Sunday, January 31, 2010

Middle East bulking up arms deployment

The US is accelerating arms sales to friendly Middle Eastern Gulf allies in response to Iran's nuclear weapons programs. Hello higher crude oil prices.

US just PO'd China--again

China, the US' largest creditor, is livid about US arms sales to Taiwan. Expect more trade sanctions. One of the few lessons learned from the Great Depression was the erection of trade barriers among countries caused commerce and economic output to plummet. Apparently, that lesson is lost among government leaders worldwide.§ionid=351020404

Anti-obesity treatments gaining traction

Thanks to my good friend Dick for finding this timely article on weight-management drugs:

At least 3 candidates are seeking regulatory approval from the FDA within the next year. The obesity market is huge (no pun intended). Two-thirds of Americans are overweight, and one-third are obese (BMI of 30% or more). Include Europe and emerging countries whose standard of living is rising, and the potential market for weight-management treatments is staggering.

The products hitting the sweet spot of safety first, tolerability, and efficacy will be blockbusters.

Disclosure: long ARNA shares.

Where is the USDollar headed?

If this chart by is to be believed, the USDollar will continue to trend lower, despite occasional countertrends. Click on the chart to enlarge.

John Embry on gold in January 2010

John Embry is one of my favorite analysts on currencies and gold due to his clear insight on fundamental economic laws. His stellar track record against a wave of naysayers certainly helps boost his credibility. This is a must read.

Saturday, January 30, 2010

New York Federal Reserve Bank

The term secret banking cabal is appropriate in describing the New York Federal Reserve Bank in its role of bailing out insurer AIG.

That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.

Later, when it became clear information would be disclosed, New York Fed legal group staffer James Bergin e-mailed colleagues saying: “I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals -- too many counterparties, too many lawyers and advisors, too many people from AIG -- to keep a determined Congress from the information.”

Think of the enormity of that statement. A staffer at a body with little public accountability and that exists to serve bankers is lamenting the inability to keep Congress in the dark.

This belies the culture of secrecy obviously pervasive within the New York Fed. Committee Chairman Edolphus Towns noted during the hearing that the bank initially refused to disclose even the names of other banks that benefited from its actions, arguing this information would somehow harm AIG.

Now, I’m not saying Congress should be meddling in interest-rate decisions, or micro-managing bank regulation. Nor do I think we should all don tin-foil hats and start ranting about the Trilateral Commission.

Yet when unelected and unaccountable agencies pick banking winners while trying to end-run Congress, even as taxpayers are forced to lend, spend and guarantee about $8 trillion to prop up the financial system, our collective blood should boil.

Friday, January 29, 2010

Greece continues to make the headlines

Greece's imminent danger of default on its sovereign debt continues to make the headlines every time the German-led European Central Bank denies rumors they will bail out the troubled Mediterranean country.

What isn't so well-published is the state of California has similar dire finances as the country of Greece. And as blogged earlier, Greece's GDP output is 3% of the Euro Union's GDP, while California makes up 13% of US GDP. The markets are waking up to the Greek problem--when will the financial press address California's fiscal challenges?


Many investors bullish on gold have allocated a significant position in the GLD Exchange Traded Fund (ETF). GLD conveniently tracks the spot price of gold well, but it should come with warning labels, in the form of the prospectus itself. I've blogged several precautionary entries on the potential hazards of owning gold paper certificates vs. the safety of possessing physical gold bullion and coins--especially in times of financial crisis. Read on.

Nothing contained in any materials should be construed as a recommendation to buy or sell any securities. I have not been compensated by any of the aforementioned companies. Perform your own due diligence. See sidebar for additional disclaimers.

Disclosure: no position in GLD.

Kelo v. City of New London
New London, a city in Connecticut, used its eminent domain authority to seize private property to sell to private developers. The city said developing the land would create jobs and increase tax revenues. Kelo Susette and others whose property was seized sued New London in state court. The property owners argued the city violated the Fifth Amendment's takings clause, which guaranteed the government will not take private property for public use without just compensation. Specifically the property owners argued taking private property to sell to private developers was not public use. The Connecticut Supreme Court ruled for New London.

Guess what eventually happened to the private properties seized? The entire project was canceled, because Pfizer pulled out due to budget cuts. Oops.

UK downgrade

The UK is about to join the ranks of downgraded sovereign debt.

FDA integrity
14. FDA routinely provides complete and accurate information to the public.
strongly agree 7% (64)
agree 40% (393)
no opinion 21% (210)
disagree 26% (251)
strongly disagree 6% (60)

15. I have been asked explicitly by FDA decision makers to provide incomplete, inaccurate or misleading information to the public, regulated industry, media, or elected/senior government officials.
frequently 1% (7)
occasionally 6% (60)
seldom 10% (96)

never 67% (660)
not applicable 17% (163)

16. I feel that FDA decision makers implicitly expect me to provide incomplete, inaccurate or misleading information to the public, regulated community, media, or elected/senior government officials.
frequently 3% (26)
occasionally 8% (74)
seldom 11% (104)

never 60% (586)
not applicable 19% (188)
In 2006, the Union of Concerned Scientists (UCS) and Public Employees for Environmental Responsibility (PEER) distributed a 38-question survey to 5,918 FDA scientists to examine the state of science at the FDA. The results paint a picture of a troubled agency: hundreds of scientists reported significant interference with the FDA's scientific work, compromising the agency's ability to fulfill its mission of protecting public health and safety.

Thursday, January 28, 2010

Money market redemptions

Everybody assumes the funds in their money market accounts are liquid--easily accessible with a click of mouse or keystroke. It's a convenient and safe place to park your cash, earning a small rate of return. In fact, it is treated as cash by most depositors and investors.

In the event of a financial crisis, that assumption is no longer true. Read on and be aware.

Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC's just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: "We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares."

Wednesday, January 27, 2010

Ted Butler on manipulation in the silver market

Never, in my 35 years of market observation, have I witnessed a more blatant manipulation. Make no mistake, this deliberate sell-off [in silver] is the handiwork of JPMorgan. This sell-off would not be possible were it not for their large concentrated short position. More upsetting is the apparent complicity of the CFTC in allowing the illegal manipulation of the silver market. The CFTC's probable involvement undermines the very concept of market integrity.
- Ted Butler, 26 January 2010

California is sinking

California is sinking...but it's not into the Pacific Ocean. It is collapsing due to the collective weight of unfunded liabilities from public employee pension costs. Even the most liberal California politicians agree on this.

Former Assembly Speaker Willie Brown, a well-known liberal voice, recently wrote this in the San Francisco Chronicle: "The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians—pushed by our friends in labor—gradually expanded pay and benefits . . . while keeping the job protections and layering on incredibly generous retirement packages. . . . [A]t some point, someone is going to have to get honest about the fact."

State Treasurer Bill Lockyer, another prominent liberal Democrat, told a legislative hearing in October that public employee pensions would "bankrupt" the state. And the chief actuary for the California Public Employees Retirement System has called the current pension situation "unsustainable."

Tuesday, January 26, 2010

2010 priorities

How much do you want to bet Obama's State of the Union address will address the top priorities in this poll? Of course, he must walk the talk...

The White House / Wall Street circle jerk

Pardon my Goldman Sachs French, but this would be theatre of the absurd, if it wasn't so tragic to our livelihood.

