Thursday, May 20, 2010

Gold demand in China

When you see this type of interest in gold in the United States, THEN you'll know we're in a bubble.

Trade war--between LA and Arizona

In the category of a big "Ooops!", Arizona has just portrayed why government entities like the city of Los Angeles can totally mangle a delicate situation. The city council and mayor of LA (and apparently San Francisco) have decided to boycott the state of Arizona in reaction to SB 1070, the immigration bill. It's lights out for Angelenos--literally.

Dear Mayor Villaraigosa,

I was dismayed to learn that the Los Angeles City Council voted to boycott Arizona and Arizona-based companies — a vote you strongly supported — to show opposition to SB 1070 (Support our Law Enforcement and Safe Neighborhoods Act).

You explained your support of the boycott as follows: “While we recognize that as neighbors, we share resources and ties with the State of Arizona that may be difficult to sever, our goal is not to hurt the local economy of Los Angeles, but to impact the economy of Arizona. Our intent is to use our dollars — or the withholding of our dollars — to send a message.” (emphasis added)

I received your message; please receive mine. As a state-wide elected member of the Arizona Corporation Commission overseeing Arizona’s electric and water utilities, I too am keenly aware of the “resources and ties” we share with the City of Los Angeles. In fact, approximately twenty-five percent of the electricity consumed in Los Angeles is generated by power plants in Arizona.

If an economic boycott is truly what you desire, I will be happy to encourage Arizona utilities to renegotiate your power agreements so Los Angeles no longer receives any power from Arizona-based generation. I am confident that Arizona’s utilities would be happy to take those electrons off your hands. If, however, you find that the City Council lacks the strength of its convictions to turn off the lights in Los Angeles and boycott Arizona power, please reconsider the wisdom of attempting to harm Arizona’s economy.

People of goodwill can disagree over the merits of SB 1070. A state-wide economic boycott of Arizona is not a message sent in goodwill.


Commissioner Gary Pierce

And people wonder why this state is bankrupt.

Jobless claims rise

And government officials are "surprised"?

Welcome to the new normal. This is no recession. Unemployment is not 9.9%--the true number is 22%.

This is the big D, and I'm not talking about Dallas (Detroit, maybe).

Wednesday, May 19, 2010

CalPERS wants $600 million more from California

This should be interesting, given the state of California is already $20 billion in the red.

Naked shorting of precious metals

This is my take on how bullion banks naked short sell gold and silver bullion. First one has to understand the difference between a short sale and a naked short sale.

A short sale is perfectly legal and desirable, as every transaction has two counterparties: a buyer and a seller. Hence, short selling provides liquidity to markets. The mechanism involves a short seller borrowing the assets (e.g. shares of a company, gold bullion, bonds, etc.), selling that asset at a determined price, and hoping the value of the asset declines, so the seller can buy it back at a lower price, profiting from the difference between the higher sales price and the lower purchasing price. It's identical to a buyer who goes "long" an asset: the buyer buys an asset, hopefully at a lower price, watches the asset value increase, and sells it at a higher price, profiting from the higher sales price. A short seller executes the same buy/sell transactions--only in different time sequence. A short seller sells the borrowed asset before buying it back (covering). Another difference is that the short seller has to pay interest for the borrowed asset, until the buyer covers his short position with the purchase.

Of course, not all long and short positions are profitable. If a long buys a stock at $10/share, and ends up selling at $8, the long position has a net loss of $2/share. Likewise, if a seller shorts a stock at $10, and the price rises to $12, the loss is again $2, plus the cost of interest for the borrowed shares. A long or short position is a directional bet: a long expects the asset value to rise in price, and a short expects the value to decline in price.

Naked short selling is contentious, and illegal in most markets, on par with fraud. A naked seller never borrowed the asset, never took possession, and hence, doesn't pay interest. It's particularly onerous because the asset doesn't exist, and therefore an infinite amount can be created out of thin air. For instance, phantom shares of a company can be created--and thus shorted, driving the shares of a company down, sometimes to zero. This is exactly what happens in a bear raid when there's a concerted effort from multiple parties betting against shares of a company, debt of a sovereign country (e.g. Greece), or precious metals.

With gold and silver, a few bullion banks borrow gold from a central bank (e.g. the Federal Reserve Bank) at the gold lease rate, sells the gold for cash, and lends out the cash at a higher rate, say the LIBOR. The bullion bank pockets the difference between the higher LIBOR rate and the gold lease rate, the so-called Gold Forward Offered Rate (GOFO). And since they are short gold, they also profit when the price of gold declines. Hence, the bullion banks have another motivation to see falling prices for precious metals, as they have huge short positions in gold and silver. Also, the concentration of a few bullion banks who have large net short positions allows them to manipulate prices lower, especially when they work in concert. This is what gold bugs have been complaining to the CFTC for years, and why the Department of Justice is finally investigating these anti-competitive practices.

What this investigation should expose is that these gold leases and sales are not backed by physical inventory, and hence are "naked." This price suppression scheme is fraudulent, and it's allegedly being carried out by the Fed, US Treasury, other foreign central banks, and a group of bullion banks, most notably JPMorgan Chase. A few years ago, Morgan Stanley was ordered to pay a fine when they fraudulently charged customers custodial fees for storing gold that never existed in their vaults. Many are questioning not only the existence of gold in the vaults of bullion banks, but also the ETF's, the futures exchanges (e.g. COMEX), and central banks themselves. It could be another reason why the Fed has resisted audits, which Ron Paul has pushed for with legislation. Ft. Knox has not had an independent audit of its vaults since 1953! Who knows how much gold there is in vaults worldwide, because the authorities certainly won't allow verification.

Why is this important to anybody--other than a few gold and silver bugs? Firstly, central banks artificially suppress precious metals prices to hide their reckless printing of paper currencies. After all, politicians have to fund entitlement programs--even if a country is bankrupt. A rising gold price exposes monetary inflation, simultaneously signaling currency debasement. Monetary inflation is a hidden tax on the citizens; a slow, grinding decline in a nation's standard of living. Until it reaches hyperinflation, when a sudden currency crisis becomes obvious to all. Gold is a fear indicator, and an inverse proxy for confidence in a government's finances--and currency.

In a fiat, fractional reserve currency financial system, banks and central banks have a vested interest in maintaining confidence in the status quo. If confidence is lost in our banking system, there would be a run on every bank, as all depositors would demand their deposits immediately. Well-capitalized banks take $1 of deposit, and lend that same dollar out to 10 other borrowers. Under-capitalized banks (highly leveraged banks) may loan that same dollar out to 40 or more other borrowers. Clearly, if every depositor wanted their money bank, every bank would be declared insolvent, unable to honor the 90+% of other depositors.

With the explosion of precious metals ETF's (which trade like a stock) allegedly backed by gold or silver, paper trading in the precious metals futures exchanges, and gold swaps and leases, it is speculated that the ratio of gold paper claims vs. physical gold above ground is 100:1. In other words, 99 out of 100 parties who believe they have claim to gold bullion do not own it at all. And if there's a run on physical gold, many "owners" of gold assets will be disappointed, much like many depositors would be disappointed (or angry) if there was a run on banks.

