Sunday, November 30, 2008

As Panic Turns To Fear

As we suggested last week, Gold may need to consolidate, and in fact has been consolidating recent gains. A nice pennant consolidation has formed here in Gold since 24 November. A break above 819 has the potential to push Gold through resistance now holding firm between 828 and 835. A break of this zone of resistance sets up a move to 872 and a battle royal for the near term future of Gold. A failure to break resistance at 835 may see Gold revisit the 770s before attempting another breach of 835. Silver will continue to follow in the shadow of big brother Gold. A significant move higher in the price of Oil may accelerate Silver's bid. Geopolitical risk, and it's effect on Gold prices, has been renewed with the carnage last week in India.

Gold rises; monthly gain biggest since 1999
NEW YORK (MarketWatch) -- Gold futures edged higher Friday in light trading following the Thanksgiving Day holiday, rising for a fourth straight week and ending the month with their biggest monthly gain in nine years.

Gold for December delivery rose $7.70, or 1%, to close at $816.20 an ounce on the Comex division of the New York Mercantile Exchange. It rose 3.1% this week. In the month, gold advanced 14%, the biggest percentage gain since September 1999.

November's gain followed gold's slump in the previous month. The metal fell 18% in October, the biggest monthly loss since February, 1983.

Gold rose "on safe-haven demand and on the likelihood of further dollar declines with further reductions in U.S. and international interest rates," said Mark O'Byrne, executive director at Gold and Silver Investments.

OPEC delays decision on cutting oil production
Reporting from Cairo -- Ministers from OPEC countries decided Saturday to delay until December a decision on cutting production to stem the fall of crude oil prices that have tumbled by more than 60% in recent months.

King Abdullah of Saudi Arabia, the leading producer in the Organization of the Petroleum Exporting Countries, was quoted by a Kuwaiti newspaper as saying that $75 a barrel was a "fair price."

The Saudis want to see prices rise by at least $20 a barrel. Saudi Oil Minister Ali Ibrahim Naimi told reporters that OPEC would "do what needs to be done" to bolster prices.

"There is a good logic for $75 a barrel," he said. "You know why? Because I believe $75 is the price for the marginal producer. If the world needs supply from all sources, we need to protect the price for them. I think $75 is a fair price."

Qatar's oil minister, Abdullah bin Hamad Attiyah, told the Arab TV news channel Al Arabiya that sinking revenues would damage the oil industry's future, saying that if prices linger below $70 a barrel, "investment would freeze, which would lead to a crisis in supply in the future.",0,2258218.story

Why This Crisis Will Send Inflation Soaring
The US financial crisis has now spread across the globe. Years of easy credit created massive asset bubbles in the housing and financial services sectors. As bond fund manager Bill Gross points out, there was “too much exuberant leverage, not enough regulation; too strong a belief in asset-based prosperity, too little common sense that prices could go down as well as up; excessive “me first” greed, too little concern for the burden of future generations.”

Many advisors still recommend holding for the long term and suggest that investors “ride out the storm.” This may eventually work for very young investors but may prove to be a poor strategy for everyone else. Bull and bear markets tend to move in cycles lasting for about 20 years. The Dow’s 1929 peak was not surpassed until 1953 (24 years later), the Dow’s 1968 peak was not surpassed until 1982 (14 years later) and the Japanese NIKKEI is down 80% from its peak of 44,000 in 1989. As of this writing, the Dow is at the same level that it was at the beginning of 1999 and the storm has only just begun. When inflation is taken into account, the length of time to break even becomes significantly longer. The current crisis is about to send inflation soaring, wreaking havoc on even the most conservative investor’s portfolio.

As defaults and foreclosures intensify and house prices continue to decline, the recession will get worse and the credit crisis will be amplified by the $1.2 quadrillion of derivatives that have been created. This will require increasingly larger government rescue and bailout attempts. What’s worse, this influx of money is certain to have unintended consequences that are both long-term and very damaging. Although trillions of dollars in bailouts have already been issued, they will take time to work through the system, and lawmakers and economists admit there is no guarantee that they will work. Currently, we are in the midst of a liquidity crisis brought on by the bursting of two asset bubbles. But the real danger is that the liquidity issue could become a full-blown insolvency crisis if credit is not made available in time to re-liquefy the system.

Over the past few months the US Fed and most other central banks have been increasing money supply by ever-higher amounts in order to fund the various bailouts. TARP, the most recent US bailout at the time this article was written, will cost taxpayers $850 billion. When all of this year’s bailouts are taken into account, they already total $1.45 trillion (see Figure 1) and some pundits are estimating that the total may eventually reach $5 trillion. In addition, on October 13 Europe created a $2.3 trillion bailout package to protect the continent's banks.

