Tuesday, March 30, 2010

Beware of tax consequences from short sales

Each state handles it differently.

http://www.mercurynews.com/real-estate-news/ci_14766648

Truth has fallen

http://www.globalresearch.ca/index.php?context=va&aid=18339

Peak oil not just a theory

I've provided evidence for a while that the world will not run out of oil any time soon. What it will run out of is cheap and easy-to-find oil. The IEA continues to overstate crude oil reserves in the Middle east--mainly to counteract a panic buying frenzy on fears of a pending shortage.

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7500669/Oil-reserves-exaggerated-by-one-third.html

Meanwhile, the Chinese continue to strategically secure energy resources via direct purchases or investments in natural resource companies.

Bond markets under stress

I've been warning of this for since late 2008. The fixed-income markets dwarf the equities markets. If the bond market breaks, run for the hills.

http://www.ft.com/cms/s/0/c51fbbce-3908-11df-8970-00144feabdc0.html


The bond vigilantes are finally flexing their muscles. A long period of stability for the US government bond market showed signs of cracking this week as a lack of investor appetite for new debt sent the benchmark 10-year yield to its highest level since last June.

The term “bond vigilantes” was coined in the 1980s when bond investors pushed up long-term yields to force central banks into taking action to curb inflation. This time, bond investors are less worried about inflation: they are fretting about huge fiscal deficits and the looming bond supply needed to finance them.

“Everyone thought we would see rising rates due to higher inflation, but it appears the bond vigilantes are demanding a higher real rate due to concerns about Treasury issuance,” says George Goncalves, head of fixed income strategy at Nomura Securities.

Worries about the debt loads of developed economies have come into focus this year amid the crisis threatening Greece and other members of the eurozone periphery.

“The spotlight on Greece only helped to reveal that the US’s kitchen – with Federal and state budget balances – was itself full of cockroaches,” says William O’Donnell, strategist at RBS Securities.

Hit and Run--coincidence?

I blogged about a London whistleblower accusing JPMorgan traders of manipulating the silver market a couple days ago here:

A day after the story ran, the whistleblower was a victim of a hit-and-run incident.

http://www.nypost.com/p/news/business/jpmorgan_chase_story_in_uk_DsMN4PnXFoQG5KdevIsQ7N#ixzz0jZHvERAe

Coincidence?

Debt saturation and diminishing productivity


Click on chart to enlarge.

http://economicedge.blogspot.com/2010/03/most-important-chart-of-century.html
This is a very simple chart. It takes the change in GDP and divides it by the change in Debt. What it shows is how much productivity is gained by infusing $1 of debt into our debt backed money system.

Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.

Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!

This is mathematical PROOF that debt saturation has occurred. Continuing to add debt into a saturated system, where all money is debt, leads only to future defaults and to higher unemployment.

This is the dilemma created by our top down debt backed money structure. Because all money is backed by a liability, and carries interest, it guarantees mathematically that there will be losers and that the system will eventually reach the natural limits, the ability of incomes to service debt.

Spin? What spin?

http://www.scl.cc/src/what-we-do.html

ECU Group's Philip Manduca on the tipping point

Philip Manduca discusses socialism, Greek debt, the euro, the USDollar, equities, the US Treasury market, and the yen.

http://www.cnbc.com/id/15840232?play=1&video=1451117844

Monday, March 29, 2010

Abu Dhabi sovereign fund manager missing after plane crash

http://edition.cnn.com/2010/WORLD/meast/03/27/investment.fund.missing/index.html?eref=edition

The Abu Dhabi Investment Fund is believed to be among the largest in the world, if not THE largest. Having said that, the fund lost billions in the aftermath of the banking and financial crisis. Comments?

Saturday, March 27, 2010

Silver manipulation in progress

A whistleblower gave advance warning to the CFTC, the regulatory body which watchdogs the futures markets, about an illegal manipulation scheme about to take place in the silver market at the COMEX exchange. The price action behaved exactly as scripted on the target date, February 5, 2010, when non-farm payroll numbers were released at 8:30 AM ET. Within a few minutes, the price of silver then experienced a waterfall decline.

When allegedly free markets are that predictable with that much precision, then they are no longer free--rather they are rigged.