Another reason for concern is since the prices of precious metals have been suppressed for years, mining for them has been uneconomic. Many mines have been closed as a result in order to stem losses, further compounding the physical shortage. And since silver is also an industrial metal, in addition to being an investment and used for jewelry, when the shortage occurs, the severe crunch will cause prices to soar, while shutting down manufacturing lines. This has severe economic and national security implications, since silver is used in many high-tech, biotech, cleantech, and military applications.

The short-term profits of a few banks and their central banking cohorts will ultimately doom the long-term prospects of a global economy. This is why many mainstream financial pundits are starting to sound the alarm bell on what could be the biggest financial fraud in the history or mankind: the big NAKED short of gold and silver.

See disclaimer in side bar.

Disclosure: long physical gold and silver, long precious metals mining shares.

Tuesday, May 18, 2010


The die has been cast.

Rick Santelli says GLD ETF lacks physical backing

It's a sentiment I've warned against for months. The GLD ETF doesn't have enough physical gold in inventory as collateral.

Robert Cohen believes gold can rise for decades

US Global Investors on gold

Gold is charging up to new highs, so it’s no surprise that the level of interest in this financial asset is charging up as well. Last week I did interviews with CNN, CNBC, USA Today and Reuters, and in most cases a specific question came up – “Should people be buying or selling gold right now?”

That’s a tough one. The monetary turmoil in Western Europe and some early signs of inflation create the right conditions for gold to continue its run, and while we see higher prices in the long term, it’s difficult to predict what might happen in the here and now.

If he’s correct – the masses in the developed world are just now waking up to how their personal wealth can be affected by the future inflation spawned by the trillions of dollars and euros created to finance economic rescue plans – the potential implications for gold are profound.

Here’s one way to look at currency destruction -- 10 years ago this week, $1,000 bought nearly four ounces of gold, and today $1,000 won’t even get you a single ounce. Gold is money, so when you look at the gold-dollar exchange rate, the dollar’s value has fallen by a startling 78 percent just in the past decade.

Murenbeeld goes on to make another interesting point – investment demand, rather than jewelry demand, has been the key driver for gold for most of modern history. We are returning to that scenario as gold’s safe haven appeal grows during this period of unstable government and monetary policies.

Our experience shows that whenever you have deficit spending, rapid money supply growth and negative real interest rates (inflation rate higher than nominal interest rate), gold will perform exceptionally well in that currency. Right now, we’re seeing massive deficits, negative real interest rates in the U.S., and a worldwide debt problem that is projected to get bigger.

We have long recommended, based on regressional analyses, that prudent investors consider an allocation to gold – not to get rich, but as a way diversify assets and protect wealth. Our suggestion is a maximum 10 percent allocation – half to bullion and the other half to gold equities or a good gold fund that invests in unhedged gold stocks.

Sears and Kmart offer cash for gold

Many believe the fact that companies offering customers cash for their gold is a bearish sign--that the price of gold is a bubble about to burst, much like NASDAQ stocks in 2000 and real estate prices in 2006.

I beg to differ. If the smart money are the institutions that trade in gold, and the retail customer is the dumb money, and the smart money is buying while the dumb money is selling gold, the prospects for gold are actually quite bullish. Why would a company buy as much scrap gold as they could if they thought the price of that commodity would decline?

In case there's any dispute in the smart money vs. dumb money debate, guess who's offering less than fifty cents on the dollar for the other party's scrap gold?

Monday, May 17, 2010

Food prices soaring

Ron Paul on Bretton Woods

Watch this Ron Paul interview for the full ten minutes.

Attempted murder on whistleblower

A London-based commodities trader claims a major New York bank is conducting serious manipulation of the silver and gold futures markets.

The practice has continued even after federal regulators have been warned of the impropriety, Andrew Maguire, a metals trader at the London Bullion Market Association, told WND.

Last November, Maguire brought allegations before the U.S. Commodity Futures Trading Commission, or CFTC, in Washington that gold and silver traders at JPMorgan Chase have conspired to manipulate global precious metals markets. He charged the manipulation amounts to hundreds of millions of dollars, if not billions, in institutional trading profit for the bank and personal profit for the traders.

Maguire charged that JPMorgan Chase gold and silver traders have coordinated massive purchases of "short contracts" betting that the price of gold or silver will go down. The purchases, he said, are part of a strategy aimed at forcing the price of gold and silver to drop dramatically at the expense of holders of "long positions" owning gold or silver.

"This is a very small community that engages in metals trading – only a handful of traders at major institutions like JPMorgan Chase," Maguire said.

If Maguire has shared the information with the CFTC, why did he decide to go public explaining his accusations to WND and to Murphy at GATA for publication?

"I want the CFTC to catch these guys in the act," Maguire answered, "and I called the CFTC to alert them to market manipulations as they were happening. But now I'm concerned that the CFTC is just sitting on the information and doing nothing to investigate my allegations or bring charges."

Attempted murder?

Maguire and his wife were involved in a bizarre car accident in London, the New York Post reported March 29.

Maguire told WND he reluctantly has come to believe the car accident was an attempt on his life.

"We got hit in the side at full acceleration and tried to corral the cars in a gas station, including the guy who hit us with a commercial vehicle," Maguire explained.

The assailant then got in his car and accelerated, hitting a number of cars as he escaped from the gas station, making the event into a hit-and-run situation.

"The police told us the assailant was known to them and even that they arrested him," Maguire said. "But recently the police won't say anything, and I haven't been able to learn anything about the assailant."

Goldman Sachs hits bottom in public opinion polls

According to the poll, Toyota (NYSE:TM) had a 31 percent approval rating versus only a 4 percent approval rating for the investment bank giant Goldman Sachs (NYSE:GS).

Rob McEwen and gold

Rob McEwen is not a run-of-the-mill gold bug: He built Goldcorp from a $50 million cap into a company worth $10 billion.

Germans buying gold as Euro tanks

Sometimes it's useful to get news outside the US media machine. Germans are buying gold wherever they can get it--including from the Australian Mint.

Sunday, May 16, 2010

Public comments on CFTC precious metals meeting

Most comments urge the CFTC to establish and enforce position limits in the precious metals COMEX exchanges.

Ted Butler continues to urge the CFTC to regulate price suppression in the silver pits.

JPMorgan analyst bullish on gold (part 2)

GATA's comments:

That observation hints at why Western central banks and the International Monetary Fund backstop the London Bullion Market Association and the New York Commodities Exchange in their sales of unlimited and largely unbacked paper gold: so that the world may be deceived into thinking that the gold supply is a lot larger than it is, so the world is deprived of its traditional hedge against monetary debasement, and so potentially "unlimited" demand for gold can be met with unlimited supply of imaginary gold, thereby sustaining confidence in government currencies and the power of governments to inflate and reap the profits and power of the hidden tax of inflation.