Is The End Of The COMEX Nigh?
The war over gold and silver rages on, with its center stage as always at the NY COMEX futures exchange, often referred to affectionately as the “CRIMEX”. Myself and other metal market observers, most notably Jim Sinclair, Marc Faber, Eric Sprott, and Bill Murphy, have painstakingly watched this horror show play out over the past decade, under the guise of the U.S. “Strong Dollar Policy”, the ultimate oxymoron and falsehood.

We and others have discussed at length the incredibly positive fundamentals for both gold and silver, and by now it should be clear to all that supply for both are PLUMMETING while demand is EXPLODING. And there’s a reason why I’ve capped these words, as I cannot underestimate how powerful these forces have become, and how much strength they gain each day. Aside from the sharp increase in demand, depicted in last week’s World Gold Council quarterly report and by the fact that the Perth Mint, one of the world’s largest, is not accepting any more orders, supply is completely collapsing in nearly all markets.

But, once again, the key to this story is NOT the dollar, NOT other commodities, NOT the credit crisis, and NOT even gold’s supply/demand balance. It is one thing, and one thing alone; the ability of the gold/silver Cartel to surreptitiously (and in many cases illegally) sate the soaring physical demand. Clearly, they are losing the battle of the physical markets, given global shortages, record demand, and record premiums being paid over spot prices. Not to mention that gold is hitting new record highs in nearly all global currencies outside the yen and the dollar, the two currencies that have benefitted the most from the deleveraging (NOT safe haven buying) going on over the past two months.

But the WAR is fought in the NY COMEX market from 8:20 am to 1:30 pm EST each day, as that is where essentially ALL of gold and silver’s losses occur. Amazingly, throughout this nearly nine-year bull market, gold has declined far more than it has risen in New York, and last I read it had fallen in something like 93% of this year’s trading sessions despite being down just 2% this year. And, by the way, that 2% decline has outperformed essentially every asset on earth, not just this year but for seven straight years, soon to be eight!

Anyone wonder why in today’s massive “reflation” trade, in which copper, oil, and stocks all rose sharply, somehow the ONLY asset to decline was gold, which by definition is the asset class of choice if one is betting on “reflation” (read: inflation)? I think you know the answer, an answer which once again was given between 8:20 am and 1:30 pm EST in the NY COMEX futures market.

But the COMEX’s days of setting global gold and silver prices appears to be nearing its end (in itself a ridiculous concept, given that such a tiny percentage of futures traders have anything to do with the business of gold and silver production). As I have been noting for some time now, COMEX open interest, or the number of outstanding contracts, has been plummeting for both metals all year. Consequently, open interest for both gold and silver are currently at multi-year lows amidst the greatest financial crisis in a century.

Why Gold
In order to understand why gold is so important now you must realize that the very concept of what is money is fluid. Since the early 80s, up until quite recently, the following were regarded as money or a proxy for money: blue chip stocks, quality real estate, quality corporate bonds. Two years ago, collaterized low quality loans were even considered money.

Ultimately fear determines what is money and what is not. We have been living in a low fear environment, obviously that is changing now.

There are two types of fear:

1) Fear of economic collapse - You will hear this expressed as a fear of deflation, but from a monetary perspective, this is a fear of loss due to insolvency, lower earnings, inability to service debt. This can be caused by over extension of credit, fraud, corruption or a combination of all of the above, which is what we are experiencing now.

2) Fear of fiat currency collapse - You will hear this expressed as hyperinflation. It is a self-reinforcing loss of confidence in the value of fiat currency.

We are being crushed between these two types of fear. There are no sound fiat currencies in which to seek shelter. This is the ultimate setup for gold and silver bullion.

Tuesday, November 25, 2008

Ho-hum, Just Another Multi-HUNDRED BILLION Dollar Giveaway

Fed's $800 billion plan to bolster lending, housing

NEW YORK (MarketWatch) -- With financial markets still not working smoothly two months after almost shutting down, the Federal Reserve unveiled further steps Tuesday aimed at lowering borrowing costs for consumers and home buyers.

The Fed has pumped billions of dollars into financial institutions, but found that this was not enough to bring institutional buyers and sellers of key mortgage and lending products back to the market.

In general terms, economists welcomed the Fed's latest actions, although some critics complained it doesn't make sense to encourage Americans to borrow more.