Commodities, basic metals, and precious metals

Here is a bullish case for basic metals and the increasing urbanization of the world's population, especially in emerging countries like China, India, and Brazil.

Here is an article on a shortage of physical silver coins.

The shortage of physical silver due to investor demand is openly acknowledged, as coin dealers are buying at prices ABOVE the spot price, and selling at even higher premiums. The spot price and prices on the COMEX futures do not reflect this physical shortage--yet. That's because the bullion banks are artificially suppressing the price of silver by shorting paper certificates via the SLV ETF, and shorting COMEX futures contracts. This fundamental disconnect between the prices of silver in the futures contracts and available physical inventory of silver will eventually be resolved, resulting in a soaring price. Price manipulation can only work so long before basic economic laws of supply and demand eventually materialize.

Disclosure: long silver mining shares.

Financial regulation

According to Jim Rogers, regulators caused the financial crisis, not lack of regulation.

Economics 101 from the 'hood

Keynesian vs. Austrian School of Economics

Deficit Reduction Commission will be a bust

Despite the necessity of reducing or even eliminating our federal budget deficit in order to maintain sound fiscal policy, I will wager the formation of a Deficit Reduction Commission, if enacted, will end up being largely impotent, as earmarking will de-fang any initiatives coming out of the commission.

It's a nice gesture to fiscal conservatives, but it will be just another bureaucratic boondoggle, corrupted by conflicting special interest groups.

John Embry on 2010 prospects

John Embry of Sprott Asset Management is bullish on gold and believes the allure of the USDollar as a safe haven is misguided.

Monday, January 25, 2010

Austrian School of Economics

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
- Ludwig von Mises

The true cost of closing failed banks

The FDIC's true cost of closing failed banks into receivership is much higher than initially calculated, thanks to the FASB's "pretend and extend" false accounting methods. This "cooking of the books" throws out GAAP "mark to market" accounting, and overstates the value of toxic assets, in an attempt to feign bank solvency. In the final analysis, this will just be another larger burden on the US taxpayer.

Jim’s Mailbox

Posted using ShareThis
Information released by the FDIC in connection with each new bank closing has been giving us a peek into the real condition of U.S. banks one year after the Financial Accounting Standards Board (“FASB”) suspended fair value accounting requirements. Across the board, we are seeing that banks have radically over-valued their least liquid assets on the basis of a fantasy called “hold to maturity.”

Banks’ fantasy valuations are put to the test when it becomes incumbent upon the FDIC to close the bank and protect depositors’ assets. At that stage, the FDIC has to find a willing buyer for the assets and fair market value is established. As a result, it is now costing the FDIC unprecedented amounts to close banks.

The problem actually goes one step further. As we know, the government’s current economic policy is one of Manipulation of Perspective Economics (“MOPE”) and Pretend and Extend. MOPE does not permit too much bad news to be released at any one time, and Pretend and Extend puts problems off to the future on a presumption that conditions will be quickly improving.

It would be too much bad news all at once to let it be known what banks’ fantasy-valued assets are actually worth. Therefore, instead of selling off banks’ assets “as is” and taking its lumps all at once, the FDIC is now routinely entering into loss-share agreements as to virtually all the assets sold. That allows the FDIC to not have to book the full extent of its losses at the time each bank is closed, but is also leading to the FDIC taking on the risk of huge future losses.

The FDIC is already broke, so any future losses it takes on are liabilities of the U.S. public. The combined policies of MOPE and Pretend and Extend are once again making it inevitable that quantitative easing must continue indefinitely.

New currency

The Chinese and Brazilians decided to trade in their own currencies, in a diversification away from a sinking USDollar. Then the Chinese and the Russians demanded a new world reserve currency, the IMF's Special Drawings Rights (SDR), which is an index of the USDollar, the Japanese yen, the Euro, the British Pound Sterling. With the closure of the gold window in 1971, SDR's are no longer pegged to gold.

The middle eastern petroleum exporting countries, the so-called the Gulf Cooperating Council (GCC), are creating a new currency, the Riyal, in an effort to sell their crude oil in a denomination other than the USDollar.

It seems every country is nervous about USDollar hegemony due to its plummeting value. Now even the banana republics are trashing the dollar, and welcoming the Sucre.§ionid=3510213

Folks, this is no longer science fiction. It's the real deal, and an indictment against the prodigious printing press of the US Treasury.


Our government financial experts really are clueless. The over-expansion of leverage and derivatives of collateralized mortgages caused our financial crisis. Now the broke FDIC wants to collateralize bad loans from collapsed banks, package them, and sell the securities to the markets. Talk of financial reform is utterly worthless if the causes of credit bubbles are misunderstood.

Our future is doomed by our government energy policies

Instead of securing energy resources, our government is obsessed with ideaology and populist rhetoric. Meanwhile, the Chinese are taking steps to secure their future.

Saturday, January 23, 2010

Illinois is broke

First California, now Illinois--bankruptcy is right around the corner for the Land of Lincoln.

Friday, January 22, 2010

The link between economic opportunity and prosperity

For those who question the advantages of a free society with personal property rights, please click on this link by the Heritage Foundation:

The limited role of government also factors into the economic freedom equation.

Global sovereign debt

This is a good assessment by Forbes Magazine of the world's sovereign debt problems.


Many observers know the FDIC is broke. Let's further examine the FDIC website to fully understand the ramifications of a bankrupt FDIC.


The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation's financial system by:

* insuring deposits,
* examining and supervising financial institutions for safety and soundness and consumer protection, and
* managing receiverships.

The insured banks themselves--not the US government--fund the FDIC. Even if their bank fees are increased, there is no way those fees will cover the funds required to close failed banks into receivership. Too many banks will collapse.

Which means the US Treasury will have to step in and bail out the FDIC. Which means it is on the US taxpayer again to subsidize the failures of bankers gone wild. Notice how this all flows down?

The most important financial link I've blogged

This may be a re-post, but it's the best article I've seen on central bank intervention in financial markets. It's long-ish, so skip the sublinks for now, and read the whole article first before clicking on the sublinks later to perform further research.

If this article doesn't jaundice you on markets and investing, you don't have a pulse.

Thursday, January 21, 2010

If the government can manipulate markets up...

they can certainly manipulate markets down with intervention in the derivatives markets, whether the underlying asset classes are equities or commodities (precious metals and energy).

Rigged markets force investors to become speculators--trying to front run big players, especially if the 800-pound elephant is Uncle Sam himself. Deciphering financial statements is no longer enough. There is no such thing as a free market anymore, and participants should understand that before venturing down into the deep end of the pool.

Fort Knox and conspiracy theories

Ft. Knox hasn't been independently audited since 1953 when Eisenhower was President. Many conspiracy theorists, including Ron Paul, believe the official numbers released by the Federal Reserve Bank are vastly overstated. GATA posits that each ounce of gold has been sold, swapped, or leased many times, as part of a surreptitious gold price suppression scheme, orchestrated by central banks with the help of bullion banks.

Even if the inventory numbers are true, Societe Generale believes the true value of gold is $6300/oz., based on USDollars floating in financial systems worldwide vs. above-ground gold tonnage.

As an aside, it was French President Charles de Gaulle who forced President Nixon to close the gold window, as the French wanted to redeem their USDollars for gold prior to 1971. Nixon had to end the gold standard, as the US Treasury had printed too many dollars to be backed by gold stored in Ft. Knox's vaults.