See part 1.

Double dip in housing?

Falling lumber prices could portend weakening housing prices, possibly due to the end of tax credits.

Volcker believes Euro could disintegrate

Former Federal Reserve Chairman Paul Volcker said he’s concerned that the euro area may break up after the Greek fiscal crisis that sparked an unprecedented bailout by the region’s members.

“You have the great problem of a potential disintegration of the euro,” Volcker, 82, said in a speech in London yesterday. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.”

Saturday, May 15, 2010

Why most financial advisers misunderstand gold

The point of no return

Hold on to your gold

That's the advice the Guild Investment Management team gives.

Nassim Taleb on the Black Swan

This is worth twelve minutes of viewing.

Illinois ignoring bills

Illinois isn't bothering with the formality of issuing IOUs, as California did last year. It simply doesn't pay.

Plenty of states face major deficits as the recession continues. They're cutting services or raising taxes or expanding gambling to close the gap. But Illinois is taking the extra step of ignoring bills.

Right now, $4.4 billion worth of bills, some dating back to October, are sitting in the Illinois comptroller's office waiting to be paid someday.

A supplier refused to sell bullets to the Department of Corrections unless it got paid in advance. Legislators have gotten eviction notices for their district offices because the state wasn't paying rent. One legislator said he had to use campaign funds to pay the telephone bill after service was cut off at his office.

This sounds awfully like Greece. And a default.

More bailouts

Some bail outs are understandable, and even necessary, but none are affordable.


Even gold bugs don't fully understand gold's store of value. Breaking news: gold's performance during deflationary times actually outperform periods of inflation. Not necessarily in nominal terms (since prices of everything generally increase nominally during inflation), but in real terms, gold actually does better in a deflationary environment. In other words, while gold is a great hedge against inflation (i.e., it maintains its purchasing power even as paper currencies are debased), it is an even better hedge during financial crisis and deflation (e.g., the Great Depression).

Second point: since official cpi numbers are understated, the inflation-adjusted price of gold should be $6300/oz., not $2400/oz., like you read in many gold-related trades. One can also arrive at the same outcomes by dividing the money supply by the amount of gold above ground, depending on which Mx metric you use for money supply. But it doesn't take a rocket scientist to track the Fed's exploding monetary base since 2008, money supply debates notwithstanding.

And if you believe the nation's unemployment rate is 9.9%, instead of the actual 22%, I've got some US Treasury bonds I'd like to sell you (or Greek bonds, for that matter).

3rd point: the bullion banks, with implicit authorization from central banks, allegedly are suppressing the prices of precious metals in London and at the COMEX. This was considered a lunatic fringe conspiracy theory, but is now being investigated by the US Department of Justice--and the normally shiftless CFTC, according to an article in the New York Post. JPMorgan was specifically named in the article. In other words, a phenomenon a few observers who cared to examine for years, is about to be blown wide open, much like the Goldman Sachs subprime mortgage derivative fraud case brought on by the other previously shiftless and incompetent enforcement agency, the SEC. Only in this case, JPMorgan and a host of other bullion banks are naked shorting silver and gold futures contracts with huge, concentrated positions.

4th point: in a related matter, the Federal Reserve Bank (Fed) has been complicit in surreptitious price suppression schemes with gold swaps, sales and leases to other central and bullion banks, with no independent auditing, and according to Ron Paul, with no authority. That's why he wants to audit the Fed, as the vaults at Ft. Knox and in New York have not been independently audited since 1953. If the gold is there, why has the Fed refused an audit for over 50 years? And if bullion banks are naked shorting precious metals, what happens to the price of a commodity if there are shortages and there is a run on inventory?

5th point: how did gold end up in Ft. Knox in the first place? Due to Executive Order 6102, FDR confiscated all private citizen's gold in 1933. Can our government do that again? Probably not, but if they did, the black market would thrive, as gold ownership is now a worldwide phenomena--among individuals, financial institutions, and sovereign central banks. Hedge fund managers, Swiss bankers, latin American overlords, oil sheiks, and 3 billion peasants in Asia are waking up to the reality of the paper currency Ponzi scheme.

6th point: the shortage in silver is even more pronounced, as it is an industrial metal, and since it is cheaper, the silver market is easier to manipulate. When the shortage hits, and "failure to deliver's" pile up, industrial silver buyers will pay any price to keep their production lines humming. We all want our iPad's yesterday, right? Industrial uses include solar panels, electronics, disinfectants, antibiotics, biotech, batteries--any green technology you can think of. Good luck on finding it when there's a run on silver.

And lastly, those on the sidelines have missed out on a decade-long bull market in precious metals. Sure, gold was the worst investment between 1980 and 2001, when the spot price declined from $850 to $250. That's because between 1983 - 2000, financial assets like equities had a historic run of about 12% return annually. But between 1971 and 1980, gold increased 24-fold. That's when the US was fighting a war it couldn't afford, the government was running a deficit, energy prices were going through the roof, and economic growth was stagnant (stagflation = stagnation + inflation). Sound familiar? Only this time, due to compounding interest on the liability side of the Federal government's ledger, our fiscal problems are much larger. If the government were to stop cooking its books and include unfunded liabilities like social security, medicare, medicaid, Fannie Mae, Freddie Mac, etc., our sovereign debt grows from $13 trillion to $60 trillion (or $100 trillion, depending on who you ask). No wonder the Fed and US Treasury are turning on the printing press.

So people have to ask themselves: are the US government budget deficit and debt problems getting better or worse? And if so, will the Fed bail out bankrupt states and municipalities also--or will they just step aside and let them undergo "austerity" measures like the Greeks have had to endure?

One guess is that they will continue to print currency, tanking the dollar further. The USDollar is only looking stronger because the euro is sinking faster. You can be the tallest midget in the room, but you're still a midget. The scary part is gold is appreciating in tandem with the USDollar, and has decoupled from its normally inverse relationship. What the markets are saying is that gold is the ultimate currency, the last man standing in a race to the bottom among paper currencies. After all, the logic goes, a weakened currency stimulates exports and employment, right?

This is not to say any asset values go straight up or straight down--there will continue to be violent gyrations from central bank intervention, and manipulation by financial institutions. But due to profligate printing and spending (and hence, the necessary obfuscation of said reckless policies), the trend of debased currencies and soaring sovereign debt will continue. Solving debt problems with more debt is lunacy, but the path our governments have chosen. It's either die now quickly, or inflate and die later. Owning precious metals is the only defense an individual has in this mad world of fiat paper currency.

See disclaimer on side bar.

Disclosure: long precious metals, long gold and silver mining shares.

Doubts about gold and silver ETF's

The takeaway message is this: when in doubt, always choose taking physical possession of gold and silver over paper certificates. Because in a financial crisis (which is a primary reason for buying gold and silver), those certificates are not 100% backed by physical inventory and may end up being claims to nothing. In other words, if you have to stand in line to claim ownership of physical bullion, you may end up being too late and a dollar short.