The U.S. central bank hopes the plan to lend to the markets for asset-backed-securities will create liquidity, which in turn would encourage originators of consumer loans to restart lending to individuals.

The markets for asset-backed securities "historically have funded a substantial share of consumer credit and SBA-guaranteed small-business loans," the Fed said in a statement detailing the new loan facility.

The facility is designed to generate increased credit availability and to support economic activity by facilitating renewed issuance of consumer and small-business asset-backed securities at what the Fed called "more normal interest-rate spreads."

Ashraf Laidi, chief foreign-exchange strategist at CMC Markets, said the Fed "is well on its way of following the Bank of Japan's policy of quantitative easing -- targeting the quantity of money rather than its price."

However, government officials denied the program was quantitative easing, noting that the Japanese central bank added reserves to influence bank behavior. By contrast, the U.S. program's aimed at investors, the officials commented.

The Fed will be adding reserves to its balance sheet, which has already grown by $1.3 trillion this year as a result of the program.

Brilliant! Let's create some more asset backed credit derivatives, that should fix EVERYTHING. Can it get any more f*cked up than this folks? Kiss the US Dollar buh-bye.

"You can lead a horse to water, but you can't make him drink."

"You can offer to borrow consumers money for free, but you can't make them borrow it."

Didn't cheap credit create this financial quagmire to begin with? It most certainly did. Then why is Hanky Panky Paulson and Bumbling Ben Bernanke obsessed with recreating cheap credit to jump start the economy? Their quest to deliver ever cheaper credit to consumers is all the proof one needs that the "boom years" so many long for were a "great big lie". If the country needs to borrow money to make the economy go, then we really do not have any economy at all.

How long will it be before these financial wizards are sending us a check once a month in the mail with a simple note attached, "Don't spend it all in one place"? This is freaking ridiculous. Patently pathetic. Why has the general public wised up to the debt burdens of our society, and not the government. The government should be encouraging us to save. The country is bereft of wealth. We have had a negative savings rate for several quarters in a row now. Americans can barely pay off the debt they have on there backs now, why would they take on more? Especially in the face of mounting job losses? Is our society, our capitalist nirvana, so screwed up that the only way we know how to buy anything is to "buy now and pay later"?

Why should the banks lend anybody money? If the bank thinks you can't pay back a loan, why should they give you a dime? How long will it be before the government is forcing banks to make "bad loans"? Not a damn thing these clowns has proposed or set in motion has a snowballs chance in hell of reversing or stopping today's financial calamity. All they have done is try to perpetuate a bad situation, and in the end, make it worse.

How long will it be before the government buys up ALL the debt in the country? Why don't they quit playing games, and just declare everybodys debt paid. If all debt was taken off the books, Americans would have more cash than they knew what to do with. Provided they had a source of income. LOL, that will never happen, or maybe...

No surprise that Gold has struggled some today. The overhead supply of Gold between 828 and 835 could keep the Gold Bulls penned up for a little while longer. It was surprising though that Gold struggled this much with the Dollar getting beat down again today, falling below 85 on the Dollar Index. Weak oil prices are rarely seen in conjunction with a weak Dollar, and would appear to this observer that the weakness in Oil today gave the Gold Bulls pause. It is well past time for Gold to dispense with this correlation to Oil prices. Gold is money, and the day is not that far off where it may be Gold that is the only acceptable form of payment for Oil.

Gold dipped to 803 early this morning from yesterday's high of 829 and rebounded to retest that high at 831 mid-day today on weaker technicals. Some consolidation may be in order before Gold can crash through this resistance zone between 828 and 835. Silver as always of late rode the coat tails of it's big brother. 10.50 Silver is a wall that must fall before the entire Precious Metals group can push higher in anticipation of a Dollar collapse, and rampant hyperinflation.

Gold Buyers Make "Significant Shift to Safe-Haven Metal" as Governments Throw "All the Money in the World" at Failing Economy
"There has been a significant shift into physical gold due to its safe-haven qualities," noted David Holmes, head of precious metals dealing at Dresdner Kleinwort in London, to the Financial Times overnight.

"Until very recently, that [physical] demand interest was being offset by paper investors who were liquidating speculative long positions as part of the wider pattern of deleveraging."

The total number of Open Contracts in Gold Derivatives shrank last week by 6% from a month earlier.

"The situation is very similar to the 1930s, but it is going to unfold differently," says George Soros, the billionaire hedge-fund manager, in an interview with Germany's Speigel magazine.

"We have learned not to allow the financial market to collapse. We will spend all the money in the world to prevent that from happening."