In any case, since the above-ground gold numbers are vastly overstated, $6300/oz. may be a conservative estimate for the price of gold.

Deficit Reduction Commission

Obama is forming a "deficit reduction commission"--with the charter of trying to reduce our exploding federal budget deficit. We all know how this is going to end up.

Recall the formation of the Department of Energy (DOE) by the Carter Administration back in the 1970's, in the midst of the Arab oil embargoes. It was created to reduce America's dependence on foreign crude oil. More than thirty years later, imports from oil-producing countries has more than doubled percentage-wise--from both friendly and not-so-friendly exporters. The DOE has obviously failed, as America is more vulnerable than ever to geopolitical supply shocks. Yet, the DOE has now grown into a multi-billion dollar cost center. It is a penultimate example of bureaucratic largesse.

In the same breath, Congress is planning to boost the national debt limit another $1.9 trillion, after raising the limit on December 28 (see zerohedge blog) to barely keep our country above water. The irony is deafening.

US could lose AAA credit rating

This threat has been articulated by this blogger a few times, despite the possibility being "unthinkable" by the mainstream financial press--at least until now. Fitch, one of the major credit ratings agencies, just issued a warning on the possibility of the US losing its AAA credit rating.

Fitch Ratings has issued the starkest warning to date that the US will lose its AAA credit rating unless acts to bring the budget deficit under control, citing a spiral in debt service costs and dependence on foreign lenders.

Bank of England warns of lower standard of living

One could argue the United Kingdom's finances are worse than the United States' debt-wise, but at least their central banker is honest about it.

Wednesday, January 20, 2010

Felix Zulauf on markets

His recent track record is impressive.

Wars and central banks

What most people do not understand is the relationship between the Federal Reserve and war. The Federal Reserve is responsible for every economic difficulty that afflicts our nation. Without a Federal Reserve creating fiat paper currency out of thin air, an empire could not wage continuous war. There is no clearer proof than evaluating major U.S. military conflicts prior to 1913 versus after the creation of the Federal Reserve. Between 1791 and 1913 (122 years) the U.S. engaged in only four major conflicts:

* War of 1812
* Mexican-American War
* Civil War
* Spanish-American War

Only the War Between the States can be considered significant and it was fought solely on U.S. soil. The Federal Reserve was created in 1913 by bankers in collusion with politicians in Washington DC. This private central bank, run by a cartel of major banks, has encouraged politicians to wage war. Continuous conflict enriches bankers, as all the money used to wage war is borrowed from them. This may explain why between 1913 and 2010 (97 years) the U.S. has engaged in eleven significant foreign conflicts:

* World War I
* World War II
* Korean War
* Vietnam War
* Grenada Invasion
* Panama Invasion
* Gulf War
* Somalia
* Kosovo War
* Afghan War
* Iraq War

Above and beyond these actual conflicts, we engaged in a 46 year Cold War with the Soviet Union that involved funding opponents to communism, coups, and assassination of foreign leaders. This Cold War was used as an excuse to station troops in over a 100 foreign countries, creation of the military industrial complex and creation of a secret spy agency, the CIA. Conveniently, when the Cold War ended with the collapse of the Soviet Union, a new amorphous war was created by politicians and their bankers. The nebulous War on Terror has been exploited to create the Department of Homeland Security and passage of the Orwellian Patriot Act, which allows the government to violate Americans’ right to privacy in the name of National Security. The War on Terror is used as the reason for invading foreign countries and using predator drones to blow up whoever our leaders feel is a threat. The cost for the War on Terror thus far has been $2.3 TRILLION. There are trillions more to be wasted because you can never win a war on terror. Who benefits from a never ending war on terror? Every dime of the $2.3 trillion has been borrowed. The beneficiaries of debt are bankers, as they reap billions in profits and pay themselves millions in bonuses. The money that is loaned to the government is then paid to the companies that constitute the military industrial complex. These companies then buy the support of Congress for their new and improved killing machines. This encompasses the circle of death in Washington DC.
- James Quinn

Obama's latest backroom deal

For someone who pledged to not crater to special-interest groups, the Obama administration sure isn't doing a good job of concealing it.

Democrats seem impervious to embarrassment as they buy votes for ObamaCare, but their latest move makes even Nebraska's Ben Nelson look cheap: The 87% of Americans who don't belong to a union will now foot the bill for a $60 billion giveaway to those who do.

Emerging from their backrooms, Democrats have agreed to extend a special exemption from the Cadillac tax to any health plan that is part of a collective-bargaining agreement, plus state and local workers, many of whom are unionized. Everyone else with a higher-end plan will start to be taxed in 2013, but union members will get a free pass until 2018.

Ponder that one for a moment. Two workers who are identical in every respect—wages, job, health plan—will be treated differently by the tax system, based solely on union membership.

Wall Street bonuses

Apparently Wall Street believes there is no moral hazard in paying out $100 billion bonuses--even as they struggle to remain solvent.

This should raise the ire of taxpayers and customers of Citigroup:
Citi, the last of the big banks to pay back the cash it received from the US government’s Troubled Asset Relief Program, is expected to clock up losses of about $8.5 billion.

Yet it is expected to pay out about $5 billion in bonuses to its investment bankers. It is expected to reveal it has paid its staff more than $30 billion in salaries, benefits and bonuses.

Meanwhile, much of America is either unemployed, underemployed, or barely hanging on to their jobs.

Tuesday, January 19, 2010

White collar crime in China

Crooked bankers, CEO's, and corrupt government officials are being executed, or are given life sentences in China. In the US, the perps are paying themselves billion-dollar bonuses.

Also last year, Li Peiying, the former head of the company that owns Beijing Capital International Airport, was executed after being convicted of bribery and embezzlement totalling nearly 16 million dollars.

The former head of oil giant Sinopec, Chen Tonghai, was sentenced to death in July after being found guilty of corrupt practices.

I wonder how many bankers and real estate developers they'll execute after the Chinese real estate bubble bursts.

Dire warning from former CBO heads

The Congressional Budget Office (CBO) provides objective, nonpartisan analyses on the nation's finances, so their economic growth projections tend to be more conservative than the Administration's. In other words, the CBO is the most credible and leading authority on the nation's accounting ledger.

A committee of three former CBO heads: June O'Neill, Rudolph Penner, and Robert Reischauer, among other experts, have published a report outlining the huge debt problems the US faces.

"The debt level of the United States is unsustainable, something has to give," said Rudolph Penner.

"The fundamental problem is that we have these three very large programs – Medicare, Medicaid and Social Security – that … are growing faster than tax revenues and faster than the economy," Penner told WND.

Studying the growth in three major entitlement programs – Medicare, Medicaid, and Social Security – the report, "Choosing the Nation's Fiscal Future," said spending was far outpacing tax revenue such that "any efforts to rein in future deficits must entail either large increases in taxes to support these programs or major restraints on their growth – or some combination of the two."

"If remedial action is postponed for even a few years, a large and increasing federal debt will inevitably limit the nation's future wealth by reducing the growth of capital stock and of the economy," the panel advised. "It will also increase the nation's liabilities to investors abroad, who currently hold about one-half of the federal government's debt."

"Increasing debt also may contribute to a loss of international and domestic investor confidence in the nation's economy, which would, in turn, lead to even higher interest rates, lower domestic investment, and a falling dollar."
Unless action is taken immediately, the study warned, the U.S. "faces the risk of a disruptive fiscal crisis."