Also note that the custodians for the GLD and SLV ETF's are HSBC and JPMorgan, respectively, who are also allegedly the two biggest naked short sellers in the gold and silver futures markets. If 100 owners lay claim to each ounce of gold and silver, 99 stakeholders are going to be very disappointed when it's time to take delivery.

Friday, May 14, 2010

Why investors should resist gold frenzy

In an attempt to balance out opinions on financial assets, specifically gold, I have included the following article.

Personally, these financial advisers demonizing gold missed the boat, and are rationalizing the missed opportunity on a decade-long bull market in gold. Their comments ring hollow and illustrate a complete ignorance of history, the role of currencies, and store of value.

Disclosure: long precious metals, and long gold and silver mining shares.

Gold bugs still bullish, but with caution from this bug

Gold bugs are still bullish for all the right reasons, but I would suggest some caution illustrated in the last sentence of this otherwise bullish article:

But let the record show that Murphy's Lemetropolecafe does supply one (short-term) cautionary note: India has just stopped importing gold -- not an unusual response to the metal's move, but sometimes a sign that it's due for a breather.

Industrial and investment demand of precious metals tend to be inelastic. For instance, industrial buyers of silver will pay any price to keep their production lines running--even if there is a shortage. Likewise, gold consumers will step up to the gold window in a flight to safety--despite rising prices, as distrust of paper currencies grows.

Retail Indian demand tends to historically be elastic, however. Gold jewelry has been an important part of Indian culture, as they are often wedding gifts. Therefore, with high prices afoot, retail demand has decreased as households cut back on their purchases. With India traditionally the highest consumer of gold, expect reduced demand from the fast-growing country as long as gold prices remain nominally high.

However, that slack has been more than absorbed by soaring investment demand from Europeans fearful of a sinking euro. And demand from China has challenged India's lead recently, due to a rising middle class in the Middle Country.

In the overall scheme, gold and silver represent much smaller markets than other financial markets: equities, bond, real estate, and foreign currencies. A rush to gold and silver can send prices soaring.

Rosenberg really bullish on gold

David Rosenberg, former Merrill Lynch economist, is bullish on gold.

BOE governor warns of US debt

Tit for tat.

Mervyn King, Governor of the Bank of England, fears that America shares many of the same fiscal problems currently haunting Europe. He also believes that European Union must become a federalised fiscal union (in other words with central power to tax and spend) if it is to survive.

Thursday, May 13, 2010

Default probabilities

This is a Top 10 list no country or state wants to be on. Notice which entity creeped into the list this past week.

JPMorgan analyst bullish on gold

This is rich. According to many conspiracy theorists, JPMorgan has allegedly been suppressing the prices of gold and silver for years. A recent article reports the Department of Justice and CFTC are investigating whether the bank is manipulating silver at the COMEX futures exchange. See previous blog.

Yet, JPMorgan analyst John Bridges is issuing a bullish report on gold. I wonder if he'll be popular at the company Christmas party.

Jim Rickards on the Euro bail out (part 2)

The Euro-bailout and guarantee fund will fail. There are several reasons for this. The initial problem is that governments have borrowed too much and the debt burdens are non-sustainable. How can you solve a debt problem with more debt? All that the program does is to substitute EU debt for the debt of Greece, Portugal, Spain and others. You are replacing national debt with multilateral debt but it's all still debt. And so-called money creation by the ECB is just another form of debt because Euros issued by the ECB are simply paper liabilities of the ECB itself, so-called "notes" so even the money is just debt. Any possible repayment of the debt involves deep austerity, spending cuts, layoffs, higher taxes, reduced benefits and other actions which will definitely cause a depression in Europe and perhaps 25% unemployment throughout the Euro-zone.

The alternative is to print money which will lead to hyperinflation and the collapse of the Euro. So there are no good outcomes. The G20 and the IMF will try to reliquify the system and create new money through the issuance of SDR's. At the same time, people will try to protect their wealth by buying gold. So as paper currencies collapse, the money system will become a foot race between SDR's and gold. Large hedge funds are completely unimpressed with the umbrella for the reasons noted above. They are shorting the Euro and buying gold.

There is one other flaw in the EU plan. In 1992, when George Soros attacked the Bank of England, he did so by selling Sterling and buying dollars. This forced the Bank of England to do the opposite which was to buy Sterling and sell dollars. Since the Bank of England had a finite amount of dollars to sell, Soros knew he could beat them by buying more than they had. However, he needed real money to do this and he was perhaps the only speculator in the world at that time with that much money. Today you do not need money to destroy national finances, you can do this by the creation of synthetic short positions in Euros through the use of credit default swaps (CDS) and other derivative instruments. Goldman Sachs are experts at this. And they can create CDS in potentially infinite amounts since there is no regulation and no margin requirements. In effect, Goldman could create a short position equal to ten times the amount of Euros in the guarantee fund. Goldman can create synthetic short positions faster than the ECB can print money. Therefore, the ECB's plan is doomed to fail because they cannot beat the speculators who can use CDS instead of real money.

- Jim Rickards

The case for dividend stocks

In the debate between capital appreciation vs. dividends, here's a worthy article on the latter, for those risk-averse investors.

See disclaimer on side bar.


The only sector in the equities market showing accumulation is the precious metals mining sector (the GDX ETF is a good proxy). Check the share volume numbers over the last five years.

Whether you believe we started a new bull market since March 2009, or we are in the midst of a rebound within a secular bear market, the volume has to mirror the price action to be confirmatory. Other sectors are showing declining volume, despite higher prices, which is non-confirming. Liquidity injections (like the most recent $1 trillion Euro bailout) may prop up equities, but the foundation could be built on tooth picks.

See disclaimers on side bar.

Disclosure: long precious metals mining shares, long some biotechs, and natural gas pipeline companies.

Wednesday, May 12, 2010

ATM with a gold touch

I'm not making this up.

Abu Dhabi's top hotel is upping the ante in the race for Gulf glitz: adding a gold-dispensing machine.

The whole world knows the value of gold, including 3 billion Asian peasants. Add to that savvy group wealthy Swiss bankers, Latin American overlords, Greek shipping tycoons, and Middle Eastern oil sheiks. As usual, the retail American investor is the last to understand gold's store of value.

Robert Reich, former Labor Secretary and current University of California professor of Public Policy, you are completely wrong--again...and so are your colleagues. The scoreboard says so.

Another BIS warning

In a working paper written by three senior staff economists (“The future of public debt: prospects and implications”), released in March, BIS warns that Greece isn’t the only Western economy with hazard lights flashing.

Indeed, it names 11 more: Austria, France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Britain – and the United States. Without “drastic measures,” BIS says, all of these countries will hit a wall of debt.

