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Use the above link to subscribe to the paid research reports, which
include 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.
The US Federal Reserve is
behind the curve. Great consequences have resulted and are likely to continue
to result. Many words can be used to describe this group. What come to mind
are inept, compromised, corrupted, distracted, ill-trained, but also
clueless, deceptive, myopic, overly cautious, and off the market in their
focus. When they remain transfixed on economic growth versus price inflation,
they are stuck in the past, in a world that no longer exists. The corrupt
spew of fraudulent mortgage bonds disseminated throughout the investment
community has both crippled the banking system from profound distrust, and
inhibited the USEconomy from credit supply fraught
with obstacles. With their irresponsibly slow reaction to significant threats
to the entire economic and financial system, the hapless USFed
has put several things at grave risk. Since mid-September, the USFed has cut the official rate twice by a total of 75
basis points (0.75%), and reduced the discount rate. These are minor steps.
More important to the matter is the flimsy net aggregate action taken by them
to provide desperately needed liquidity. Since many USFed
official actions are merely temporary lending actions, withdrawn soon,
whether overnight or for a full week, they can actually take away all
medicine very soon after delivering it. In fact, John Hussman
points out that the USFed on a net basis has injected only
$15 billion into the banking system since March, a tiny sum given the $12
trillion size of that system. The USFed is
dithering. The longer they dither, the bigger the gold response will be to
the Final Solution, sure to center on a powerful
gigantic Resolution Trust Corp, bigger than the previous one in 1991.
The banking system is
burning, but the USFed firemen are still focused on
the hustle & bustle of activity scurrying about the business centers surrounding the structure in flames. The
misdirected firemen are still focused on the horrendously doctored price
inflation figures. They seem more interested in denying the slowdown with
powerful momentum in the USEconomy, replete with
exaggerations to hide its current recession, than to address the problem in
ways it can. They seem more interested in the boomerang effect of price
inflation stemming from a weak USDollar, replete
with laughable exclusions, substitutions, omissions, all useful to hide its
current rampage in prices, than to address the problem in ways it can. The USFed is suffering from a credibility problem. They are
the object of rather harsh but deserved criticism, for being slow to address
the situation effectively, and for ignoring the real problem. When the core
of the banking system exhibits deep distrust from the cancerous toxins
floating about, and cannot trust the lousy quality in financial collateral,
the USFed must react to fix it. Unless and until
the USFed removes toxins in grandiose style, the
problem will persist. The remedy must be as grand as the problem. The
medicine must match the sickness. Powerful medicine is coming, which will
ensure bigger rate cuts and bigger USDollar damage,
the next impetus to power gold upward toward 1000 !!!
These guys are clowns, who
are matched by greater clowns on the White House Council of Economic
Advisors. They spend far more time lying about the economic condition,
defending falsified perspectives, than they do in putting in place effective
remedy, even for a burning building. Good riddance Al Hubbard. You are
perhaps dumber than a run-of-the-mill ‘C’ student in a secondary
school, and that aint saying much. Your public
comments have sounded more obtuse, clueless, and promotional than a toothless
obnoxious loud barking pimp standing in front of a brothel to promote an
aging unattractive inventory. Hubbard epitomizes the stupidity, blandness,
and mental vacancy that dominates economic policymaking.
Is mental wattage no longer important in such crucial posts? John Snow
established a pattern when his empty headed parroted commentary used to
dominate the Dept of Treasury. Paulson has caught the Snow disease. Hubbard
sees a housing problem, sees a mortgage bond problem, lies
about job growth, but points blame to Congress for inaction while bipartisan
bickering has rendered that once august institution useless. The whole world
is watching, and the Untied States look like an embarrassment in stewardship.
When not warranting shame from ineptitude, they provoke shame from
corruption. As the world reacts with disdain for the stewards aboard the USShip of State, they sell the USDollar
and purchase gold.
The USEconomy had relied upon the housing boom as
its perverse foundation for over three years, even endorsed by that monetary
drug dealer Alan Greenspan. What did we once hear? A sophisticated economy
was led by the financial sector, which benefited from financial engineering
to reduce risk? A clean economy free of smokestack industry? An economy set
to advance from a lower cost structure after massive unprecedented
outsourcing to Asia?
An economy well supplied by reliable foreign sources of credit, their hard
earned savings? Import dependence, including capital, is not an issue since
trade partners are all our friends? Well, the harsh news is that the housing
boom is a bust. An economy cannot rely upon asset inflation. What a heretical
concept! The main products from the financial sector are fraud, mispricing, leverage, and backfires, resulting in toxin
and seizure, with a guarantee to unwind in seeming endless fashion as mutual
distrust seethes. Wall Street favorite sons
poisoned our credit suppliers. What a suicidal concept! The lack of income
growth stems from jobs being shipped outside the country. Prosperity does not
come from jobs sent overseas. What a moronic concept! A nation run by
aggressive leaders with little concern over fiscal discipline, foreign
resources, treaties, with a strong stick used in financial
inter-relationships cannot expect heavy handed actions to go without
retaliation. Stability, cooperation, and progress cannot come from
intentional designed chronic import dependence. What a ludicrous concept!