It takes a FORMER government official to become honest, while current bureaucrats cheerlead non-existent green shoots.

When former government officials agree with me, I am longer a conspiracy theorist.

US refineries

I had a couple discussions last week with two men who work in refineries, one in Louisiana and Texas. Apparently, it's becoming increasingly difficult to operate a petroleum refinery in the Gulf states due to environmental pressures, shrinking profit margins and regulatory restrictions.

Refineries are an important link in our nation's energy chain, where crude oil is processed and refined into byproducts such as gasoline, diesel, asphalt base, kerosene, heating oil, and liquefied natural gas.

The US already imports too much crude oil from foreign countries, some with unstable governments, putting us at geopolitical risk. If more domestic refineries are forced offshore, we will become increasingly dependent on foreign sources of energy. Crude oil AND refined products would need to be imported. This will increase our exposure to supply shocks, and it will also inject a hidden, permanent tax on our energy sources.

Monday, January 18, 2010

Fannie Mae and Freddie Mac revisited

Notice how our government set the table for another Fannie and Freddie bailout--on Christmas Eve (chronicled here in a previous blog), when the world was busy celebrating peace, love and happiness.

The bullish case for gold

I will put my disclaimer upfront before attaching the link. The opinions of this author do not necessarily represent my opinions, and should not be viewed as financial advice. Always do your own due diligence, as investing is inherently risky, and investors can lose all their capital. Good luck to all.

Disclosure: long precious metals mining shares.

Frightening quote

Anybody find this quote disturbing--and too close to home?

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”

–Joseph Goebbels

2010 forecasts from Pollitt

Noah's Ark

From Casey's Daily Dispatch, a great punchline:
The Lord spoke to Noah and said, "In six months I am going to make it rain until the whole world is covered with water and all the evil things are destroyed. But I want to save a few good people and two of every living thing on the planet. I am ordering you to build an ark." And, in a flash of lightning, he delivered the specifications for the ark. "OK," Noah said, trembling with fear and fumbling with the blueprints, "I'm your man."

Six months passed, the sky began to cloud up, and the rain began to fall in torrents. The Lord looked down and saw Noah sitting in his yard, weeping, and there was no ark.

"Noah!" shouted the Lord, "Where is My ark?" A lightning bolt crashed into the ground right beside Noah.

"Lord, please forgive me!" begged Noah. "I did my best, but there were some big problems. First, I had to get a building permit for the ark's construction, but Your plans did not meet their code. So, I had to hire an engineer to redo the plans, only to get into a long argument with him about whether to include a sprinkler system.

"My neighbors objected, claiming that I was violating zoning ordinances by building the ark in my front yard, so I had to get a variance from the city planning board.

"Then, I had a big problem getting enough wood for the ark, because there was a ban on cutting trees to save the spotted owl. I tried to convince the environmentalists and the U.S. Fish and Wildlife Service that I needed the wood to save the owls, but they wouldn't let me catch them, so no owls.

"Next, I started gathering up the animals but got sued by an animal rights group that objected to me taking along only two of each kind.

"Just when the suit got dismissed, the EPA notified me that I couldn't complete the ark without filling out an environmental impact statement on Your proposed flood. They didn't take kindly to the idea that they had no jurisdiction over the Supreme Being. Then, the Corps of Engineers wanted a map of the proposed flood plan. I sent them a globe!

"Right now, I'm still trying to resolve a complaint with the Equal Opportunities Commission over how many minorities I'm supposed to hire. The IRS has seized all my assets claiming that I am trying to leave the country, and I just got a notice from the state that I owe some kind of use tax. Really, I don't think I can finish the ark in less than five years."

With that, the sky cleared, the sun began to shine, and a rainbow arched across the sky. Noah looked up and smiled. "You mean you are not going to destroy the world?" he asked hopefully.

"No," said the Lord. "The government already has."

CFTC and position limits

"The chairman of the Commodity Futures Trading Commission said that the agency's planned meeting in early March to discuss possible position limits on metal futures and options contracts will focus on gold and silver contracts."

Let's see if CFTC Chairman Gensler is serious this time.

This Reuters article does a decent job of capturing the CFTC's comments on concentrated position limits in the COMEX, but then lays an egg with this wrong conclusion:

"A review of possible position limits on the COMEX gold and silver market should not affect prices because of the vast physical spot gold market outside of the United States, traders said."

Um...reducing and enforcing position limits in the silver and gold market exchanges will cause prices on said precious metals to rise, as the bullion banks will no longer be able to execute their price suppression schemes. Regulating abusive price manipulation will expose the shortage of physical silver and gold bullion, as true market price transparency is achieved.

Nancy Pelosi in Copenhagen

Jack Cafferty: "Nancy Pelosi is a horrible woman."

Wednesday, January 13, 2010

Consumer confidence plunging--again

Despite promises of green shots by the Obama administration, mounting job losses and an economy stuck in reverse have resulted in a loss of consumer confidence. Perhaps people are opening up their Christmas shopping bills.

Editor's note: if I stopped posting negative blog entries on the economy, I wouldn't have anything to blog. I apologize.

A hunch...

Shares in gold and silver mining companies are surging higher today, even though the spot price of gold bullion has increased moderately. We'll see if this is a precursor to higher prices for both. See disclaimers on sidebar.

Disclosure: long precious metals and mining companies.

Japan about to implode

The huge debt load will finally crater Japan, sending shockwaves throughout the financial world, according to Dylan Grice of Societe Generale.

Tuesday, January 12, 2010

Why bankruptcy could be good for America

Perversely, I agree with this author.

A history of France--and hyperinflation

Open letter to the CFTC

The Commodity Futures Trading Commission (CFTC) is holding an open hearing this Thursday, January 14 to deliberate and possibly vote on position limits for commodity futures markets, specifically the COMEX. Enforcing hard position limits prevents a few powerful entities from cornering the market on a commodity, and reduces the effectiveness of price suppression schemes. In other words, large commercial traders like bullion banks and hedge funds won't be able to rig markets, as the playing field is kept even. Rigged markets are destructive because market participants eventually exit and never return.

In an apt analogy, if investors in 401K savings accounts knew the mutual fund markets were rigged and investors were losing money due to surreptitious gaming by insiders, those retail investors would no longer invest their savings in said mutual funds. Likewise, Ponzi scheme fraudsters like Bernie Madoff discourage all investors due to lack of transparency and oversight by regulatory bodies like the Securities and Exchange Commission (SEC).

The CFTC has a similar role--only they monitor the futures and derivatives markets. It's time they stopped turning a blind eye to the price manipulation endemic in the precious metals and energy exchanges.

Dear Sirs,

It is outrageous that JPMorgan is allowed to be short 40% of the COMEX silver market and 30% of world production. There should be hard position limits in the precious metals markets, just like position limits should be enforced in other commodities, including the energy complex. This prevents price manipulation by a few concentrated positions, and sheds transparency in markets. Exemptions should be closely scrutinized, and naked shorting outlawed.

If we are to have free markets with true price discovery, we need to enforce position limits in all markets. Otherwise, the market is rigged to the benefit of a few, and destruction of the majority. In that scenario, eventually the market shrinks, as participants exit.

The current Administration gained office with a message of change and transparency...and the end of corruption and deceit. Please do your part in enforcing position limits in all commodity exchanges--including precious metals.