Tuesday, May 11, 2010

Dr. Doom Nouriel Roubini

Nouriel Roubini, a money manager and professor at Yale, was nicknamed Dr. Doom for his apocalyptic economic forecasts. I agreed with most of his reasons: high debt levels and unsustainable deficits. But I am calling him out on his forecasts for gold. Here is a partial excerpt from his website (it is partial because I am not a client of his):

In a Bloomberg interview in November 2009, Roubini said gold was a bubble that was about to burst. Gold was priced at $1100/oz at the time. When billionaire hedge fund manager Jim Rogers declared gold would double to $2000, Roubini dismissed it as "utter nonsense."

He was wrong then and I'm going on record that he will be wrong going forward. When gold does reach $2000, will Roubini apologize to Rogers and admit he was wrong? I doubt it. If gold plummets to $500, I promise I will admit I was wrong.

See disclaimer on side bar.

Disclosure: long physical gold and silver, long precious metals mining shares.

Gordon ("Bottom") Brown resigns

Given his blunder in "Brown's Bottom" when he sold England's gold at the most inopportune times between 1999 and 2002, it's no surprise that Gordon Brown submitted his early resignation to the Queen of England today. The former Chancellor and now ex-British Prime Minister doesn't exactly have a stellar track record.

Between 1999 and 2002, Mr Brown ordered the sale of almost 400 tons of the gold reserves when the price was at a 20-year low. Since then, the price has more than quadrupled, meaning the decision cost taxpayers an estimated £7 billion, according to Mike Warburton of the accountants Grant Thornton.

Perhaps I should give him more credit. At least he's smart enough to exit before the ship sinks.

The Last Dance

Mike Krieger gives his macro analysis on the global financial crisis.

Frank McGhee on gold

"Gold is acting like a currency. It's the ultimate currency."

JPMorgan the man, not the bank

“Gold Is Money, and Nothing Else.“

- JP Morgan, testifying under oath to Congress before the Pujo Commission, 1913

Yet, almost a hundred years later, we find JPMorgan Chase Bank being investigated for manipulation of precious metals in the silver future markets.

Jim Rickards on the Euro bail out

"Look at what Soros did to the Bank of England in 1992 - he went after them, they had a finite amount of dollars, he was selling sterling and taking the dollars, and they were buying the sterling and selling the dollars to defend the peg. All he had to do was sell more than they had and he wins. But he needed real money to do that. Today you can break a country, you don't need money you just need synthetic euroshorts or CDS. A trillion dollar bailout: Goldman can create 10 trillion of euroshorts. So it just dominates whatever governments can do. So basically Goldman can create shorts faster than Europe can create money."
- Jim Rickards

This is why the Club Med Euro countries will circle the drain. In fact, any country's finances are vulnerable to attack--including the UK, Japan, and the good ol' USA.

Monday, May 10, 2010

Fed resumes currency swaps

Since the available bullets available to the Fed to further ease monetary policy, and the phrase "quantitative easing" has become anathematic to disgruntled fiscal disciplinarians, the Fed has decided to resume currency swaps to support the Euro zone. I'll keep it simple: currency swaps are just another means to print more currency. We've seen it before, and we'll see it again.

Convoluted logic

After European finance ministers unveiled a $1 trillion bailout plan for Greece and other indebted nations, gold immediately crashed almost $30. Why did it crash if:

1) quantitative easing (money creation) is inflationary, and
2) gold is a hedge against inflation?

The answer is while gold is an effective hedge against inflation, it is an even better hedge against financial crisis (and eventual collapse). In light of the Club Med countries' fiscal problems, gold prices have been rising, as the possibility of bond defaults has become very real. Hence the correct flight to gold as a safety valve, and the incorrect flight to the USDollar as a long-term safe haven (I would agree the dollar may rise nominally in the short term--until the market figures out the USdollar is an impaired currency).

With the announcement of a bailout for indebted European countries, the markets perceive the possibility of a default has been taken off the table. Hence, the fear of a financial crisis subsided temporarily last night in Asian overseas trading. However, sober speculators realized quantitative easing is also inflationary, and subsequently drove the price of precious metals back up. Long-term, precious metals bulls will ultimately profit--whether inflation or financial crises occurs, probably both.

The Euro bailout is a precursor to more bailouts about to occur in the US. Attempts from both sides of the pond to normalize economic recovery will fail, as the bailouts are merely debt bandaids to major debt problems. I expect the Fed to "rescue" bankrupt states and municipalities, including currency swaps and quantitative easing as part of their monetary arsenal. The Fed certainly can't reduce short-term interest rates any further--we are already at zero.

In a related matter, European Central Bank (ECB) President Trichet last week declared the ECB would not resort to purchasing junk bonds from Greece, Spain or Portugal, in attempting to prop up the Euro currency. In a huge reversal last night, the ECB agreed to purchase said bonds. Talk about head fakes. In the process, the ECB slaughtered the bond vigilantes who were betting on the Euro collapsing, as well as the countries whose governments and citizens have been living beyond their means for decades. Ultimately, those bond vigilantes will be proven right, as the ECB has indeed extended the Euro zone life line, but they have done nothing to structurally resolve their debt problems. These bailouts merely delay the inevitable collapse; they do nothing to address the debt problems--if anything, they make them worse.

While current group think among economists, politicians, and academia have distorted Keynesian economics into its current monstrous from of government manipulation in markets, John Maynard Keynes for whom those economic theories have been named after, was absolutely correct with this comment:

"Markets can remain irrational far longer than you or I can remain solvent."

In other words, perfectly efficient markets with rational price discovery mechanisms are mythical in a world where markets are rigged and gamed to the advantage of a powerful few. I should correct myself: gold is not only a hedge against inflation and financial crisis, it also hedges an individual against a corrupt and reckless government money printing press. When one takes possession of physical gold, there are no counterparty risks. Thousands of banks have collapsed over the course of modern banking history. Thus, depositors and holders of derivatives have lost capital in our fiat currency financial system, unlike holders of gold, which have retained their store of value for thousands of years. With gold ownership, there are no other claims against it, and you won't get zeroed out.

The only way to be dispossessed is if the government confiscates it, which is exactly what Franklin Delano Roosevelt did by Presidential Executive Order 6102 in 1933:

See disclaimers on side bar.

Disclosure: long physical gold and silver, long precious metals mining shares.

Sunday, May 9, 2010

DOJ and CFTC investigating JPMorgan on silver suppression

To all the haters, you can kiss my ass.

We'll see if this probe has some teeth. I can foresee a slap on the wrist, allowing the crooked manipulation to continue, as the corruption is at the highest levels of government, central banks, and bullion banks.

CEO's rank California dead last

California is killing the manufacturing industry according to a survey among CEO's.

Asked to rank states by business climate, CEOs put California dead last. Texas was No. 1.

• "Texas is pro-business with reasonable regulations while California is anti-business with anti-business regulations."

• "California is terrible. Even when we've paid their high taxes in full, they still treat every conversation as adversarial. It's the most difficult state in the nation. We have actually walked away from business rather than deal with the government in Sacramento."

• "The leadership of California has done everything in its power to kill manufacturing jobs in this state. If we could grow our crops in Reno, we'd move our plants tomorrow."

• "State politics seem consumed with how to divide a shrinking pie rather than how to expand it."