LIBOR
REJECTION
Perhaps the single most
important global short-term interest rate is the LIBOR. The London InterBank Overnight Rate is used for supply of credit to
adjustable mortgages, even in the United States. The LIBOR is used
to supply credit to hedge funds, those villainous agents for speculation, who
once were praised by Greenspan for assisting in offloaded risk. The LIBOR is
used to supply credit for vast supply of credit derivatives, that mountain
acting as a rooftop to cap prices for an assortment of things like long-term
rates and gold. The LIBOR is used to supply credit for a vast hoard of credit
spread positions, which play USTreasurys against
more risk laden securities like mortgage bonds and corporate bonds. The LIBOR
has taken center stage in recent months, perhaps as
a signal that London has superceded
New York City
itself. NYCity has clearly taken the mantle of the
Financial Fraud capital of the world. London
has eclipsed it in size and importance. LIBOR is its baby, not new by any
means, but new in recognition across the Atlantic Ocean.
In the last two months,
LIBOR has taken center stage. As corporate paper
for interbank loans has shrunk massively in the United States,
the source of LIBOR for interbank lending has
become crucial. With higher demand comes a higher rate. However, a more
important factor has made itself evident. The LIBOR rate has rejected the USFed solution to date so far. It has delivered a
powerful ‘Vote of No Confidence’ to the USFed
itself and US
bank sector. That vote loudly states that the USFed
has not put in place any solution at all. The net $15 billion in system
liquidity increase is woefully inadequate when banks distrust the collateral
put up by other banks and major borrowers. The LIBOR 3-month rate has moved
with an independent mind to the USTreasury
short-term bond yields.
When the USTBill 3-month yield went from late August at 4.4% to
late October at 3.95% to late November here at 3.08%, a firm trend was set. The
3-month TBill yield has fallen by a total of 1.38%
since August. The LIBOR has not followed suit. Its 3-month interbank rate has moved from late August at 5.51% to
late October at 4.98% to late November here back to 5.08%, in defiance. Its
total move has been down by only 43 basis points. Above is shown the LIBOR
one-month daily moves, which parallel the moves in the 3-month.
What does this mean? THAT
THE USFED WILL CUT THE BENCHMARK INTEREST RATE AGAIN, BECAUSE THE US CENTRAL
BANKERS HAVE NOT SOLVED ANYTHING. The USFed has
failed to alleviate any credit problems, evident in actual credit flow. The
credit markets continue to turn to London
for the starved credit. One can make a credible argument that the USFed has taken its cue from S&P stock market droops.
In August the credit problems, the banking fraud issues, the huge portfolio
losses were all evident. In August the S&P500 stock index fell down
sharply. The droopy swoon must have motivated the USFed
to make their first official rate cuts. Now with the S&P stock index
once more drooping badly, instability in the stock market seems once more to
motivate USFed Governor designee to make public
pronouncements. The Dow Jones index move up by over 300 points on
Wednesday highlights both the effective response of the Fed Governor Kohn
commentary made in the morning, and the motivation for making such comments. He
spoke to the stock market. The USTreasury Bond
market is well managed, as in manipulated, so as to support stocks. Despite
foreign flight out of USTBonds, despite revolt by
foreign central banks and their sovereign wealth funds, a phony
‘Flight to Quality’ has been engineered. JPMorgan can take a bow
for that project, using yet another small mountain of credit derivatives. In
fact, the JPMorgan share of 2Q2007 credit derivative growth is larger than
the entire market! Federal regulators are asleep at the wheel, which is to be
expected when they not just are the federale’s
pockets, they are the federale’s
working agents.
Bear in mind that the Kohn
comments, keeping the door wide open on additional official rate cuts, came
the same day that US
existing housing data was released from October activity. The housing market
is nowhere near stability, or even leveling off. Existing
home sales have fallen by 20.7% from October 2006 to October 20007. Well,
that assumes no cancellations, so the decline is worse. The existing home
inventory lifted by 1.9% to 10.8 months of supply. The national nightmare
continues. Talk is lively on the extension of home price losses, and whether
they will fall by 10% when dust clears. Try a figure at least twice that,
maybe more.