All the money in the world grew to a yet-bigger number on Tuesday, as the Bank of Korea put five trillion Won ($3.3 billion) into a new government lending scheme aimed at unfreezing Seoul's money market.

The South Korean government has already announced a "stabilization" package of 10 trillion Won.

The central bank of Malaysia today cut its key interest rate by 0.25% to 3.25% – the first cut since spring 2006 – and reduced the ratio of cash deposits which commercial banks must keep in its reserves, stoking the supply of credit.

The International Monetary Fund (IMF) meantime approved a $7.6 billion loan package for Pakistan in a bid to avert a debt default before the end of 2010.

Over in Washington, US Treasury secretary Henry Paulson was due to announce a new tax-funded lending institution – run directly by the Federal Reserve – offering auto loans, student loans and credit cards to consumers.

"We are going to do what what's required to jolt this economy back into shape," promised US president-elect Barack Obama at a news conference yesterday.

"We have to make sure that the stimulus is significant enough...of [the] size and scope necessary...that it really gives a jolt to the economy."

Monday, November 24, 2008

The US Dollar: Feet Of Clay

Used to be strong dollar means weak gold, but now?
From July up to now, in November, a combination of the rapidly rising U.S. dollar index, vicious forced and panic selling of all asset classes and massive deleveraging have helped to put downward price pressure on both gold and silver along with all other commodities. Very large funds and investors that were faced with the need to raise cash have been forced to sell anything liquid, even that which they wished they could hold, in order to meet redemptions, margin requirements or what have you.

Carry trade unwinding has forced offshore investors to buy U.S. dollars as a function of selling off dollar denominated assets. Perversely, the U.S. dollar has gotten the mother of all forex bids during this horrible financial bedlam. Not because the dollar is inherently strong, mind us all, but mostly because it happens to be what things are traded in the most and, thanks to the U.S. Federal Reserve, it is also the most liquid of liquid currencies.

When people are suddenly and violently frightened financially they just want cash and treasuries. Without getting too much more into exactly why, (which could take up all the space allotted to this report by itself), suddenly the dollar has merely become one of the strongest and healthiest looking members of the global fiat currency leper colony. All fiat currencies are sick, but apparently not equally sick.

The dollar is rising and rising fast. Too fast. The spike in the dollar is a signal flare. It is a warning klaxon sounding. This is a flame out just before the inevitable stall.

This week we learn from the World Gold Council that, as we suspected it would from those very high physical metal premiums, all over the world demand for gold has been tremendous, especially in the Middle East, India, Indonesia, Asia and in Europe.

On Friday, November 21, we may have seen a taste of what gold is supposed to do in times of real economic crisis. Why?

As financial terror once again escalated through the week, with equity markets plumbing new depths, fear of systemic financial collapse escalated on the price cave in of Citigroup to just over $3.00. Attempts to explain and to reassure by public officials, including Treasury Secretary Henry Paulson, failed to slow the carnage. While that financial nightmare was unfolding we observed gold holding steady in a tight consolidation range. That was even as the U.S. dollar remained quite strong relative to a basket of other fiat currencies.

Then, on Friday, the heretofore dominant sellers of gold futures across the globe saw their $750 Maginot Line give way as gold powered higher $43.00 or 5.8% in one day. Technicians love consolidation breakouts and tend to gain confidence from them provided they show staying power and follow through right afterwards.

Time will tell whether or not what we saw on Friday is a portent of more to come or a one-off news-driven event, but some of the most astute observers out there today are suggesting that at some point the current “bubble” in the U.S. dollar will reach a crescendo, followed by a hard and fast plunge in the purchasing power of the greenback. These analysts, the same ones that correctly predicted the current set of dire circumstances, continue to encourage people to find safety in gold.

Once the unnatural deleveraging and panic selling pressure becomes exhausted, as analysts say it has to eventually, gold looks set to explode much higher. It is merely a question of when.

On Friday Gold finally broke through major resistance at 776. Today, Gold added to gains with some smart follow through and actually cleared and closed above the 50% retracement of the October 930 to 680 dump which lies at 805. Gold met stiff resistance at 828 when it ran into old support there that is now resistance. A 61% retracement of Octobers dump lies just overhead at 835. Gold has it's work cut out for it up here between 828 and 835.

Silver took a shot at cracking 10.50 today. This is MAJOR resistance for the Silver bulls. A breach would set in motion a major squeeze in Gold's little brother. Meandering here will be punished. Support in Silver lies at 9.96 and 9.75.