It is much better to choose to do the right thing, then to have it forced upon you. The price manipulation of certain commodities has temporary effect, but the true supply/demand dynamics of any commodity will eventually come to fruition. It will be by stampede if the market-rigging tactics are allowed to continue. Naked short sellers will be exposed when demand for physical delivery is unmet.

The ball is firmly in your court. Thank you.

Monday, January 11, 2010

Traffic ticket

Record fines in Europe for traffic violations.

Europe slapping rich with massive traffic fines

The Associated Press
Sunday, January 10, 2010; 11:30 AM

GENEVA -- European countries are increasingly pegging speeding fines to income as a way to punish wealthy scofflaws who would otherwise ignore tickets.

Advocates say a $290,000 (euro203,180.83) speeding ticket slapped on a millionaire Ferrari driver in Switzerland was a fair and well-deserved example of the trend.

Germany, France, Austria and the Nordic countries also issue punishments based on a person's wealth. In Germany the maximum fine can be as much as $16 million compared to only $1 million in Switzerland. Only Finland regularly hands out similarly hefty fines to speeding drivers, with the current record believed to be a euro170,000 (then about $190,000) ticket in 2004.

The Swiss court appeared to set a world record when it levied the fine in November on a man identified in the Swiss media only as "Roland S." Judges in the eastern canton of St. Gallen described him as a "traffic thug" in their verdict, which only recently came to light.

"As far as we're concerned this is very good," Sabine Jurisch, a road safety campaigner with the Swiss group Road Cross.

Here are the true unemployment numbers

December, 2009 Unemployment

The US Bureau of Labor Statistics (BLS) official unemployment rate is 10.0%.

The BLS also tracks marginally attached and part-timers (underemployed), bringing the unemployment rate to 17.3%. accounts for discouraged workers who have given up looking for a job, bringing the unemployment figure to 21.9%.

Argentina's central banker

Didn't Federal Reserve Chairman Ben Bernanke and Time's Man of the Year attend Harvard?

Lies, lies, and more statistics

When is Obama's chief economist Christina Romer going to start telling the truth on the economy and employment? It's been one year of persistent lies every time she opens her mouth. How stupid does she think we are?

“We are getting closer to stability in employment. The next step is to finally start adding jobs,” Christina Romer, the head of the White House Council of Economic Advisers, said yesterday on ABC News’s “This Week” program. “I think we are on the path of steady progress.”
Really? The "path of steady progress"? How does she come up with these inane conclusions?

The Department of Labor’s latest unemployment report, which showed an unexpected loss of 85,000 jobs in December, was “somewhat of a setback,” Romer said, “but they are still part of this trend of greatly moderating job losses.”
This was unexpected? By whom?

As one way to pay for the changes, the Senate would impose a 40 percent tax on employer-provided insurance plans that exceed $8,500 for individuals and $23,000 for families...
Great--raise taxes on employers--that should help with reducing unemployment...

“We simply have to put in place rules of the road so that this system doesn’t bring this economy to the edge of collapse like it did a year or so ago,” she said.
Anybody care to wager we won't have another financial collapse?

Government jobs

"Why don't we just put everyone in the United States on the federal government payroll and call it a day?"
counters Rep. Jerry Lewis, R-Calif.

Chart courtesy of Tim Iacono

Hawaii is so broke...

they can't afford to have an election for one of their Congressional seats.

Venezuela devalues currency

This is what happens when a currency is devalued.

Hint: currency debasement is occurring worldwide by sovereign governments, including the US. It's done by either market forces or by government mandate--or both. Either way, consumer purchasing power and wealth is destroyed, even as debts are deflated.

How Harvard blew up

Lawrence Summers, former Harvard President and now Obama's lead economic adviser, almost drove Harvard's enormous endowment fund into insolvency by placing wrong-way bets on interest rate swaps. Now he's doing it again with our government finances.

The Ascent of Money--or Hooey?

Gold price suppression about to end?

Too many buyers are stepping up on the dip in gold prices to render gold suppression schemes successful. The tide has turned.

Ron Paul on auditing the Fed

So, we should never be afraid of competition. If gold is not good money, then nobody will deal with it. But I'm on the side of history with this one because paper money has never worked. It eventually goes to zero and people quit using it. But gold has survived for many, many centuries.

- Ron Paul, 1/8/10 Forbes interview

Government debt default

The American Enterprise Institute for Public Policy Research recently published a study that indicated that “by all relevant debt indicators, the U.S. fiscal scenario will soon approximate the economic scenario for countries on the verge of a sovereign debt default.” - David Einhorn, Greenlight Capital

Saturday, January 9, 2010

Biggest boondoggle of them all

The Biggest Financial Deception of the Decade

Jeff Clark, Editor, Casey’s Gold & Resource Report

Enron? Bear Stearns? Bernie Madoff? They’re all big stories about big losses and have hurt a lot of employees and investors. But none come close to getting my vote for the decade’s most dastardly deception...

First came Enron, with $65.5 billion in assets, going belly-up and becoming the largest bankruptcy in U.S. history at that time. Chairman Kenneth Lay said that Enron's decision to file bankruptcy would “stabilize the company,” but over the next five years the company was completely liquidated. The stock went from a high of $84.63 in December 2000 to a whopping 26¢ one year later.

And what had we been told by the media? Fortune magazine dubbed Enron “America's Most Innovative Company” for six consecutive years. A well-intentioned friend wanted to give me a gift subscription to the magazine for Christmas; I choked on my cocktail and luckily he assumed my drink was too strong. In the end, you can thank Enron for bringing us the Sarbanes-Oxley Act of 2002, a ghastly financial reporting regulation for which compliance is grossly expensive, and – stop the presses! – hasn’t prevented similar repeats.

Next came WorldCom filing for bankruptcy in 2002, their assets of $103.9 billion dwarfing Enron’s. “We will use this time under reorganization to regain our financial health and focus, while operating with the highest integrity,” assured CEO John Sidgmore. Was his eggnog spiked? Today, WorldCom stock certificates have been spotted as doilies under pancake house coffee mugs signifying it’s decaf.

Tyco, Adelphia, Peregrine Systems… it’s a crowded field around this time. But their stories of fraud and greed and mismanagement get boring after awhile. Just watch the closing credits from the movie Fun with Dick and Jane and you’ll see what I mean.

Bear Stearns set us all up for the Big Meltdown of 2008. It was B.S. (no, I mean Bear Stearns) that pioneered the asset-backed securities markets, and we all know how that turned out. Later we learned that as losses mounted in 2006 and 2007, the company was actually adding to its exposure of mortgage-backed assets, gearing itself up to 35:1. With net equity of $11.1 billion supporting $395 billion in assets, B.S. carried more leverage than a streetwalker’s push-up bra.

And during it all, Bear Stearns was recognized as the “Most Admired” securities firm in a survey by Fortune magazine (there’s that Lower Manhattan tabloid darling again). Frequent sightings of company executives on country club fairways assured the public that all was well. And CEO Alan Schwartz told us there was “no liquidity crisis for the firm” and insisted he “had the numbers to back it up.” His company was sold four days later to JPMorgan Chase at $10 per share, a 92% loss from its $133.20 high. Perhaps his numbers were prepared by ex-Arthur Andersen employees.

Lehman Brothers, the 158-year-old investment bank, was next and still today holds the title as the largest bankruptcy in U.S. history. L.B. succumbed to 2007’s Word of the Year, “subprime,” and its $600 billion in assets all went poof! In just the first half of 2008, before the meltdown, Lehman’s stock slid 73%.