A comment in fairness to
the USTreasury Bond complex is necessary. There are
two powerful sources of money being channeled into USTBonds lately, having nothing to do with manipulation. They
are funds migrating from stocks into bonds, motivated to some extent by
recession fears and withering corporate earnings. They are closed out
US$-bound spread trades in bonds. A sector carry trade exists to go long the
higher yielding higher risk bond like mortgages or junk, even corporate
bonds, while going short the USTBond. For instance,
as the mortgage spread trade ends, the anchor USTBond
is covered. As the junk spread trade ends, the anchor USTBond
is covered. The result is a short cover rally in USTBonds,
advertised as a Flight to Quality, which in a narrow sense is true. The lie
is that the flight is not global, since foreigners show signs of shunning
US$-based securities.
CURRENCY WAR TIDBIT
Wrapped up in the day was a
modest little USDollar bounce, exaggerated by the
press in a manner that would befit gallows humor,
except they were serious. The US DX index did not even manage a move to touch
76. Oh, by the way, that hefty euro selloff of over 100 basis points evaporated by end of
day. One of the justifications for the big S&P stock rally was a
rebounding USDollar. The Fed Beige Book report
seems to set the stage for another USFed rate cut
on December 11, since much weakness was reported.
The European Union has
dispatched a team of emissaries to plead with the Chinese Govt on currency
matters. With a sharply rising euro currency, and a
managed slow upward revaluation of the Chinese yuan
currency with respect to the USDollar, the euro has risen substantially against the yuan also. The Europeans want China
to take steps to reverse the huge disadvantage left to European firms wishing
to export to China.
We might soon see a second exchange rate of yuan
versus euro, but do not count on it. We have moved
to the point where the Europeans are more vulnerable to Chinese mercantilism
than the Americans. The Chinese, as my analysis pointed out two years ago,
will ravage the EU economy and built up surpluses from it, in a rotating
fashion. Such is the nature of currency wars, as victims are rotated.
USFED
NEEDED ACTIONS
Moral hazard has been in the
news lately. What Kohn essentially said is that this is no time for morale
hazards to be avoided, that the USFed might have to
take very strong action, that the USEconomy is at
great risk, that the US banking system is crippled enough to render harm to
the economy. My forecast is for a 20% to 30% fall in home prices, depending
upon creation of a serious Resolution Trust Corp. If they are going to
permit a mammoth housing bubble, with an ugly leveraged bond extension, then
an equally mammoth and equally ugly resolution structure is needed. Time
is of the essence, while they dither. The USFed
actions with rate cuts so far have been rather trifling, insignificant, and
without substance. Salvaging Wall Street banks has been the hidden preliminary
agenda.
The USFed
has dithered so far. They are concerned about the morale hazard, about the
perception of bailing out Wall Street banks, about a focused rescue. Of
course, they are bailing out Wall Street banks, which are probably first in
line at redemption tables. The USFed has been
overly pre-occupied with its usual klapptrapp of
economic growth versus price inflation. The bigger problem is banking system
insolvency. The bigger problem is interrupted credit supply, from subprime hairballs stuck in the system. The bigger
problem is distrust among bankers, enough to sidetrack many legitimate
businesses who have difficulty finding adequate capital. The interbank system is replete with distrust and suspicion
now. The Wall Street criminals have infiltrated the entire US banking
system with toxins. The solution cannot be a measured reduction in interest
rates by the USFed. They seem hamstrung and dazed.
So the USFed will be cutting interest rates again,
as they see themselves as having no choice. This central bank is powerless to
powerful market forces. The Fed Funds futures contract clearly indicates a
total of 50 basis points in rate cuts by February 2008. Shown is a FF reading
at 96.0, meaning 4.0% on the Fed Funds target rate. With a 2-year Treasury
Bill yield at 3.17%, it too screams the USFed is
behind the curve. The official Fed Funds target is 4.5%, which translates to
the USFed being 1.3% wrong high. This presents
supply & demand problems within the banking system itself.
My Hat Trick Letter has
cited numerous simultaneous drastic measures needed to deal with the cluster
of related problems. One is inadequate. They are all after effects of the
housing bubble, since no bubble can exist and thrive to bubblicious
proportions without a constant powerful stream of money. The entire
housing bubble and mortgage monstrosity apparatus is breaking, as the
financial risk model is being unwound, without proper recognition. The
USFed does not even recognize it, and if they did,
they would not acknowledge it. The USFed must take
historically unprecedented drastic action on numerous fronts. The Resolution
Trust Corp must be put in place immediately. England has taken steps to
restructure all adjustable loans so as to interrupt the foreclosure process. The
knucklehead corrupt denizens of the US banking industry are too
confused and compromised to accomplish much of anything. The RTC must have
broad powers:
Ø
To
provide a floor bid on mortgage bonds, from ‘AAA’ to ‘BB’
Ø
To
serve as a clearing house on traded mortgage bonds and their instruments
Ø
To
deliver dead mortgage securities to a cemetery
Ø
To
assist in renegotiated adjustable mortgages, in workouts
Until these measures are
instituted, the USDollar will sell down
continually. Until then, the USFed will lose
integrity. Until then, the phony Flight to Quality
in USTreasury Bonds will continue. Heaven help
foreign FX reserve holders if both the USDollar and
USTBond fall together! What we are witnessing is
the US$ exchange rate used as a proxy vote against the USGovt
leadership, against the US Federal Reserve leadership, against the Wall
Street leadership. The US$ reflects lost confidence, structural
brokenness, absent leadership, unbridled fiscal recklessness, utter locked
ineptitude of Congress, perhaps even anti-militarism. In my view the US
Congress has become a useless den of landlocked vipers, lobbied heavily,
privileged heavily, and compromised fully.