The major development of the day was the breakdown in the Dollar's uptrend. The Dollar slipped below it's power uptrend line with a breach of 87 today. The close below 86 only added insult to injury. A breakdown thru 85 could quickly send the Dollar to 83 and it's 50 day moving average. We'll find out what the Dollar bulls are made of when we get to that level. I suspect the hunch by many observers that there are no real Dollar bulls will be confirmed should the Dollar test it's 50 day moving average.

Today's bailout of Citibank by the US Government may, when looking back, prove to be "the straw that breaks the camels back" as the world comes to the realization that the the US has no way to pay for these continued bailouts with out monetizing their debt and in effect severely debasing the Dollar. The mother of all bubbles in the US Treasury market will be the last great bubble to burst, sending the Dollar reeling and Gold soaring.

Despite the potential, it is still to early to declare the Bull back in charge in the Gold market. We have endured too many false starts to get comfortable just yet. Further follow thru is essential. Opportunities for quick trades to the short side will develop, but with the breakdown in the Dollar today, it would be wise to begin buying the dips in Gold now, and avoid selling the rallies. Gold made a powerful technical breakout on it's weekly chart last week that has turned sentiment towards the bulls, but gold must clear 872 and stay there to reestablish and renew the secular uptrend in Gold.

Gold and Silver are among, if not actually, the smallest of all markets traded globally. The deleveraging "story" can only continue so long before all those that wish to sell are finished. A key turning point in Gold may well be it's reaction to the next setback in the general equities markets. Should Gold continue rising at the next downturn in the equities markets, we will have our first clue that Gold's "safe haven" status has been reinstituted, and higher prices are to be expected. Recall that the US Treasury has, reportedly, the World's largest Gold horde, but it's "value" at $800 an ounce is ONLY $280 BILLION. It has clearly dumped over TEN TIMES that amount onto the worlds financial system over the past six months, American Banks in particular, in a feeble effort to bandage the gaping wound in the system. Trillions have been lost in the global equity markets during this whole fiasco. It is hard to imagine that "hedge fund" selling of Gold can continue to have much, if any, effect on Gold prices going forward from here.

A Discredited Dollar Is a Likely Outcome of the Current Crisis
There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses. This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.

...the most recent Fed survey of loan officers provides hard evidence of the intensifying credit crunch in America. A net 83.6% of domestic banks reported having tightened lending standards on commercial and industrial loans to large and midsize firms over the past three months, the highest since the data series began in 1990. A net 47% of banks also indicated that they had become less willing to make consumer installment loans over the past three months.
Consumers are also more reluctant to borrow. A net 48% of respondents indicated that they had experienced weaker demand for consumer loans of all types over the past quarter, up from 30% in the July survey. This hints at the Japanese outcome of "pushing on a string" -- i.e., the banks can make credit available but cannot force people to borrow.
What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.

It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.

In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.
The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.

Sunday, November 23, 2008


Jack Bauer is back, and boy is he pissed.

We can only hope a similar fate awaits Hank Paulson when he goes to leave office. Better yet, maybe when Jack escapes custody again, he will hunt down Hanky Panky Paulson and make him pay for destroying Jack's government pension.

On Friday, Gold soared. I made light of the Citibank situation in a couple of conversations I had Friday afternoon. Here's another bank blow-up staring the Fed and Treasury in the face, and Gold runs up. If you think Gold ran up on Friday for any other reason than this Citibank "threat", you were not really paying attention.

Now, how many times have we seen Gold race higher in anticipation of a banking catastrophe, only to puke up all it's gains on some cockamamie government bailout. Too damn many times, that's how many. Will this episode be another "1984 moment" for Gold. Citibank is one of the big fish people. Citibank goes bye-bye and there is NOT going to be a Christmas this year. If Gold should be doing anything right now, it should be racing towards the stars. We should know it's immediate fate, and that of Citibank come sunrise on Wall Street.

Sources: Gov't working on Citigroup rescue plan
Sunday November 23, 8:30 pm ET
WASHINGTON (AP) -- The government was weighing a plan on Sunday to rescue Citigroup Inc., whose stock has been hammered on worries about its financial health.

The Treasury Department and the Federal Reserve have been in discussions over the weekend to devise a strategy to stabilize the company, according to people familiar with the talks. They spoke on condition of anonymity because the discussions were ongoing.

Plan to Rescue Citigroup Begins to Emerge
Federal regulators were nearing approval of a radical plan to stabilize Citigroup on Sunday in which the government would soak up tens of billions of dollars in losses at the struggling bank, according to people briefed on the discussions.