• "Union density is increasing, contrary to national trend, from 16.1% of workers in 1998 to 17.8% in 2002."

• "Unfunded pension and health care liabilities for state workers top $500 billion and the annual pension contribution has climbed from $320 million to $7.3 billion in less than a decade."

California's long-term job losses are downright ugly. Since 2001, while politicians dither and spend, 634,000 factory jobs have disappeared along with 34% of the industrial base. From 2003 to 2007 alone, according to the Milken report, 79,000 jobs were lost due to excessive regulation and too-high taxes.

But if California's private companies are suffering, its public sector sure isn't. From 2001 to 2009, California lost 235,000 net private-sector jobs, but gained 163,700 government jobs. Those cushy union jobs also pay more than comparable private jobs and provide gold-plated benefits. Now Californians find they actually have to pay for this foolishness.

Thoughts for the day

If gold is a barbaric relic, why is the state with the highest GDP called the Golden State? And why is the Denver Mint the top coin facility in the world?

Read your history books, and remember the years 1849 and 1858. The whole western United States expansion occurred after those dates. Blood, sweat, tears, and death went toward producing something of value, unlike an instantaneous computer key-stroke to create trillions of dollars out of thin air.

Today's "prospectors" work around the clock to build value for customers: smarter smart phones, better search engines, smaller computers, faster internet connections, and effective treatment for diseases. Their form of alchemy is transforming sand (silicon) into better communications, deeper knowledge, higher entertainment value, and better health.

These entrepreneurs should be left unfettered to create more value and generate prosperity for all of us, while increasing our quality of life. They are the growth engine of our global economy. They shouldn't be punished for bankers gone wild and politicians gone crooked.

Saturday, May 8, 2010

Photos of cats

In another selfish promotion to drive traffic, I am including a link to a portal that has photos and videos of a lot of cats. Content is all user-submitted, and the site gets millions of hits. This is American enterprise at its best (or worst), and shows how a little creativity can be monetized on the internet.

Here's to all my cat-loving ex-girlfriends in LA (who never read this blog on finance and technology).

The Road to Greece and Rome

Jacob Hornberger gives his Libertarian views on the financial crisis. He draws many parallels to the Roman empire.

Louise Yamada on markets

Louise Yamada, a technical analyst extraordinaire, weighs in on equities, bonds, interest rates, and commodities, including gold and silver.

German article on bubbles

This is one of the best articles I've seen on sovereign debt. It's longish, but I highly recommend reading it if you have been stuck in a cave the last two years.,1518,692666,00.html

The derivatives bomb--and silver suppression

In the latest Office of the Comptroller of the Currency quarterly report , part of the US Treasury Department, the following exists:

The notional value of derivatives held by U.S. commercial banks increased $8.5 trillion in the fourth quarter, or 4.2%, to $212.8 trillion.

Five large commercial banks represent 97% of the total banking industry notional amounts and 88% of industry net current credit exposure.

In Table 1 on page 23, the five biggest banks: JPMorgan Chase, Bank of America, Goldman Sachs, Citibank, and Wells Fargo have total combined assets of $5,464,143,000,000, or almost $5.5 trillion. Yet, the notional value of their derivative contracts is $206,182,123,000,000, or over $206 trillion.

Financial reform? Too big to fail? Our shiftless government and banking regulators haven't learned a thing, and therefore, future financial crises will be unavoidable.

With silver, JPMorgan and HSBC hold derivatives with a notional value representing 106% of annual global production. I'd like to see exactly where they store all this silver, and exactly when these banks got into the mining business.

US gold coin sales surge

As I've often posited: better early than late. No crystal ball predictions here, as we may be entering a temporary overbought situation, but treat precious metals as insurance against a financial crisis, not a money-making venture. And given the past and current debt problems domestically and offshore, the odds of a crisis have increased substantially. Good luck to all.

See disclaimers on side bar.

Disclosure: long physical precious metals, long precious metals mining shares.

CFTC issues warning on trading limits

I wonder if the CFTC is finally getting off their hands since the Department of Justice is investigating criminal price manipulation of the precious metals at the COMEX (see previous blog on DOJ Anti-Trust investigation).

Look at the two charts in the following link to see if there there's any smoke. The announcement of the warning came at precisely 11:15 am Central Time. The spike in gold and silver prices coincided with the announcement. Coincidence?,-GOLDSILVER-Spikes.html

The crimes in progress in our financial institutions aren't even debatable anymore--it's apparent to all except the blind. It's not just Goldman Sachs--it's the entire banking cartel. The bullion banks have been naked shorting gold and silver (selling precious metals they don't own) under the directive of the Fed for years with impunity. They know if prices of precious metals rise, it's an indicator of fear and loss of confidence in the currency Ponzi scheme. That's why government officials demonize gold; they know rising gold prices undermine their money printing presses. We've gone from million dollar deficits, to billion dollars, and now arrived at trillions in debts. Include derivatives, and the notional value of all worldwide derivatives tops $1 quadrillion. Folks, that is a lot of zeros behind the 1, considering worldwide GDP is only $60 trillion.

Hence, the central banks' and bullion banks' motivation to short sell gold and silver--even if it means naked shorting the futures markets and the ETF's. And hence, the motivation of the Fed to resist independent auditing of their transactions. They've gotten away with it since at least 1995. The concerted price manipulation forces speculative longs to liquidate their positions, enabling the suppression of precious metals pricing.

Between the Fed, US Treasury, other sovereign central banks, bullion banks, and sovereign governments, there is heft behind the price suppression schemes. They could create derivatives to infinity. Anybody on the long side of that trade using leverage has lost big. But the decade-long bull market in precious metals is starting to threaten the bullion banks' stranglehold on the paper trading market (again, via derivatives), because demand in the physical market is exploding, with intense buying pressure in Asia, the Middle East, Latin America, and now Europe with their debt crisis. Even hedge funds have loaded up on gold. Astute longs are refusing cash settlement--they are demanding physical deliveries.

But while creation of paper currencies may seem unlimited, the unwinding of toxic derivatives is coming home to roost. Even derivatives have limits--especially when payment is demanded in the form of physical bullion, rather than cash settlement. Why? Because the shorts are naked--they don't have possession of the gold and silver they have sold in forward contracts, so they will fail to deliver. And while it may take a microsecond to literally create trillions of fiat currency out of thin air, it takes 15 years to find and mine precious metals. They are valuable for a reason--they are scarce.

Therefore, longs will eventually trample the crooked shorts, although without a fight. While the long trade has been and will eventually be profitable long-term, soaring precious metals prices and physical shortages will threaten national security. Silver, used for jewelry and investment, is also an industrial metal, used in numerous applications, including electronics, solar panels, disinfectants, biotechnology, antibiotics, materials, construction, etc. Artificial price suppression of silver has discouraged miners from exploration, as it became an uneconomic business. This will create severe shortages in the future, undermining our already anemic industrial base.