Read the series of emails chronicling the correspondence between whistleblower Andrew Maguire and the shiftless CFTC regulator.

http://www.gata.org/node/8466

IMF refuses to sell its gold to Sprott Management

http://www.zerohedge.com/article/imf-now-rejecting-prospective-buyers-its-gold-stash

Niall Ferguson on sovereign debt (repeat)

This is a repeat blog from last month, but I'd like to highlight one paragraph.

http://www.ft.com/cms/s/0/f90bca10-1679-11df-bf44-00144feab49a.html?nclick_check=1


Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Bill Gross bearish on bonds

http://www.bloomberg.com/apps/news?pid=20603037&sid=aBgdtQr3KDNc

Friday, March 26, 2010

The Haiti handshake

...and Presidential wipe.



http://www.youtube.com/watch?v=0DtwkTS9mq8

Cuba's Castro applauds US healthcare reform

Not exactly the type of endorsement the Obama administration was looking for.

http://finance.yahoo.com/news/Cuban-leader-applauds-US-apf-124808403.html?x=0&.v=1

Debt problems concern Greenspan

Now that Alan Greenspan is no longer Fed Chairman, he's speaking out on the huge debt burden.

http://www.bloomberg.com/apps/news?pid=20601068&sid=a77tZkPI2DT4

Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television.

“I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”

“I don’t like American politics and what’s happening,” Greenspan said.

Historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow,” he said. “That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.”

Law of diminishing returns on debt creation

http://3.bp.blogspot.com/_m5i6pLhlNWU/S6yxP5cpeOI/AAAAAAAABpk/tlIGh2oQI7g/s1600/GDP4QTCMD4Q.JPG

GATA's written testimony on price suppression

http://www.capitolconnection.net/capcon/cftc/032510/Presentations/Panel%203/March%2018%20%20FINAL%20CFTCLetterCP-03-18-2010.pdf

Initially we thought that the manipulation of the gold market was undertaken as a coordinated profit scheme by certain bullion banks, like JPMorgan, Chase Bank, and Goldman Sachs, and that it violated federal and state anti-trust laws. But we soon discerned that the bullion banks were working closely with the U.S. Treasury Department and Federal Reserve in a gold cartel, part of a broad scheme of manipulation of the currency, precious metals, and bond markets.

It has been possible to extrapolate that the two banks that hold these large manipulative short positions on the Comex are JPMorgan Chase and HSBC because of their huge positions in the OTC derivatives market, whose regulator, the U.S. Office of the Comptroller of the Currency, does not provide anonymity when it publishes market data. 6 In the first quarter 2009 OCC derivatives report, JPMorgan Chase and HSBC held more than 95 percent of the gold and precious metals derivatives of all U.S. banks, with a combined notional value of $120 billion. This concentration dwarfs the concentration in the gold and silver futures markets and should raise great concern about the lack of position limits on the Comex.

GATA has evidence that there are huge physical short positions in the gold market that cannot be covered. Growing stress caused by burgeoning physical bullion demand is threatening to lead to a price explosion, which will restore to the market the balance that regulation has failed to maintain. In our view, the Comex paper market will become dysfunctional, with “force majeure” having to be declared as the concentrated shorts are unable to deliver on their obligations.

Testimony of a precious metals COMEX trader

http://www.capitolconnection.net/capcon/cftc/032510/Presentations/Panel%202/CFTC_Metal_Testimony_Epstein_2010-03-25_final.pdf
The size of the open interest in COMEX silver is irresponsibly large, given the reality of world inventories and production. Additionally, there is a significant imbalance between the largest long positions and the largest short positions, with the shorts being heavily concentrated. In a physically delivered futures contract for a commodity of finite-supply, this also exposes the marketplace to an unnecessary risk of failure-to-deliver. Such an event could destroy the COMEX silver market.

JPMorgan bullion traders implicated in price manipulation

http://beforeitsnews.com/news/27781/A_London_trader_walks_the_CFTC_through_a_silver_manipulation_in_advance.html

Wednesday, March 24, 2010

Starvation already hitting parts of Europe

http://www.zerohedge.com/article/john-taylor-worlds-largest-currency-hedge-fund-sees-euro-dropping-120-august

These are what "austerity measures" yield.