Citigroup executives presented a plan to federal officials on Friday evening after a weeklong plunge in the company’s share price threatened to engulf other big banks. In tense, around-the-clock negotiations that stretched through the weekend, it became clear that the crisis of confidence had to be defused now or the financial markets could plunge further.

Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to people briefed on the talks, who spoke on the condition that they not be identified because the plan was still under discussion.

If the government should have to take on the bigger losses, it would receive a stake in Citigroup that could potentially hurt existing shareholders.

It was unclear on Sunday night exactly how the Citigroup arrangement might work. The government and Citigroup executives were combing through Citigroup’s books and trying to determine the level of losses that it would be willing to bear. Another question is whether any additional government money for Citigroup, which has already received $25 billion under the initial rescue plan, would come from the $700 billion industry bailout that Congress approved in October or from other sources, like the Federal Reserve or the Federal Deposit Insurance Corporation.

Regulators were debating various terms of the arrangement on Sunday, including whether the government would receive preferred stock or warrants, instruments that give holders the right to buy stock. Preferred stock would be more beneficial to taxpayers because Citigroup would pay dividends on those shares; warrants would be more attractive to Citigroup’s existing shareholders because they would not immediately dilute the value of their investments as much as preferred stock.

Once the nation’s largest and mightiest financial company, Citigroup lost half its value in the stock market last week as the bank confronted a crisis of confidence. Although Citigroup executives maintain the bank is sound, investors worry that its finances are deteriorating. Citigroup has suffered staggering losses for a year now, and few analysts think the pain is over. Many investors worry that the bank needs additional capital.

With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.

And you thought this "crisis" couldn't get more pathetic. The wheels have clearly come off, and the train is about to jump the tracks. I can see the sheep lining up to buy more US Treasury debt now...for safety. You'd be safer holding a 2-iron to the heavens in a lightning storm. Ugh, this is gonna get ugly...

Friday, November 21, 2008

Like A Moth To A Flame

TREASURIES-US 10-year note yield hits 50-year low
NEW YORK, Nov 20 (Reuters) - The U.S. 10-year Treasury note's yield fell to its lowest in five decades on Thursday, as deepening economic gloom and an exodus from stocks and other riskier assets propelled a strong bid for safe haven government securities.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose more than two full points, for a yield of about 3.0908 percent according to Reuters data, the lowest since 1958.

Over the past six months we have been witness to some of the most bizarre market gyrations in recorded history. None more befuddling than the fall of Gold in the face of a global financial meltdown. Today comes the news above that the moths have not only flown to the flame, but right into it. 1958? "When you see the flash, duck and cover." Those were the words to the wise if you hoped to survive a nuclear blast. In other words, when the world's financial system implodes, "buy Gold and hide", don't race towards ground zero to save yourself.

How can Treasuries be a safe haven? Banks today, in their infinite wisdom, have come to the realization that loaning money to people that cannot pay it back is a very bad idea. Many believe right now that loaning money to anybody is a bad idea. When you buy a US Treasury bill, you are loaning money to the US. Last time I checked, the USA was the WORLD's largest debtor nation. That means the USA owes more money to the world than any and all other countries. Each day the US must borrow $2 BILLION Dollars just to make payments on its debt. THEY HAVE TO BORROW MONEY TO PAY BACK MONEY THEY BORROWED. Obviously, the USA is broke, and cannot repay their debts. Why then do people continue to loan money to the US by buying US Treasury bills? To get your money back, you will have to sell those t-bills. [or wait 10 years for them to mature] What if the day comes where nobody wants to buy them when you want to sell? That's simple, you're screwed. There is NOTHING safe about US Treasury bills. That is an old wives tale.

"Play with fire, and you'll get burned."

Gold rises on physical buying as stocks tumble
NEW YORK/LONDON (Reuters) - Gold prices ended higher on Thursday, buoyed by interest from jewelry makers and as investors sought safety after U.S. stocks plunged nearly 7 percent on mounting worries about a deepening economic slump.

"Investment demand for gold should hold up because there is strong risk aversion in the markets right now. That's why we are optimistic gold will hold up," Barbara Lambrecht, analyst at Commerzbank, said.