An added ingredient could
soon buttress the grand rescue package, whenever that occurs. Foreign deep
pocket sources have decided, starting with the Abu Dhabi $7.5 billion stake in Citigroup,
to provide some desperately needed equity. That represents a 4.9% stake. The
cost to save Citigroup is dear, helped by a 11% junk
bond type dividend. Yes, Citi is a vampire, walking
dead, masquerading as a bank conglomerate, with what, 300 thousand employees?
The trend will continue with Asian and Arab leading institutions ponying up valuable stakes of equity ownership, cold hard
cash, to support the US
broken insolvent system. The trouble is that many firms they will
buttress are dead, so the stakes are to share the painful demise. They are
assisting liquidity, but not solvency. If assets fail to surpass debts, then
external cash for a stake merely shares the failure. The cash infusion was
to avert bankruptcy by Citigroup, an event sure to garner some
attention!!!
The US financial
sector foundation is crumbling. Without such drastic action and coordinated
measures, that financial sector foundation, fully networked with leveraged
securities gone amok, the basis of the risk management regime,
will continue to disintegrate. The longer the USFed
& Dept of Treasury & Wall Street banks dither and hesitate, the more
difficult the chartered job of the Resolution Trust Corp will be. The road to
such an RTC plan is full of potholes. The Freddie Mac multi-billion$ loss was
a brutal blow to anyone who actually maintained the lunatic notion that
either Fannie Mae or Freddie Mac could conceivably serve as a foundation for
any mortgage resolution platform. Well, unless a cover firm and thick enough
can be constructed atop a financial sewage cesspool. What exactly would such
financial cement look like??? Can paper act in such a role??? The longer
the Powers That Be delay on the solution platform, the bigger the size of the
platform rescue itself, and the greater the GOLD RESPONSE will be. The
platform will spill liquidity from massive stimulus, enough to ignite gold. Unfortunately,
the longer a delay in the Final Solution, the more damage done to speculative
stock positions. They, like many other risk trades, suffer from the absence
of risk capital.
Do not look to USFed Chairman Bernanke for
guidance, to show the way out of the wilderness. Instead, look to him for an
effective gauge on fear. He showed fear before Congress in his last
appearance. In my view, he is a midget to fill a giant role. Greenspan would
have recognized the gigantic systemic threat, but not the former Princeton
University Economics Dept chairman. Remember, no bank operations experience,
no business corporate experience, no financial market experience, no profit
& loss experience. Bernanke was picked to be
either the Fall Guy or
the Puppet to control by Wall Street for its benefit. The USDollar
will continue to be sold off, and gold will be pursued as a haven, as long as
no serious solution is even discussed. The Wall Street SIV (Structured
Investment Vehicle) was a sham seen as a potential bailout of Wall Street
mortgage bonds, or a Hot Potato Party wherein nobody would step forward to
handle such burning items.
SOCIAL
CHAOS COMING
In the next several months,
expect rising chaos to gradually strike the American fabric. The list of
triggering factors grows almost with each new season. Look for problems and
intense social reactions to extend from:
Ø
Rising
food prices, such as bread, milk, cheese, eggs
Ø
Rising
gasoline prices with scattered shortages
Ø
Lost
jobs from corporate outsourcing trend resumes
Ø
Lost
homes from bank foreclosure
Ø
Later
on, bank run on deposits at failed banks
Ø
Later
on still, freeze on stock accounts, as corporate parents go bankrupt
The ‘crack
spread’ describes the difference between the crude oil price and the
gasoline price. It has widened to do harm to gasoline refiners. Unless a
50-cent move comes to the gasoline price, expect wide gasoline shortages. It
is simply unprofitable to produce it. The food price issue is an offshoot
from the mandated movement toward ethanol. In this crazy world, almost
everything is connected.
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By : Jim Willie CB
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Jim Willie CB is the editor of the
“HAT TRICK LETTER”
Jim Willie CB is a
statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics.
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