Obamacare will bankrupt us, according to former CBO Director

http://moneynews.com/StreetTalk/Obamacare-Bankrupt-Us-DouglasHoltz-Eakin/2010/03/24/id/353700

Portugal next

Like clockwork, the "P" in the "PIIG" European countries--Portugal, is about to roll over due to sovereign debt problems. This is like watching a developing train wreck in slow motion.

http://www.businessweek.com/news/2010-03-24/asian-stocks-rise-on-strengthening-global-economy-euro-falls.html

Guns, butter, and gold

I originally read 50,000 prisoners would be released early last year, but it looks like 24,000 will get their wish.

http://cbs13.com/local/parole.easy.california.2.1586031.html


Actually, I'm all for decriminalizing drug possession. It'll reduce the prison population, which is fine if the violations were non-violent. It'll also reduce the profit margins of the drug trade.

Disclosure: I do not condone use or abuse of controlled substances. I just think we should end the prohibition of recreational drugs. It didn't work for alcohol, and it's not working for controlled substances.

State pension shortfallexceeds $1 trillion

The pension shortfall for all US states reached $1 trillion in mid-2008, and some estimate the figure is closer to $2 trillion.

http://www.bloomberg.com/avp/avp.htm?N=video&T=Pew%20Center%27s%20Urahn%20Interview%20on%20State%20Pension%20Shortfalls%20&clipSRC=mms://media2.bloomberg.com/cache/vWSPXqYptlbE.asf

Adrian Douglas pre-CFTC hearing

https://marketforceanalysis.com/index_assets/CFTC%20HEARING%20ON%20METALS%20MARKETS.pdf
SUMMARY
1) Comex data show that the price of gold and silver are suppressed
2) There is a direct correlation of price suppression and the positions of two US
banks
3) The Bank Derivatives Reports from Treasury Dept. Office of the Comptroller
of the Currency (OCC) indicates these two banks are JPMorgan Chase and
HSBC
4) Appropriate enforcement action is required

Boring markets

The foreign currency, equities, and commodities markets have been in a trading range lately, with reduced volatility (the VIX is below 17, at 2-year lows). But with so many potential catalysts for significant moves on the horizon, a long options straddle may be a fruitful strategy.

See sidebar for disclaimers.

Disclosure: no options position.

NYC looking at major cuts

Unless the state of New York receives bail outs, New York City will have to undergo major cuts in public services, including laying off thousands of cops, firemen, and teachers.

http://wcbstv.com/local/nyc.budget.cuts.2.1583545.html

Bart Chilton on position limits

https://research.tdwaterhouse.ca/research/public/Markets/CommoditiesNews?documentKey=1314-N23256396-1

The rhetoric from Bart Chilton is positive, but we'll see if CFTC Chairman Gary Gensler concurs.

Tuesday, March 23, 2010

CFTC and position limits this Thursday

Thursday, March 25 could be a historic date for precious metals investors, as the CFTC will hold a hearing on position limits and exemptions.

http://agoracom.com/ir/Crystallex/forums/discussion/topics/409676-is-pog-s-manipulated/messages/1350508#message

Let's hope CFTC Chairman Gary Gensler takes the proper path. I have my doubts, because the bullion banks have had free reign to manipulate the precious metals pits forever, and Gensler's history at Goldman Sachs leads me to believe it will be business as usual at the CRIMEX-er, COMEX.

High fructose corn syrup contributes to obesity

http://www.princeton.edu/main/news/archive/S26/91/22K07/index.xml?section=topstories

Time to end the corn subsidies, dontcha think?

Bailout song

Econ 101--only more entertaining. School is in session.



http://www.youtube.com/watch?v=dnT21hmlT4o&feature=player_embedded

Peter Schiff revisited



http://www.youtube.com/watch?v=9H3mSTsly5M&feature=player_embedded

Government mandate

Since Congress has passed a healthcare reform bill which would require healthcare insurance under penalty of fine, they should also mandate every US resident, legal or otherwise, to purchase a firearm. Surely that would create jobs in the firearms industry. The government could provide compelling evidence of how firearms saved victims from assailants, and cite research studies indicating employment growth due to gun ownership for every American man, woman and child.