Now there's a headline we haven't seen in awhile. Gold up as markets tumble? Could Gold be reaching for a turning point in sentiment? It should be noted that since Golds brief dip below $700 on November 23, it has traded in a tight range between 708 and 764. The hard bounce in Gold off that low on the 23rd was brought about by Hanky Panky Paulson's revelation that he and his cronies would not be buying up toxic mortgage waste from banks and would instead focus on getting money to consumers. Stories about the Fed's "quantitative easing" have filled the financial pages ever since. This quantitative easing is hugely bullish for the Gold camp. The Fed and Treasury, by following this path, have chosen balls to the wall inflation as their solution of last resort to guide us through this global financial crisis. In effect, Hank has decided to debase the currency. Wall Streets reaction to Hank's news has been to turn violently lower. They should be dancing in the streets at Wall & Broad on this news. The inflation that Hank's decision will inflict on the globe is sure to send the price of EVERYTHING, including stocks, much much higher in time. Gold bugs can smell inflation ahead of the rest of the crowd. It is no coincidence that the Saudis have purchased over $3 Billion Dollars of Gold in the last month. Few nations stand more to lose from the debasement of the Dollar than the Saudis because it is Dollars they accept for payment for their Oil. [But with the Bush family soon out of the White House, that Dollar gambit may end quickly to save the Kingdom.] China stands to lose a great deal as well with the debasement of Dollar. Word on the street is that they may accumulate up to 4000 tonnes of Gold. This "small" purchase alone could send the price of Gold soaring:

Is China Ready to Buy Gold at Last?
China wants 4000 tonnes of gold, to help "diversify" their $1.9 trillion in U.S. bonds. It's quite a joke. Please bear with me as I explain.

A tonne of gold is 32,151 ounces. Please search "troy ounces per tonne" at google to confirm, because this one bit of information, and a simple calculator, can help you unlock and decipher the meaning of what you read in the news regarding the gold market, as gold at the national level is usually always quoted in terms of tonnes.

The total ounces China is seeking, is thus: 4000 tonnes x 32,151 ounces/tonne = 128,604,000, or 128.6 million ounces.

That's an interesting number because it is about half of the U.S. official gold reserves of 261 million ounces.

It's also an interesting number because the total annual gold market consumption is said to be about 4000 tonnes, while annual mine production is only about 2500 tonnes.

But let's now multiply by the current gold price, to see how much of China's reserves could be diversified if they obtained that, without disturbing the price.

At $736/oz., times 128.6 million ounces = $94649.6 million, or $94.6 billion.

That's funny, because $94.6 billion is not very much of $1.9 trillion, which is $1900 billion.

What's the percentage? Simple: $94.6 / $1900 x 100 = 5%.

See, if China diversified 5% of their reserves, they would dominate the world gold market, buying an equal amount bought by the rest of the world in a year, and that could crash the dollar by 50%, while gold prices could double!

Of course, we have been waiting for years now for the rest of the world to diversify their Dollars into Gold. If, and/or when that will ever happen is clearly open to debate. But with US Treasury's yielding just 3% in a highly inflationary environment, not to mention owning the debt of a bankrupt entity, it would prudent to begin dumping ones Dollar assets for Gold.

We see this morning that there is a bit of a run progressing in Gold and Silver. The Dollar is down almost a full point. We're not too excited yet. Gold must still clear 776 and Silver 10.50, and stay there, before the Gold Bulls can run again. A true flight to quality and the real safe haven of Gold may still be a ways off yet, but it is never too soon these days to book your ticket.

Reflation Challenge & Gold
Jim Willie CB
A major challenge looms large on the immediate horizon. The USEconomy must be reflated in order to avoid collapse. Debts have become a crippling factor. Liquidation of speculative trades coincides with economic retreat, and hedge funds are under attack by their creditors (largely Wall Street firms) while major companies shed workers by the tens of thousands. When asked about economic prospects, a standard answer lately of mine has been to observe important signals not of recession but of potential disintegration. Almost all of the economic data, almost all of the Fed regional reports, almost all of the consumer sentiment indexes, almost all of the jobs data, almost all of the housing foreclosure data, is negative. The most dangerous and disgusting aspect of the current rescue initiatives is that almost all Dept Treasury and USFed actions are not revealed via any disclosure at all, nothing. Despite demands for transparency, nothing is shared on detail. Corruption and fraud usually thrive in such an environment.

Many clownish elite economists seem to miss the point, when they overlook how bank insolvency is much more the issue than liquidity. Big banks not only have doubts as to their own solvency, but they dislike the credit standing of many of their borrowers. So the challenge will be to reflate the economy even as desired, to proceed with money flowing into its credit centers, and to exploit how current loans can be paid back with cheaper future money. Gold will thrive in this environment, since a climax of a disaster, or a climax of produced price inflation will benefit gold enormously. Both scenarios are very favorable to gold and silver prices. Besides, a default at the COMEX for both gold and silver seem highly likely, with cracks forming in December, and outright highly publicized defaults suffered in 1Q2009.

