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The Follow the Money Concept

On December 09 2008

Re:        Chairman's Corner - Sunday, December 07, 2008
Title:     The Follow the Money Concept
Author:    Jim Sinclair

Dear Friends,

Let's put on our practical thinking hats. I am inviting opinions from both our academic readers as well as those that believe answers are more accurate when derived by the "follow the money" concept.

The Fed says and statistics support that the majority of the $8.5 trillion in funds injected into the economy in various ways was to protect the US financial community. This has given comfort to the establishment intellectuals who claim there is no inflationary implication as a result of these unprecedented liquidity injections.

Follow the money approach

The US Federal Reserve made $8.5 trillion available to Wall Street and other entities with OTC derivatives in their inventory. These "assets" have the potential for causing bankruptcy.

It is claimed that the majority of these funds will not have an inflationary impact because of the huge amount of T bills, bonds and note sales that will offset the inherent liquidity injections.

The main buyer of the Treasury instrument issued was China.

China sold US Agencies and as a courtesy bought US treasuries, claiming no negative impact on US financial plans.

The inviting question is who got sterilized? Sterilization impacts the entity that buys the T-bills.

The conclusion then is that it is China and not the USA that received the sterilization process tool. The Chinese, being no fools, offset this process by selling US Agency instruments.

It follows that the USA got the liquidity but not the sterilization, leaving all those funds locked and loaded to fulfill Dr. Milton Friedman's accurate statement that inflation is monetary, not demand-pull or cost-push motivated.

The Fed figures say sterilized but it is totally false when the "follow the money process" is utilized to understand the action.

China, however, did remain relatively dollar neutral as the product of selling agencies to buy T-bills.

Therefore the final answer is that $8.5 trillion that is unspecialized has been injected into the US monetary system.

Where is the beef?

When the Fed buys OTC derivatives say from AIG, Fanny and Freddie and guarantees them against loss or keeps them on their balance sheet, the Fed becomes the principal counterparty as the loser to each OTC held or guaranteed.

It is reasonable then to assume that a non-performing OTC derivative instrument becomes a performing asset as long as it is held or guaranteed by the US Federal Reserve. The Fed would need to be responsible for the obligations of the losing counterparty to the special performance obligation.

If these defunct instruments are now functional it is reasonable to assume that bailout entities were losers in the specific performance contracts known as OTC derivatives. There has to be one or a daisy chain of winners out there of $8.5 trillion, either paid out or held as a full value position

Who are they?

Now let's look at the assumption that the $8.5 trillion is not a factor because the intellectuals state that all it does is fill a black hole of losses.

You own a junior gold company that has been under attack by naked and pool short sellers. Mr. Oliver has done the work of God to make cold calls to major stockholders (discovered in required filings) informing them of his opinion that the entity is overpriced at zero.

I now come to your house informing you that I feel sorry for you and hold the naked and pool short seller in contempt. Therefore here is a check for the difference between your cost and the present market value.

Does that fill a black hole of losses or put you back in business? It puts you back in business with your wealth factor reestablished.

What intervention factor will start the flow of the absolutely unsterilized $8.5 trillion dollars of liquidly into the business section?

The answer is that significant FISCAL STIMULATION through Quantitative Easing (aka wild-ass money printing) will trigger the dollar's death by inflation of the currency unit. When roads, schools, special education, music, athletics, teacher's salaries, the no child left back policy, and local infrastructure building providers are granted Federal contracts with Federal guarantees of borrowing, they go to the bank. What bank against a Federal fiscal stimulus contract or guarantee will fail to lend up to 90% of the required funds?

That will open the barn door of liquidity.

This is followed by inflation then hyperinflation (a currency event not an economic event) in the midst of a recession so deep it threatens to be the second Great Depression.

The dollar declines below .72 and gold moves above $1024 on its way to $1650. What would make Alf Field's technical projection of the price of gold at $3000, $5000 or even $10,000 correct?

The answer to that question is also easy: $8.5 trillion in government bailouts and direct cash injections as fiscal stimulus while quantitative easing throws money in the street for people to pick up (Bernanke and the famous electronic Helicopter Money Drop fighting speech will do the trick).