And then they can further mandate purchase of every single product Wal-Mart has to offer--because, well, it's every American's right to purchase Wal-Mart products.

The lunacy continues.

More quantitative easing

As predicted, and against a backdrop of Fed-speak about "exit strategies" several months ago, the Fed is continuing to implement quantitative easing, i.e., printing money out of thin air. The Fed will do everything in its power to avoid another Greek "austerity" situation, delaying the inevitable currency crisis as long as possible.

Treasury Secretary Tim Geithner has also declared the US government will never lose its AAA credit rating. Moody's, the credit ratings agency, says the possibility is very real, due to soaring debt levels and deficits. Fed Chairman Ben Bernanke, former Treasury Secretary Hank Paulson, and former New York Fed Governor Geithner completely missed the housing bubble, financial crisis, and deep recession in their testimonies. Why should any of us believe them now?

http://2.bp.blogspot.com/_m5i6pLhlNWU/S6eXGjhi9yI/AAAAAAAABnk/zhzzZADs7kU/s1600-h/BOGAMBSL.JPG

Financial reform, North Korean-style.

http://edegrootinsights.blogspot.com/2010/03/north-korean-finance-chief-executed-for.html

Why and What are Geithner and Bernanke hiding?

http://www.huffingtonpost.com/2010/03/22/new-york-fed-warehousing_n_508443.html

Sunday, March 21, 2010

Bernanke wants to eliminate reserve requirements

It's on the Fed's website, buried in footnote 9.

http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm#f9

Since I'm speechless, here is commentary on Bernanke's testimony.

http://finance.yahoo.com/tech-ticker/bernanke-wants-to-eliminate-reserve-requirements-completely-yftt_444354.html

Bullion Management Group

http://www.bmgbullion.com/document/682

Click on charts to enlarge.





The Plunge Protection Team at work again

I've blogged about the President's Working Group on Financial Marks a few times in the past. It was created by President Reagan with Executive Order 12631 as a means to short-circuit a financial market meltdown, in response to the 1987 stock market crash.

The President's Working Group was dubbed the Plunge Protection Team (PPT) by Washington Post writer Brett Fromson in this 1997 article.

This recent article concludes the PPT has been working overtime to prop up the equities market since March of 2009.

http://finance.yahoo.com/news/What-or-Who-is-Driving-up-etfguide-1348236303.html?x=0&.v=1


The significance isn't that the PPT exists--it's decreed in the Executive Order, after all. The fact that it's an article that has surfaced on Yahoo Finance means the PPT is no longer a figment of the imagination of conspiracy theorists, but is now being exposed to mainstream financial pundits. I will leave it up to readers to form their own judgments on the implications on financial market rallies and the overall economy. Even the phrase "jobless economic recovery" is an oxymoron.

Lehman whistleblower letter

http://blogs.wsj.com/deals/2010/03/19/breaking-news-here-is-the-letter-at-the-center-of-the-lehman-report/

British unemployment rate is 25%

As bad as the employment figures are in the US, the UK has it worse. The implication is that quantitative easing won't end, despite the Fed's plan to abort purchasing of US Treasury bonds and agency mortgage-backed securities. In other words, until the employment picture improves, attempts to stimulate the economy will continue.

http://www.telegraph.co.uk/finance/jobs/7465199/Quarter-of-adults-out-of-work-official-figures-show.html

Banks with troubled loans

This is a list of banks with high troubled asset ratios.

http://www.msnbc.msn.com/id/29619237/ns/business-economy_at_a_crossroads/


As a back drop, the FDIC insures deposits when a bank enters receivership (i.e. is closed down). The FDIC itself is in the red. Draw your own conclusions.

$50 billion loss is a drop in the bucket

According to some at investment bank Lehman, now bankrupt, a $50 billion loss is a "drop in the bucket." Someone look up the word "hubris" in the dictionary. Add "sociopath."

http://nymag.com/daily/intel/2010/03/lehman_executives_nonchalant_a.html

Wednesday, March 17, 2010

ARNA 4th quarter earnings

http://www.reuters.com/article/idCNN1225473220100312?rpc=44

Arena Pharmaceuticals Inc (ARNA.O) expects to launch sales of its weight loss drug -- alone or with a partner -- within 12 weeks of U.S. regulatory approval, according to the company.