And what did CEO Dick Fuld tell us in April of that year? “I will hurt the shorts, and that is my goal.”He must have been referring to the attire of his tennis club buddies, because the ones who actually got hurt were numerous other banks, money market funds, institutions, hedge funds, REITs, brokers, private and public trusts, foundations, government agencies, foreign governments, employees, and investors.

Moving on to the largest U.S. government bailout recipient by far, AIG’s troubles spawned my favorite placard of the decade: seen outside their Manhattan offices stood a sign that simply read, “Jump!” Maybe its creator heard what I did from AIG’s financial products head Joseph Cassano: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.”

He must have substituted his prescription eyewear with those giant New Year’s Eve glasses, because the government sunk $180 billion into the company and it still had to be split up and the assets sold to the highest bidder. I’m sure that his non-flippant comment had nothing to do with him making CNN’s “Ten Most Wanted Culprits” list in 2008.

GM, with $91 billion in assets, filed for bankruptcy in the summer of 2009 and is now largely owned by the U.S. and Canadian governments (i.e., taxpayers). The $19.4 billion in federal help wasn't enough to keep the nation's largest automaker out of bankruptcy. But don’t despair: the government is pouring another $30 billion into GM to fund “reorganization operations.”

GM shares? Bye-bye. For 83 years GM had been a member of the prestigious 30 Dow Industrial stocks. It managed to survive the Great Depression but not this decade’s Greater Depression. Yet chairman Ed Whitacre had insisted, “I remain more convinced than ever that our company is on the right path and that we will continue to be a leader in offering the worldwide buying public the highest quality, highest value cars and trucks.” I wonder what he thinks now that the stock is named “Motors Liquidation,” trades only on the pink sheets, and sells for about 50¢?

Topping off our list is the infamous Bernie Made-off (er, Madoff), who scammed $65 billion over 20 years from unsuspecting institutions and wealthy investors. But don’t be too upset, because the number is probably half that amount. Hey, the alleged size of the losses comes from his own ledger book, and should we really trust his balance sheet? Dubbed the largest Ponzi scheme ever, I beg to disagree, as you’re about to see...

By now you are probably wondering... what’s bigger than all these? He’s covered the major frauds and scams of the past decade – what could possibly be left?

To quote my favorite sleuth, Hercule Poirot, “When all the facts are laid before me, the solution becomes inevitable.”

Here are a few clues…

Federal Reserve Chairman Ben Bernanke said on July 16, 2008, that Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.” Then-Secretary Treasurer Henry Paulson declared on August 10, 2008, “We have no plans to insert money into either of those two institutions.”

►Both Fannie and Freddie were nationalized 28 days later, on September 8, 2008.

Ben Bernanke claimed on February 28, 2008, “Among the largest banks, the capital ratios remain good and I don’t expect any serious problems of that sort among the large, internationally active banks...” Henry Paulson added on July 20, 2008, that “It’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”

►Since the recession started in December, 2008, 144 banks have failed.

Paulson informed us on April 20, 2007, that “All the signs I look at show the housing market is at or near the bottom.”

►The number of foreclosures skyrocketed shortly thereafter and will now any day surpass those during the Great Depression.

Ben Bernanke announced on June 20, 2007, that “[The subprime fallout] will not affect the economy overall.”

►Less than one year later, the stock market crashed, losing 53% of its value, and is still down 25% despite one of the biggest bounces in history.

Those in charge of our country’s finances not only failed to see the crises developing and then bungled the handling of the recovery, they’ve deliberately misled us about what they’re doing to our currency. In spite of emphatic promises, flowery speeches, pat-on-the-back assurances, and continual reassurances, here’s what they’ve actually done to the dollar:

* Since September 1, 2008, the monetary base has ballooned from $908 billion to $2.0 trillion. The current monetary base is now equal to bailing out General Motors 23 times.

* Bailout funds in 2008 and 2009 total $8.1 trillion. That’s almost 78 WorldComs. It’s over 123 Enrons.

* U.S. debt has risen sharply, from $6.2 trillion in 2002 to $12.1 trillion today. That’s over $39,000 per citizen.

* David Walker, the comptroller general of the Government Accountability Office from 1998-2008, warned that the U.S. is on the hook for $60 trillion in unfunded liabilities. Independent analysts peg the figure at near twice that. Whatever the number, it is incomprehensibly large. The only way we will meet these liabilities is to print the money and inflate them away.

We’re bailing out corporations that should fail, making financial promises we can’t keep, and adding layers of debt we can’t possibly repay. And the real killer is, if we don’t have the cash, we just print it. It is, by any reasonable account, the “blunder that will plunder” the next several generations. It is changing America permanently, and the problems will persist long after you and I are laid to rest.

Bottom line: after all the bailout programs, housing initiatives, rescue efforts, stimulus schemes, bank takeovers, wars, unemployment benefit extensions, and numerous other promises, the biggest financial deception of the decade is what the U.S. government is doing to the dollar. Nothing else even comes close.

This reckless activity has spooked our foreign creditors, weakened our global standing, diluted our currency, is punishing savers and retirees, and ultimately sets us up for a level of inflation this country has never seen before.

Yet, what is the guardian of our economy and money telling us now?

“Will the Federal Reserve's actions to combat the crisis lead to higher inflation down the road? The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so. In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here.” (Ben Bernanke, December 7, 2009).

This is pure rubbish. If inflation could be controlled by just thinking stable inflation thoughts, then Ben should be able to grow a full head of hair by just thinking scalp follicle thoughts. This is so ridiculous, it’s insulting.

Government actions make a mockery of their words; what they say and what they do are diametrically opposed. It’s clear that inflation is not a question of if, but when.

Any level-headed individual has to conclude that there will be a steady – and likely accelerating – decline in the dollar’s purchasing power. It’s inevitable.

The great masses don’t quite understand it yet, but they will. There will be no escape from the cold, hard slap in the face the citizens will receive when higher levels of inflation arrive. And when it does, it will make a mockery of any opposing viewpoint.

So the question before you is simple: Will you be a prepared survivor for what lies ahead, despite what our government leaders tell us, or will you be a complacent victim of the biggest financial deception of the decade?

For me, there’s only one solution. Don’t kid yourself into thinking a man-made asset will protect your purchasing power. This is the time to be overweight gold and silver. I advise letting them serve their purpose for you.

Thursday, January 7, 2010

US is broke

Are there anymore skeptical Polyanna's who don't believe the US government is on the brink of bankruptcy? Read this tidbit on the national debt and the ability to fund it.

What's a billion?

A. A billion seconds ago it was 1959.

B. A billion minutes ago, the year was 1 A.D.

C. A billion hours ago our ancestors were living in the Stone Age.

D. A billion days ago no-one walked on the earth on two feet.

E. A billion dollars ago was only 8 hours and 20 minutes, at the rate our government is spending it.

What's a trillion? Don't ask.

Obama's brother-in-law isn't doing that well either

Craig Robinson, President Obama's brother-in-law, is having a tough first year as Oregon State head basketball coach. They lost to Seattle University 99 - 48. Seattle U. is no basketball powerhouse--they just moved up to Div. 1 basketball recently, and possess a 7 - 9 record.

It's probably safe to say the honeymoon period is over for both.