Obama will be cheered as saving the US economy for at least one year while the equity markets get its 1930 rally for a year.

Keep in mind that the grease of the wheels of the equity market has been and always will be LIQUIDITY for a short to medium term rally.

Weekend Events

Republic Windows and Door Corporation got a surprise on Friday when it furloughed all its workers as a result of Bank of America calling their cash flow, plant and equipment based loan.

This morning and all weekend the employees are marching around the facility demanding their severance pay and reimbursement for vacation days earned after only a 3-day notice.

The Federal Warrant Act demands employees get 60 day notices or get paid for 60 days pay when furloughed.

The workers are after Bank of America and the assets of the firm to meet their legal demand.

As a side note the company does not have the funds for severance payment or its contribution to employee's health insurance.

Most employees' health insurance was up for renewal now.

The Bank of America was asked to extend the company loans for severance and health insurance. Their reply was "you have to be kidding."

Christmas Shoppers Publicly Warned

The warning was given not to rob Christmas presents for their children in this difficult business condition.

To assume that present day workers will quietly go to soup kitchens or live as hobos is madness.

Soon stealing a loaf of bread for your family will be a capital crime.

Respectfully yours,

Jim

Standoff continues as workers protest layoffs
Sunday, December 07, 2008 | 12:50 AM

CHICAGO (WLS) -- Workers are refusing to leave a Chicago factory they have occupied since Friday.They started a sit-in after getting three days notice that the plant was being shutdown.

"We've been here since yesterday and last night, and we're not going anywhere. We are committed to this," worker Melvin Maclin said.

The protestors are calling their demonstration a peaceful occupation. Some 200 workers at Republic Windows and Doors are staying inside their plant, in shifts, even though the company has told them that - as of yesterday - their jobs no longer exist.

"I do whatever I have to do to support my family," said Armando Robles, who also was laid off.

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Jim Sinclair's Commentary:

And now some news about the "States of the Union."

41 US States Face Bankruptcy In 2009

A recent study by The Center on Budget and Policy Priorities revealed that 41 states are facing severe budget shortfalls for 2009. Some states are worse off than others, with California ($31.7 billion) and Florida ($5.1 billion) leading the deficit pack. In all, the 41 states are currently facing a $71.9 billion budget shortfall. The key word here is "currently," since a similar study was conducted by the same group only three months earlier, at which time "only" 29 states were predicted to face shortfalls of a "mere" $48 billion. As the recession deepens, so will the state's budget problems, turning this "budget crisis" into a humanitarian disaster. Projections have already been made for a $200 billion shortfall by 2010.

These deficits have already transcended the computer screen of the statistician into real suffering of the most vulnerable sections of society. In dozens of states across the country, vital services are being cut to the elderly, disabled, the poor, and recently unemployed. Teachers are being cut from schools and tuitions are rising. Workers from state construction sites are being laid off, while social service employees suffer a similar fate. Non profits are closing their doors.

Most likely, these pains only mark the beginning. Many states have a "rainy day fund" of some kind that they use to plan for such crises. These funds are already depleted, or certain to dry up quickly, with "hard decisions" now having to be made. This is especially troubling when one considers that, in many cases, state cutbacks made from the 2001 recession remained in place. Not to mention that successive presidents have successfully plundered federal social programs. The new, extraordinary state budgets that are being drawn up to address the current deficit crisis will essentially destroy the social safety net for millions of people, including access to daycare, food stamps, welfare, and basic medical services. The fact that the federal budget is in even worse shape, and will likely choose to follow a similar route of massive cuts, makes future predictions of social calamity all but certain.

The options available to states to respond to budget crises are limited since states are not allowed to run deficits; they must solve their budget problems immediately. Nearly every state government is reacting to the crisis in essentially the same way: by cutting essential services and raising "secondary" taxes (alcohol, cigarettes, gas, etc). In reality, after spending their reserve funds, states have only two viable options: cutting spending and raising taxes.

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Message sent on Sun Dec 7, 2008 at 3:51:06 PM Pacific Time