Shares are up 10% today.

Disclosure: long ARNA shares.

Moody's puts US AAA credit rating in question

One could argue the US government is already insolvent. Is it coincidental that Berkshire Hathaway's Warren Buffett is reducing its holdings in Moody's, the credit ratings agency? Berkshire, the American icon of capitalism, itself was recently downgraded.

http://www.nytimes.com/2010/03/16/business/global/16rating.html

Tuesday, March 16, 2010

Dan Norcini's commentary

There is no such thing as a jobless recovery, despite what the government spins. Either it's an economic recovery--or it's not.
Bonds are strangely higher today when one considers a yearly high in the S&P 500 and a general reflation trade. I have given up attempting to figure that market out as it is undoubtedly so heavily intervened in by the monetary authorities that the signals it gives off are dubious. One would think that with gold moving higher today and the Dollar lower that the last thing that would be moving higher is the bond market. After all, if the economy is so damned good that the equities can put in a yearly high leading one to believe the chatter that the Fed is moving towards draining excess liquidity because things are so peachy-keen, then why would money be flowing INTO and not OUT OF bonds.

In the meantime, don’t worry about a single thing – bankrupted states, financially impoverished towns, townships, counties and cities, falling tax revenues, chronically high underemployment rates and federal government spending that can only be described as a treacherous betrayal of the next generation of citizens – none of this is important – the only thing that matter is that the stock market is higher so all is well. Let the good times roll baby!

House may try to pass Senate health-care bill without voting on it

The title of this article says it all.

http://www.washingtonpost.com/wp-dyn/content/article/2010/03/15/AR2010031503742.html?hpid=topnews

Sovereign funds no longer buying US Treasuries

http://www.bloomberg.com/apps/news?pid=email_en&sid=avsB.BdWGdIE
“Foreign central banks stopped buying Treasuries in January,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “If this were to continue, if China were to stop recycling its dollars into U.S. Treasuries, it could have dire implications for Main Street America in that mortgage rates could move higher.”

Thursday, March 11, 2010

Ludwig von Mises on credit expansions

Ludwig von Mises from the Austrian School of Economics has the following thesis on credit expansions (and busts):

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. 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 the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Tuesday, March 9, 2010

Bud Conrad on sovereign debt


His notes:

We have gone through 3 of 4 predictable ordered phases:

1) Credit Bubble (everywhere, even subprime);

2) Credit Crisis from the bubble burst;

3) Massive Bailout, with the government absorbing the bad credit going into debt to lift the collapsing private sector, keep politicians in power, and support industries slopping at the government trough;

Leaving us with one more logical extension:

4) Currency Crisis. The massive government debt can't be paid off, confidence in the dollar will weaken more, and the eventual result will be repudiation of the debts that can't be paid. That is the step that comes after the Banking/Financial/Credit Crisis.

In our case, it is assured by the accumulated trade deficit on top of the government deficit. I was trying to give some parameters about that toward the end when Brian was asking for a time frame. The fact is that I don't know when, but I'm confident it will happen; in part because no one is worried about it.

The Chinese shunning of gold?

Not according to Dan Norcini:

Gold put in an impressive performance today from where I sit battling back from a barrage of selling linked to the ridiculous story circulating around the market today that China was not interested in buying gold. That initially emboldened the raiders at the Comex and sent the lemmings packing and heading for the hills before saner minds prevailed who began buying into the weakness. The result was a strong bounce from important technical support near the $1,110 level (see the chart for a view and read the comments there).

Let’s state the obvious here – the Chinese NEVER announce their intentions beforehand. Do the investors/traders in this nation believe that they are stupid? Anyone who follows the soybean market can attest to this. As we mentioned last time a story appeared announcing China’s intention to buy the remainder of the IMF gold sale; such a thing would be very uncharacteristic for them. After all, we are not dealing with a Gordon Brown here (the Prime Minister of England who at the time he headed the Treasury there announced beforehand his intention to sell England’s horde of gold thereby guaranteeing that the citizens of his nation would receive the lowest possible price). Rest assured that China has no intention of saying the least thing positive about gold purchases knowing full well that they will create a stampede of buying into the market which would guarantee them the worst possible purchase price.