When to sell gold

Richard Russell on selling gold:
Question -- Russell, you've been bending our ears about buying gold ever since the year 2000. Out with it, at what point or at what level do I sell my gold or silver?

Answer -- An excellent and important question. The answer (and this may not surprise you) is that you NEVER sell your gold or silver. These precious metals are an integral part of your estate and net wealth. I don't care what the current price of gold is, gold represents unencumbered wealth.

Let me give you an example from the rich man's standpoint. The rich man accumulates and holds ten thousand ounces of gold. At one point (such as today) his gold holdings are worth $12 million dollars. He's still rich.

Then gold declines to a price of $700 an ounce during a crushing world deflation. Bankruptcies rule, and the price of anything and everything with debt against it has collapsed. At this point the rich man is holding $7 million worth of gold. The fellow is still very rich. Next comes a run-away inflation and gold climbs to $2500 an ounce. Here the fellow owns $25 million dollars worth of gold. Now he's almost embarrassingly rich, at least in relation to his neighbors.

You see the point. In holding ten thousand ounces of gold, this fellow is always rich, but let's call it shades of rich depending on the economy. So the rich man isn't trying to 'beat" or "out-trade" the gold market. He holds his gold as an eternal store of wealth though good times and bad.

Non-performing loans

Non-performing loans is banker-speak for bad loans. And when bad loans soar, it's an indication that the economy isn't doing so well (understatement of the year)...which means banks aren't doing well, either.

Buyer beware

Since tungsten has the same density as gold, some counterfeit gold bars and coins have been minted. Caveat emptor.

Wednesday, January 6, 2010

Hee Haw

Barton Biggs recommends moving to the country, buying some seed, growing your own food, and buying some ammo. Barton Biggs is not a wild-eyed survivalist, but he's starting to sound like one. He has an impressive track record for financial forecasts as a former Morgan Stanley chief economist.

China cornering the market on rare earth elements

Warning: adult language!

Put this in the "unintended consequences of the anthropogenic global warming hoax" bin. There is no doubt we should diversify away from petro-fueled middle eastern countries for our energy sources--for national security and economic reasons. But the transition should be orderly and measured. Because if the carbon-reducing extremist crowd has their way, the US will be plundered into the abyss.

Green technologies actually require natural resource elements that must be mined--tons of it, in fact. They are unfamiliar to most, except for those who can recite from the Periodic Table of the Elements. Rare earth elements (REE) like Neodymium, Lanthanum, Terbium, and Dysprosium are used in diverse applications as solar, wind, and eletric car batteries. The problem is China controls 97% of the world's supply of these REE.

So while China may outwardly reject carbon credit proposals, which aim to punish violators of carbon-emission thresholds (the "polluters"), they have hedged themselves by ensuring they control the components necessary for enabling green technologies.

"This is chess, it ain't checkers!"

Another Fed head fake

After declaring the end of quantitative easing (i.e., money printing) late in 2009, we see the Fed has done a 180 degree turn and left the door open for further stimulative easing. Plans to end purchases of US Treasury bonds were revealed late last year, as well as the planned termination of agency mortgage-backed securities purchases in March, 2010. Now the Fed is doing an about-face--in case the housing market and economy doesn't recover as planned.

Quantitative easing to infinity sure sounds like a recipe for inflation.

Gary Gensler on CFTC reform

With all due respect to Gary Gensler for being a bright, intelligent, and nice man, he's speaking out of both sides of this mouth. He seems like an ethical, reasonable person, but let's read between the lines. He's worked on Wall Street for 18 years with Goldman Sachs, an investment firm (and now commercial holding bank) with some of the smartest traders and arbitrageurs on the Street. They can influence, if not manipulate markets.

His rhetoric of enforcing concentrated position limits in the energy pits (and commodities markets, in general) is shallow, because manipulation of markets with outsized positions is exactly how the big commercial banks profit. The gold and silver COMEX exchange is home to some of the most grotesque short positions in a price suppression scheme obvious to everyone except the blind or captured. In other words, I'll believe the enforcement of CFTC position limits when I see it. Until then, see my disclosure.

Disclosure: long gold and silver mining shares.

PIMCO predicts UK bonds downgrade in 2010

Not that it took a genius, but PIMCO's Scott Mather predicts United Kingdom gilts (sovereign debt) will be downgraded in 2010. This will inevitably raise the cost of borrowing 100 basis points (1%) for England, further exacerbating their huge debt problems.

With downgrades in Iceland, Ecuador, Hungary, Dubai, Greece, Spain and Ireland, it's likely the UK will be joining that unpleasant party. In fact, many countries in Europe will share that fate, including EU member countries, putting pressure on the Euro.

Tuesday, January 5, 2010

China's insatiable appetite for gold

Redemption suspension

The words "suspend redemptions" evoked panic and fear in hedge fund investors in 2008 after Lehman Brothers collapsed. Insolvent hedge funds had to delay investor demands for redemptions because they lacked access to liquidity during the financial crisis. A credit freeze ensued, and no one trusted their counterparties who were equally insolvent.

Fine, hedge fund investors are allegedly savvy and required to understand the outsized risks and rewards of investment in hedge funds. An accredited investor needs to have a minimum income of $200,000 and a minimum net worth of $1 million, but most have income and net worth levels much higher than the minimum thresholds. They understand "high risk/high reward"--at least they're supposed to.

But the latest financial reform being pushed by the Obama financial team "to protect consumers" includes the following language: "suspend redemptions to allow for the orderly liquidation of fund assets." This clause is in direct conflict with Securities Exchange Commission (SEC) Rule 2a-7, which provides minimal risk, no volatility, and redeemability for money market funds. In other words, when the average Joe parks his money in a money market account, he expects miniscule interest earned, in return for the safety and liquidity of funds being instantaneously accessible via a computer keystroke or a visit to the bank teller.

What this "financial reform" clause does is allow financial institutions to NOT guarantee your request for cash withdrawal if financial markets are collapsing. In other words, how "safe" is your cash if you can't even access it in times of financial distress--or when there's a run on banks?

This is the same SEC which is chartered to protect investors from unscrupulous swindlers and regulate free, orderly markets. Given their dismal track record of protecting investors from the likes of Ponzi schemers Bernie Madoff and Allen Stanford, it should come as no surprise that savers and investors will become incredibly vulnerable should the next financial iceberg hit again.

Paul Tudor Jones

For those unfamiliar with Paul Tudor Jones, and this trading legend's track record, here is his wikipedia entry:

And here is a recent quote in an October 15, 2009 letter to his investors:
“I have never been a gold bug. It is just an asset that, like everything else in life, has its time and place. And now is that time.”

One must ask oneself: are these the words of a lunatic?

Deflation or inflation?

With much of the focus in the commodities sector on crude oil and the precious metals gold and silver, what's been somewhat lost among the mainstream media and audience is the surge in the "red" metal, copper. Since copper is used in many industrial, housing, and information technology industries, it's been dubbed the bellweather for economic activity and inflation.

The deflationists correctly claim economic activity is dormant in the US and other developed countries, but they are not accounting for the unintended consequences of the carry trade, where Fed easy monetary and interest rate policies are causing asset bubbles and booming economic activity in emerging countries such as China, India, and Brazil. In essence, the hot money is borrowing at 0% interest rates in the USDollar, and investing in commodities and equities in foreign currencies, hence driving asset values higher.

Deflationists also point to official consumer price index (CPI) numbers--benignly low at 0.1% in November, 2009, as further proof that inflation is not an imminent threat.