This shortage will create disruptions in our defense, space exploration, high-tech, energy, greentech, and biotech industries. While the banks have profited from the precious metals suppression schemes short-term, they are setting us up for a huge economic collapse long-term. It's one thing to miss deliveries on an IPad, it is an entirely different circumstance to not deliver a stealth fighter, missile, or satellite to the Department of Defense. Precious metals traders in London and New York may joke about making easy money while screwing longs, but their crimes are treasonous. And the Fed is complicit.

Friday, May 7, 2010

Americans are landlords of Red Roof Inn

According to House Representative Grayson, any financial reforms should include auditing the Fed.

Panic in the S & P 500 pits

This is what a panic meltdown (and meltup) sounds like.

More employment cheerleading

Our government leaders must really think we're stupid.

CME confirms no Fat Finger

At least they admit to no irregular trading snafus.

According to Themis Trading:

Yesterday afternoon and evening all the business programming focused on how the markets were in turmoil, and Greece this, and overdue correction that, and fat finger the other thing. They couldn’t even recognize the story, as even the business media doesn’t understand that the markets are a changed structure and beast. The story is not a key-punch error. The story is a failed market structure. The market failed today.

VIX soars in market rout

Anybody remember this blog on the VIX I wrote in late March?

Or how about this one back in September, 2009?

Dr. Fat Finger

Rumors are being spread that some trader entered the wrong dollar amount, triggering an avalanche of computer-driven algorithm sell orders. Liquidity dried up, and high-frequency trading caused the market meltdown. Bids disappeared, providing no support for plummeting prices.

Personally, I don't buy the "fat finger" theory. Markets are skittish, and any exogenous event can trigger a sell-off, whether it's Greek sovereign debt, or the collapse of the Euro.

SkyNet Defense System now activated!

Energy industry safety

Click on chart to enlarge.

Despite its unsavory reputation, nuclear energy sources may not only be the cleanest environmentally, but also the safest. Recall that sun power and wind turbines require not-so-green manufacturing processes and vast land, respectively. This pie chart graphs the number of deaths for energy industries.

We need to develop alternative energy resources to wean ourselves away from hostile foreign oil producers for economic and national security reasons, but we should do it methodically and strategically. Driving our economy to the ground in an attempt to maintain energy independence will have catastrophic outcomes.

Tedbits newsletter on sovereign insolvency

Wednesday, May 5, 2010

David Rosenberg bullish on gold

Rosenberg, Chief Economist for Gluskin Sheff, is a former economist for Merrill Lynch and rumor has it that they parted ways due to his too bearish stance on the economy. I guess honesty is too much to ask from Wall Street.

Bud Conrad on economic crisis

Clinton exonerates Goldman Sachs and is a gold bug

Yes, former President Clinton believes going off the gold standard in 1971 has been the source of our financial problems. I nearly fell off my chair--surely, it must have been a Freudian slip on his part.

Democrat or Republican, most voters respected President Clinton for his fiscal policies while the economy prospered during his presidency in the '90's. His conclusions on Goldman Sachs are insightful, if debatable, but his ideas on the gold standard are surprisingly forthright, given the government's preponderance to demonize gold--and ridicule gold enthusiasts. See commentary on this interview.

Europe to United Kingdom to United States

The contagion will spread according to the Global Europe Anticipation Bulletin.

Middle East is snapping up gold

Not only are Asian central banks and citizens buying gold as the financial crisis continues to develop, but so are middle eastern sovereign wealth funds and clients.


I've been immersed in these games the government and banks play, so I incorrectly assumed everyone believes what I believe about Wall Street, our government, central banks, fiscal and sovereign debt problems, Iceland, Dubai, Greece, etc.

The problem is this: most people don't have a clue about basic economics and financial models, even people much smarter than me, including the experts. Have they been that influenced by the media and teachings? Why do they cling to a Keynesian school of thought which clearly has failed? Why do they believe the only way to fix a huge debt problem is to add more debt, induced by a few privileged men? Why do they continue to believe the economic equivalent of a flat earth?

I've managed to piss off Ivy Leaguers, industry experts, financial insiders--you name it--for being the messenger. I've talked to economists, historians, and academicians from top schools and they believe the system is sound--that outlying events spoiled it for all of us, they reckon. They don't see the systemic breakdown in our fiat, fractional reserve financial systems--or how leverage has created huge pools of toxic derivatives, vulnerable to manipulation. Our financial system is a gigantic, rigged casino. Our profligacy has turned unfunded entitlements like pension funds, social security and healthcare programs into giant Ponzi schemes.

My friends in the real estate and equities markets have shunned me. What are they running away from--me? I'm one data point, unable to move my old dishwasher, much less markets. I haven't been a popular member of the cocktail circuit or at family dinners. And I thought to myself: why are these very bright people so unaware of what has been so coherent to me? I've ranted endlessly the basic economic laws of supply and demand for a certain asset class. Why are educated, bright, authoritative, and influential people missing out on something so luminous? I leave these questions to ponder, unsure of the correct answers. And I exit hoping I am completely wrong in my conclusions.

Tragedy and Hope, by Carroll Quigley

“The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements, arrived at in frequent private meetings and conferences. The apex of the system was the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the worlds’ central banks which were themselves private corporations. The growth of financial capitalism made possible a centralization of world economic control and use of this power for the direct benefit of financiers and the indirect injury of all other economic groups.”

- Carroll Quigley, Georgetown University professor, economic historian

Quigley was one of Bill Clinton's professors at Georgetown.

Tuesday, May 4, 2010

Government wants to nationalize your 401K/IRA

If this passes, watch the stock markets collapse. Wow, the government is really eager to raise revenue. Whether you are a Democrat, Republican, Independent, Libertarian, or from Mars, passage of this proposal should concern you.

Dear Secretaries Solis and Geithner:

As members of the Republican Savings Solutions Group, we write today to express our strong opposition to any proposal to eliminate or federalize private-sector defined contribution pension plans, such as 401(k)s, or impose burdensome new requirements upon the businesses, large and small, who choose to offer these plans to their employees.

In the Annual Report of the White House Task Force on the Middle Class, Vice President Biden discussed at length the creation of so-called “Guaranteed Retirement Accounts, (GRAs)” which would provide for protection from “inflation and market risk” and potentially “guarantee a specified real return above the rate of inflation” – presumably at taxpayer expense. In the Report, the Vice President recommended “further study of these issues.”

The Vice President’s comments are troubling, insofar as they come on the heels of testimony before Congress from supporters of GRAs proposing to eliminate the favorable tax treatment currently afforded to 401(k) plans, and instead use those dollars to fund government-invested GRAs into which all employees would be required to contribute a portion of their salary – again, with a government subsidy. These advocates would, essentially, dismantle the present private-sector 401(k) system, replacing it instead with a government-run investment plan, the size and scope of which remain to be seen. This despite data showing that 90 percent of households have a favorable opinion of the existing 401(k)/IRA system.