You might recall that after copper collapsed from over $4.00 all the way down to $1.25 that it was not until it had recovered quite nicely off the bottom that word leaked out that China had been accumulating the red metal for its strategic stockpiles. Did China come in and announce beforehand that they were going to buy gobs of copper? Of course not –it was only after the market began moving higher and kept moving higher and traders were speculating as to what was going on that the truth came out. I remember full well the comments from the analysts at the time who were dumbfounded by the fact that the metal kept moving higher in the face of a collapse in the US housing market and an abrupt shutdown of the US economy. They were all sitting around scratching their heads trying to come up with reasons why the market was going up and not down.

It will be exactly the same for gold. China will buy it and you will not know it UNTIL AFTER THE FACT. The price chart will tell us when the buying is occurring but it will not tell us who is buying. I repeat, the East does not announce their intentions until after the fact. They will accumulate the metal on price weakness whenever Western-based hedge funds are in the process of selling it. If I had to bet on these funds against China, my money would be on the Chinese.

One last comment about this matter – China is still reeling from the fact the India beat them to the market on their gold buys late last year. And do not forget that India is going to be adding more gold to their official reserve holdings at an appropriate price level.

Even if you leave the Chinese out of the gold market – gold has not been making all time record highs in terms of the Euro and the British Pound and 30 year highs in terms of the Swiss Franc because China might or might not buy the metal. It has been doing so because it is functioning as a currency without any obligations attached to it. In other words, China’s actions in the gold market have nothing to do with gold’s string of all time highs in these major currencies. It is fear, uncertainty and a desire for a safe haven that have fueled the metal’s rise. China is just an added bonus which will serve to keep a floor under the metal on price retracements.

It looks to me like it's just another head fake--this time thrown by the Chinese to throw speculators and other sovereign governments off their trail.

Disclosure: long gold mining shares.

Monday, March 8, 2010

Man bulldozes his own home

He bulldozes his home about to be foreclosed on.

http://www.youtube.com/watch?v=a_2HTKodv10

Sunday, March 7, 2010

Obama budget is optimistic

I would argue Obama's budget forecast is unrealistic. The CBO numbers will prove to be optimistic as well--government economic projections always are--even if "independent."

http://www.bloomberg.com/apps/news?pid=20601087&sid=abu_W64CzGy4&pos=8

Saturday, March 6, 2010

Margaritaville

Since March Madness is upon us, I thought I'd take this opportunity to offer up my own version of spring break:



May your NCAA brackets be kind to you.

Toxic derivatives explained clearly

Jim Sinclair gives a witty, metaphorical explanation for toxic derivatives.
The FDIC is going to cure the problem below by securitizing seized assets and selling them to the public. We are truly lost!

An Easily Understandable Explanation of the Derivatives Markets

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi’s "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit.

By providing her customers’ freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.

Now, do you understand?

Friday, March 5, 2010

Excerpt from "No One Would Listen"

This is an excerpt from Harry Markopolis' book "No One Would Listen". He was the whistle-blower in the Bernie Madoff ponzi scheme case.

http://today.msnbc.msn.com/id/35606057/ns/today-today_books/


My belief is that we have regulations in place to minimize fraud. It's the regulators who need to enforce the laws.

US external debt


Click to enlarge.
This chart is from Chief Economist Bud Conrad from The Casey Report.

Thursday, March 4, 2010

Competitiveness and jobs

Has America lost its competitiveness? And is this why jobs are migrating offshore?

http://www.nytimes.com/2010/03/03/opinion/03friedman.html?hp#

Tuesday, March 2, 2010

Wall Street hustle

This is an excellent article by Rolling Stone's Matt Taibbi on how "banks too big to fail" and our government are raping and pillaging its tax-paying citizens. It's long, but it's a MUST READ.

http://www.rollingstone.com/politics/story/32255149/wall_streets_bailout_hustle/1

Bank of England Governor quote

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K." Eddie George, Bank of England Governor to Nicholas J. Morrell

Nah, central bankers don't manipulate markets, do they?