To which I say "hogwash", as the increase in copper and commodities prices overall reflect inflationary pressures. Banking lending has not returned to nominal levels and wage labor prices have not increased due to a loose employment market; these two scenarios should be keeping a lid on prices. But commodities prices continue to rise despite an absence of these two inflationary factors. When and if the two components do return, inflation could potentially soar due to the exploding monetary base and resultant increased money supply.

While I expect asset values in US housing and equities in certain sectors to continue to be under pressure, the Fed's easy money policies will continue to debase the USDollar, deteriorating the purchasing power of consumers.

Monday, January 4, 2010

David Einhorn of Greenlight Capital

David Einhorn, head of hedge fund Greenlight Capital, gives us his summary on currencies and gold. Early in 2009, he loaded up on the gold ETF GLD. Sensing a shortage of physical gold, he later traded in his shares of GLD for physical gold bullion. Rumors were he allegedly caused a run on gold futures contracts, as short sellers had difficulty filling orders for delivery of the gold bullion he purchased.

Four years ago I spoke at this conference and said that I favored my Grandma Cookie’s investment style of investing in stocks like Nike, IBM, McDonald’s and Walgreens over my Grandpa Ben’s style of buying gold bullion and gold stocks. He feared the economic ruin of our country through a paper money and deficit-driven hyperinflation. I explained how Grandma Cookie had been right for the last thirty years and would probably be right for the next thirty as well. I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long-term value as difficult to assess. However, the recent crisis has changed my view.

The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? Just because something hasn’t happened, doesn’t mean it won’t. Yes, we should continue to buy stocks in great companies, but there is room for Grandpa Ben’s view as well. I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money-printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.

A few weeks ago, the Office of Inspector General called out the Treasury Department for misrepresenting the position of the banks last fall. The Treasury’s response was an unapologetic expression that amounted to saying that at that point “doing whatever it takes” meant pulling a Colonel Jessup: “YOU CAN’T HANDLE THE TRUTH!” At least we know what we are dealing with. When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The Euro, the Yen, and the British Pound might be worse. So, I conclude that picking one of these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.

News alert: former IMF economist shoots old boss

That is not a misprint. It is not a gang-related shooting incident. It involves two IMF economists.

I wish I could make this stuff up.

Robert Rubin on the economy

Wow, Robert Rubin finally speaks, after stepping down from his perch at Citigroup. According to a few independent thinkers, Rubin was one of the main instigators in the cause of the financial and economic crises we find ourselves in. The former Treasury Secretary formerly headed up Goldman Sachs and Citigroup, encouraging banks to leverage up their balance sheets to increase dubious earnings via the use of derivatives, which ended up being toxic assets. We all know how that drunken party turned out.

His progeny in the ensuing bank bailouts include former Treasury Secretary Hank Paulson (also, formerly of Goldman Sachs), top Obama financial advisor Lawrence Summers, and current Treasury Secretary Tim Geithner, among other well-placed government bureaucrats and bankers.

The editorial actually gives fair warning to the approaching storm, even if it lacks any mea culpa for past misdeeds. I guess omission is a form of honesty.
First, there must be sound fiscal and monetary policies. The United States faces projected 10-year federal budget deficits that seriously threaten its bond market, exchange rate, economy, and the economic future of every American worker and family. Those risks are exacerbated by the context of those deficits: a low household-savings rate, even after recent increases; large funding requirements for federal debt maturities every year; heavy overweighting of dollar-denominated assets in foreign portfolios; worsened fiscal prospects in the decades after the current 10-year budget period; and competing claims for capital to fund deficits in other countries.

The conventional concern here is that private investment will be crowded out, which would result in a reduction of productivity, competitiveness, and growth. In addition, the very early 1990s showed that unsound fiscal conditions can have a symbolic effect that broadly undermines business and consumer confidence. But finally, and far more dangerously, our bond and currency markets could react with severe distress to fears about imbalances in the supply and demand for capital in the years ahead or about the possibilities of inflation. Those effects have been averted so far by a number of factors: large inflows of capital from abroad into Treasury securities; concerns about other major currencies; the low level of private demand for capital; and the psychological state of the market. But this cannot continue indefinitely, and change can occur with great force—and unpredictable timing.

Read Matt Taibbi's scathing article on Obama's big sellout and the pandering to big Wall Street bankers--at the expense and hoodwinking of tax payers. Robert Rubin is a central figure in the web of lies, deception, and pilfering.

Bubble in Treasury bond market?

Although the TBT exchange-traded fund (ETF) is not an efficient proxy for rising long-dated US Treasury bond yields, it is one of few investment vehicles available to retail investors.

TBT is a leveraged bet against the long Treasury ETF iShares Barclays 20+ Year Treasury Bond (TLT). It attempts to double the inverse of the returns of TLT, using options and futures contracts. Theoretically, if TLT rises 1%, TBT should decline 2%. Likewise, if TLT declines 1%, TBT should rise 2%. In essence, if 20+ Year Treasury Bond yields rise by a certain amount, the price of TBT should rise twice that amount.

The reason why TBT underperforms its intended goal of achieving these returns is due to performance drag from the derivative contracts of the UltraShort fund being rebalanced every day. This causes isotopic decay, so the ETF never reaches previous highs--even if the directional bet is correct.

The best way to profit from rising yields in long-dated US Treasury bonds it to short sell them in the futures market, which is unfeasible for most retail investors, due to volatility risk and excessive leverage.

In summary, the TBT ETF trade will be profitable short- and mid-term if long-dated bond yields increase, but it won't be as profitable as expected long-term. Of course, the best way to protect yourself from rising interest rates is to lock in historically low interest rates with a fixed-rate mortgage.

Disclosure: long TBT shares.

Sunday, January 3, 2010

FDIC gearing up for more bank closures

The FDIC is anticipating more bank failures, increasing their budget to $4 trillion and hiring more staffers.

Ben Bernanke on the housing bubble

Federal Reserve Chairman Ben S. Bernanke said low central bank interest rates didn’t cause the housing bubble of the past decade and that better regulation would have been more effective in curbing the boom.

Stunning. This is the same guy who totally missed the bursting housing bubble. And now he's absolving himself of any blame.

Saturday, January 2, 2010

Bank bailout fatigue

Tired of bank bailouts? The House has a 1,279 page financial reform bill which includes a clause allocating $4 trillion more for emergency funding in case banks collapse.

Treasury Secretary Tim Geithner also raised an additional $400 billion to backstop Freddie Mac and Fannie Mae, without Congressional appproval, conveniently implemented on Christmas Eve.

And with the federal budget deficit running out of control, and no investors willing to fund those deficits (except the Fed itself), they are now coming up with a new instrument in addition to overnight bank reserves, dubbed benignly as "term deposit facility." In essence, they are creating Federal Reserve CD's for member banks.

Many rightfully believe creating money out of thin air is inflationary, due to the printing of more USDollars. Another more dire scenario is hyperinflation, due to the more expansive creation of electronic currency via a computer keystroke.

In other words, the US Treasury can only print so many USDollars, as there are not enough trees. But it can certainly create more virtual currency through the miracle of computer technology. Turbo Tax Timmy's forefinger is developing carpal tunnel syndrome from all the keystrokes. Either way, the paper currency in your wallet is being devalued--on a much bigger scale. Protect yourself accordingly.