.
To date they only talk about deeply impaired mortgage bonds, with
short-sightedness. Just Thursday, the hapless Secy of Inflation Bernanke
admitted that 15% to 20% of US homeowners are underwater on home loans,
living with negative home equity. THIS IS THE ULTIMATE PROBLEM BEHIND THE
INSOLVENT BANKS.
Bankers will not lend when
borrowers are insolvent. Bankers will not lend when their own balance sheets
decline each quarter due to falling home prices, the effect being to push
their mortgage bonds down further in value. The great majority of homeowners
facing foreclosure who accept federal help in mortgage repayment plans
actually pass through a revolving door. They face foreclosure only a few
months later. WHY? Because the late payments are put onto the loan balance,
the fees are sometimes waved, the interest rate is reduced in many cases, BUT
THE LOAN BALANCE REMAINS ABOVE THE HOME VALUE. The unsuccessful USGovt HOPE
NOW program calls for VOLUNTARY banker reduction in the loan balance. To
date, the great majority of troubled home loans are NOT reduced. Thus the
revolving door. A big jump has been seen in recent home loan refinances, with
lower mortgage rate. This is good news, but fails to address the ultimate
problem of insolvent households. The priority must be the achievement of bank
solvency and actual home loan balance reductions with federal reimbursement.
THE NEXT MAJOR STEP IS MONTHS
AWAY, BUT IT WILL FEATURE NATIONALIZATION OF MORTGAGES, REDUCTION IN LOAN BALANCES,
WHOSE COSTS ARE COVERED BY THE US CONGRESS. More pain is needed to reach a
consensus on such a huge new program. The nationalization of mortgages will
ultimately cost at least $2 trillion.
After blowing $8.5 trillion so
far in US Federal Reserve programs, Federal Deposit Insurance Corp programs,
Treasury Dept programs, and Federal Housing Administration programs, none of
which address the ultimate problem of insolvent homeowners, the stage is set
for a radical solution, the final solution to the problem. See the SFGate
table of details on this colossal sum of money, which to date roughly doubles
the entire USGovt federal debt up to 2008 (CLICK HERE). With nationalization and meaningful loan balance
reductions to a few million mortgage loans, a bid can only then be finally
placed under home prices. Mortgage bond losses will be stemmed. Bank ruin
will be halted. Of course, the solution is radical. But so is the problem. The
people lack a solid representation in the USCongress anymore.
THE MORTGAGE NATIONALIZATION
WILL FINALLY PERMIT REFLATION, SURE TO RESULT IN HYPER-INFLATION. THE GOLD
PRICE WILL REACT IN A CLEAR AND UNMISTABLE MANNER. Now that most foreign
central banks have moved to extremely accommodative official interest rates,
the USDollar is less at risk from relative monetary competition. They are by
now fully aware of the risk to their own banking systems and economies. The
global move to reflation, if not hyper-inflation, is soon to be triggered.
The maneuver in October to install a globally available USDollar Swap
Facility was a deft insurance policy planted by the USFed to assure that
foreign banking systems are laced with USTBonds. They can less easily abandon
the USDollar as the global reserve currency. The entire, at least Western,
world will be joining in the process.
GOLD IN EURO TERMS
The last several months have put
too much focus on the US perspective. The gold price has consolidated in euro
terms. The real fireworks for gold lie ahead. The COMEX gold & silver
markets are certain to endure major assaults. Their phony low price invites
heavy demand, if not destruction much like an outstretched rubber band. The
swallow of the bitter hyper-inflation pill will assure the rise in gold
price. The engines are revving still at 10 thousand RPMs, as gold watchers
await the price inflation skidmarks on the economic tires. They are coming.
Patience has been sorely tested. With the shift of power away from the US and toward Europe in the Western world, the price of gold should be viewed more often in euro
terms. It has not fallen badly, but instead has consolidated. The bullish
divergence is clear. A U-shaped reversal pattern requires a move above 650
euros to ignite a rally. Before long, gold will run up in all currencies.
Jim Willie CB
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Jim Willie CB is a statistical
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