Beware of fake gold bullion

With the decade-long surge in gold prices, it's inevitable that gold counterfeits are proliferating. Some conspiracy theorists believe even official central bank gold inventories include tungsten, which has the same density as gold, and therefore harder to detect when embedded inside gold bullion bars.

Since the largest central bank of all--the Federal Reserve Bank, has not had an independent audit since 1953, who knows how much gold resides in Ft. Knox and the official US government mints. Add to the list of suspicious gold inventories at the COMEX and LBMA vaults, as well as the gold ETF's, which are allegedly backed by physical gold.

There is a growing disconnect between the countervailing forces for pricing: paper gold contracts are constantly sold short by the bullion banks in futures exchanges, while demand for physical demand remains high, propping up prices. Something has to give, and it will eventually.

Meanwhile, watch this video on how tungsten-filled gold bullion is detected.

http://www.youtube.com/watch?v=ZKczs-7BFRI


According to jsmineset.com:
BullionAnalysis LLC has developed a technological application that is unique to the precious metals market, for the purpose of determining if your bullion has been counterfeited by including tungsten alloy. This technology is completely safe and non-destructive to the precious metal, and will be effective on everything from fractional ounce coins all the way up to the full size 100, 400 and 1,000 ounce COMEX bars of gold and silver.

Their technological application has been developed in response to the growing threat to the bullion community from tungsten/lead alloy adulteration. Tungsten (19.25 g/cm3 density) has a density nearly identical to gold (19.32 g/cm3 density), and lead (11.35 g/cm3) will have a density very close to pure silver (10.45 g/cm3). Lead can also be alloyed with lighter elements to match even closer the density of silver. The threat arises from unscrupulous individuals and possibly institutions that have been removing precious metal from the center of bullion bars and replacing it with tungsten or lead alloy. Modern computer-aided machine tools are then used to seamlessly re-smooth the surface of the bullion product to hide any trace of the theft that has just happened.

Traditionally, the use of a density calculation (mass divided by volume) has been the solution to verify the assay purity of bullion. Unfortunately the insidious use of tungsten and other alloys that match the densities of gold and silver make this test completely useless for this type of problem.

Their new detection technologies are unique to the bullion market. They can detect tungsten/lead and other impurities and cavities that are hidden at any depth inside the bullion product and it is 100% completely non-destructive and safe.

In addition, they are able to produce tamper-resistant holographic-sealed assay certificates with the analysis results for the bullion item, that bear a digital image of the bullion product and show the serial number and hallmark if present. These tamper-resistant assay certificates could then trade with the bullion product and give both buyers and sellers a sense of real security.

At the present time they are focusing their efforts on delivering this service to depositories and institutions and plan to expand their services to cover retail gold and silver investors in the near future.

Alan Greenspan quotes

Former Federal Reserve Bank Chairman Alan Greenspan quotes:

Before he was Fed Chairman:
"In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. ... This is the shabby
secret of the welfare statists' tirades against gold. Deficit spending
is simply a scheme for the confiscation of wealth. Gold stands in the
way of this insidious process. It stands as a protector of property
rights. If one grasps this, one has no difficulty in understanding the
statists' antagonism toward the gold standard." - Alan Greenspan, 1966, pre-Fed Chairman.

Post-Fed Chairman:
“Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies… What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment."
–Alan Greenspan, 9 September 2009


This is in stark contrast to what he was saying during his multiple appointments as Fed Chairman. And his easy money, zero-interest rate policies mirror what current Fed Chairman Ben Bernanke is endorsing today. But the Fed is allegedly unbiased and independent, right?

Deep Capture and bear raids

It's a longish read, and has raised the ire of many financial institutions, but this article exposes the underbelly of Wall Street and its accomplices, including mainstream financial media icons like CNBC and Jim Cramer. deepcapture.com is a highly recommended read, one which reads better than a spy novel--only it's not fiction.

http://www.smartbrief.com/news/aaaa/industryPR-detail.jsp?id=90097940-195B-4EBE-B497-9CADD523BA91

The Fannie Mae and Freddie Mac sink hole deepens

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ7Vw70CckxU&pos=2

Fannie Mae will seek $15.3 billion in U.S. aid, bringing the total owed under a government lifeline to $76.2 billion, after its 10th consecutive quarterly loss.