In light of these facts, we write today to express our opposition in the strongest terms to any effort to “nationalize” the private 401(k) system, or any proposal that would dismantle or disfavor the private 401(k) system in favor of a government-run retirement security regime.


House Republican Leader John Boehner (R-OH)
Rep. John Kline (R-MN)
Rep. Dave Camp (R-MI)
Rep. Sam Johnson (R-TX)
Rep. Dean Heller (R-NV)
Rep. Brett Guthrie (R-KY)
Rep. Michele Bachmann (R-MN)
Rep. Pat Tiberi (R-OH)
Rep. Bob Latta (R-OH)
Rep. Erik Paulsen (R-MN)
Rep. Lynn Jenkins (R-KS)
Rep. Ed Royce (R-CA)
Rep. Buck McKeon (R-CA)

A poster from 1934

These are words from a poster in 1934, a parody on the times.

Plan of Action for US


Under the guise of recovery

- Bust the government

- Blame the capitalists for the failure

- Junk the Constitution and declare a dictatorship

John Williams from

If you look at those GAAP-based statements and include in the deficit the year-to-year change in the net present value of the unfunded liabilities for Social Security and Medicare, what you'll find is that the annual operating shortfall is running between $4 and $5 trillion; not $500 billion as we saw before the crisis or the $1.4 trillion that they announced for fiscal 2009. Now to put that into perspective, if the government wanted to balance its deficit on a GAAP basis for a year, and it seized all personal income and corporate profits, taxing everything 100%, it would still be in deficit. It can't raise taxes enough to contain this. On the other side, if it cut all government spending except for Social Security and Medicare, it still would be in deficit. With no political will to contain the spending, eventually the government meets its obligations by revving up the currency printing press.

Congressmen shorted the markets too

While deservedly accusing Goldman Sachs of shorting structured financial securities they in turn sold to clients, members of Congress also allegedly shorted the market during the financial crisis, profiting from the market declines. I have no problems with legal profits from trading/investing. But if you bet wrong and lose big, don't expect a bail out. Having said that, these government interventions are creating some very strange interactions.

Monday, May 3, 2010

Inflation rises

Thanks to my friend Dick for this article. The headline says inflation rose 2% last month, but when you peel back the onion, you'll see a different picture.

Energy and food costs rose 18.7 percent against March 2009, up almost four percentage points compared with February.

I guess they believe items like food, gas, home heating, and electricity bills are immaterial. In their defense, the US government excludes food and energy in their Consumer Price Index (cpi) due to high volatility, but the omissions don't reflect reality in determining purchasing power.

Banks buying Treasuries

Banks are increasing purchases of U.S. government securities to pump up profits while lending to businesses languishes near the lowest levels since credit markets started to freeze almost three years ago.

Banks, facing increased regulation after posting $1.78 trillion of writedowns and losses since the start of 2007, are taking advantage of the record gap between their borrowing costs and yields on U.S. debt instead of lending, according to data compiled by Bloomberg.

The increase in government debt comes as banks shrink their balance sheets for the first time since the Great Depression, further restricting lending, particularly for small businesses that rely on banks for financing, according to Brown Brothers Harriman & Co.

Buying longer-term debt is reminiscent of Japan, where banks increased their holdings of government bonds to record levels during the country’s so-called lost decade of economic stagnation that began in the 1990s, according to Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey.

Like Japan’s response to the real estate collapse in the 1990s, the U.S. flooded the economy with cash only to see financial institutions sock the money away in bonds instead of making loans. Yields on 10-year Japanese bonds ended last week at 1.27 percent.

“It’s the Japanese movie, just an American version,” said Cheah, who worked for Singapore’s central bank. “The next scene is that after banks buy more and more government bonds it will be very difficult for the Fed to raise interest rates because they will lead to massive losses in the banks and cause them trouble all over again.”

The secret deaths of bees

If true, this could cause the next dust bowl.

Goldman Sachs and CFTC has a crooked history

"As I've stated several times before, I found out exactly how little Goldman Sachs cared for their clients when OffshoreAlert exposed a Goldman Sachs-sponsored criminal enterprise called Stirling Cooke Brown Holdings, which went on to commit a $1 billion insurance/reinsurance fraud and a $50 million securities fraud."

"The architect of this scandal was Reuben Jeffery III, a Goldman Sachs managing director who later went on to become Chairman of the Commodity Futures Trading Commission."

"It is remarkable that someone who was either knowingly involved in a massive fraud or, alternatively, could not spot it when it was right in front of his face could be deemed suitable to be a top regulator," says Marchant. "What confidence can investors have in the financial system when someone who has played a leading role in a major scandal is appointed to such a lofty position, apparently because of his political connections rather than his ability to regulate? No wonder the financial industry is in such a mess."

BTW, the current Chairman of the CFTC, the watchdog for the commodities exchanges, is one Gary Gensler, a former Goldman Sachs executive. He talks a good game about leveling the playing field, but I'm thinking he is another Goldman Sachs plant. That's just my jaded opinion.

More Albert Einstein quotes

"Great spirits have always encountered violent opposition from mediocre minds."

- Albert Einstein

"The minority, the ruling class at present, has the schools and press, usually the Church as well, under its thumb. This enables it to organize and sway the emotions of the masses, and make its tool of them."

- Albert Einstein

Sunday, May 2, 2010

Warren Buffett bearish on currencies

Even Buffett is sounding the currency debasement alarm bells.

I agree with his overall take, but strongly disagree with this one comment:

Still, Buffett noted that as long as the U.S. borrows in U.S. dollars, there's "no possibility of default."

"You don't default when you can print your own currency," he added.

A country can absolutely default when it can print its own currency. The German Weimar Republik defaulted in the early 20's, as has Zimbabwe recently. Besides, hyperinflation is essentially a technical default. Paper is only worth as much as what value people attach to it. In a currency crisis, it can plummet overnight.

DOJ Anti-Trust Divsion looking into JPMorgan in silver manipulation

No, I am not crazy. I've been touting this underground conspiracy "theory" to a largely empty audience for a couple years. The CFTC, chartered to regulate commodities markets, has largely been asleep at the wheel regarding monitoring price suppression in the precious metals exchanges. Well, it looks like the Department of Justice Anti-Trust Division is investigating not only price manipulation, but CONCERTED price manipulation by several parties, including bullion banks. If there's fire where there's smoke, civil as well as criminal charges will be levied.

Unfortunately, a possible outcome is a slap on the wrist (see the SEC's case against Goldman Sachs for fraud), as the sources of these market manipulations go all the way to the top of our government financial agencies (see Plunge Protection Team blog). It's tragic how the injured parties (in this case, retail longs) receive no compensation, but the government agencies who enabled these illegal activities to occur for decades under their watch are the collectors of the fine payments.

In other words, I am not expecting massive EFFECTIVE financial markets reform, but this is stunning news to those who have been following these surreptitious price suppression schemes. Let's hope this isn't window dressing, but a real investigation to end these "crimes in progress", as Ted Butler calls it.

After clicking on the links, click on the microphone icon to hear the audio interviews.