For the full year, Fannie Mae’s loss widened to $74.4 billion from $59.8 billion in 2008.

The company’s shares, which peaked at $87.81 in December 2000, closed at 99 cents yesterday in New York Stock Exchange composite trading. The Treasury owns 79.9 percent of the company’s outstanding common stock.

Wow. Shares of Fannie Mae have dropped from a high of $88 to $1 in the last decade. That is some serious destruction of wealth. By contrast, the price of gold has more than quadrupled in the same decade. And with more bailouts and money printing looming, people have the gumption to tell me holding gold is risky?

Disclosure: long gold and silver.

Monday, March 1, 2010

Judge Andrew Napolitano on the Patriot Act

An 1801 - present USDollar chart

A declining USDollar = diminishing purchasing power = price inflation. This chart tells enough.


Now we look at Siegel's calculation of the dollar's purchasing power from 1801 to 2008. It's a measure of inflation over more than 200 years.

In periods of inflation, which reduce the value of a dollar bill, the line falls. In periods of deflation, which increase the value of a dollar bill, the line rises.

This chart's message: In the 19th century, inflation and deflation alternated wildly, but the dollar remained roughly in the same range.

In the 20th century, inflation won out decisively -- except for the relatively short interlude of the Great Depression.

Because of this 20th-century experience, the value of the dollar has fallen precipitously, to a recent 6 cents. By an astonishing coincidence, the decisive move began about the same time as the Federal Reserve did.

The beginning of the end for USDollar hegemony

I have had many discussions among friends about the inevitability of the collapse of not only the USDollar, but all paper currencies. People shouldn't mistake the recent weakness of the Euro as a sign of strength in the USDollar. Almost all developed world countries share the same characteristics of high deficits, huge debts, and weakened economies--with poor prospects for growth. The end of USDollar hegemony is around the corner. Again, it's a matter of when, not if. Sovereign central bankers can paper over their insolvencies for only a finite period of time before the bond vigilantes attack their respective currencies.

Every major trading country has initiated attempts to diversify away from a declining dollar. Part of that strategy inevitably includes adding gold reserves. China, Brazil, Russia, and middle eastern oil-exporting countries have already made plans to trade in currencies other than petrodollars.

http://abcnews.go.com/Business/wireStory?id=9958995


My take is that even if the IMF's Special Drawing Rights (SDR) are used for global trade in lieu of USDollars, hard assets will likely appreciate against any other currencies, due to all four currencies included in SDR's (Japanese yen, British Sterling pound, the Euro, and the USDollar) having been debased by their respective central bankers. It's a mad dash to the bottom, as all countries desperately devalue their respective currencies in an attempt to stimulate their economies. As controllers of the world's reserve currency, the US just happens to be the worst offender.

Bernanke and Greenspan finally speak the truth

Two years late and several trillion dollars short, but the former and current Fed Chairmen are finally telling it like it is: our huge budget deficits are a threat to the financial health of this country--not just in Greece. They're even urging Congress to reign in spending and to raise taxes. Good luck with that.

http://www.washingtontimes.com/news/2010/feb/25/bernanke-delivers-warning-on-us-debt/


Perhaps Bernanke is tired of hearing complaints from the blogosphere about him being asleep at the wheel.

LA on the brink

http://www.guardian.co.uk/commentisfree/cifamerica/2010/feb/25/financial-crisis-useconomy

While the federal government has considerable wiggle room to borrow or simply increase the supply of money to help fight its way out of financial collapse, smaller government units in America don't have those options; increasingly cities, counties and states are facing the sorts of austerity measures we've come to associate with third world countries in crisis, or, in recent years, with vulnerable European nations such as Greece or Latvia.

The broader economy may be starting to show some signs of healing, but for those at the bottom of the economy, for those most reliant on government services in Los Angeles and the countless other cities teetering over financial abysses, 2010 looks more like a bona fide Depression year than one made beautiful by the myriad green shoots of recovery.