As for my "prediction" that Oil was within 5% of it's low...oops. Maybe 10%, we'll see. I do firmly believe that the upside in Oil here is far greater than the downside. $65-70 Oil, minimum, is essential for the Oil industry...not to mention OPEC.

Wednesday, November 19, 2008

Persistence + Patience = Payoff

If I had to select one quality, one personal characteristic that I regard as being most highly correlated with success, whatever the field, I would pick the trait of persistence. Determination. The will to endure to the end, to get knocked down seventy times and get up off the floor saying, ''Here comes number seventy-one!''
Richard M. DeVos
1926-, American Businessman, Co-founder of Amway Corp.

Today's mid-morning spike in Gold prices can be attributed to the Federal Reserve's vice chairman all but admitting that the Fed is debasing the Dollar and will inflate the money supply rather than die. Unfortunately, misconceptions in the "rate of inflation" that were released just prior to the vice chairmans comments, kicked the legs out from Gold's rally. US CPI may have fallen a record 1% last month, nut that's consumer "prices" that fell folks. The increase in the monetary base last month is quickly becoming legendary. As for inflation, we ain't seen nothin' yet...

Dollar Down As Kohn Mentions Deflation, Quantitative Easing
NEW YORK (Dow Jones)--The dollar fell sharply across the board Wednesday morning as Federal Reserve Vice Chairman Donald Kohn said there's a small risk of deflation and said the central bank is engaged in quantitative easing.

Quantitative easing is when central banks use money supply as opposed to interest rates to supply funds in the market.

Kohn said after a speech in Washington on Wednesday that the Fed is doing both quantitative easing and monetary policy. But with the bank's benchmark rate at 1%, there's only so much more rate-cutting it can do.

His comments caused immediate dollar-selling as investors began to wonder whether the Fed is debasing the dollar.

This pushed the euro to as high as $1.2805, more than two U.S. cents up from its intra-day low.

"The move (down) in the dollar began as a technical move, but the comments by Kohn aren't helping," said Geoffrey Yu, currency strategist at UBS in London. "The market is going to ask if the Fed is trying to monetize the debt."

Despite the dollar's losses Wednesday, Yu said that global risk aversion related to the banking crisis and economic slowdown may continue to provide some offsetting support for the dollar as investors buy it as a safe haven.

Consumer prices drop record 1 percent in October
WASHINGTON (AP) -- Consumer prices plunged by the largest amount in the past 61 years in October as gasoline pump prices dropped by a record amount.

The Labor Department said Wednesday that consumer prices fell by 1 percent last month, the biggest one-month decline on records that go back to February 1947. The drop was twice as large as the 0.5 percent decrease that analysts had been expecting and marked the third straight month that prices had either fallen or been unchanged.

Goldman Shares Sink to Lowest Price Since 1999 IPO
Nov. 19 (Bloomberg) -- Goldman Sachs Group Inc. closed at its lowest price since the firm first sold shares for $53 apiece to the public in 1999, as the profit outlook darkens for a company that set a record for Wall Street earnings last year.

The stock fell $6.85, or 11 percent, to $55.18 in New York Stock Exchange composite trading, giving the company a market value of $26 billion. The New York-based firm's value reached a high of $105 billion, or $248 per share, on Oct. 31, 2007.

And God willing, Goldman shares will go to ZERO.

World Currencies Play 'Meet Me at the Bottom'
From a purely technical standpoint, the Dollar’s rally is already on borrowed time. It is important to understand that the overwhelming majority of the rally has been driven by the ongoing global liquidation and triggering of credit default swaps and other OTC derivatives. This has created a dream scenario for anyone wanting to purchase real assets. Oil has been reduced to $55/barrel, gold to the low $700’s, and silver to single digits. The situation is similar across the full spectrum of tangible assets.

In short, there is no fundamental reason whatsoever for the Dollar to gain value. The current situation is an opportunity to get real. Get real assets and buckle your seatbelts because the currencies of the world are about to play a good old-fashioned game of meet me at the bottom. Lucky for us Gold won’t be participating in the game.

For gold, a tussle between two groups of investors
NEW YORK (MarketWatch) -- Retail investors sharply increased their demand for gold bars and coins in the past few months as they struggled to find a safe place for their money amid the financial crisis, research shows.

But institutional investors have kept the upper hand, according to Wednesday's report from the World Gold Council, a gold mining industry association. Heavy selling by institutions has more than offset retail buying and pushed gold prices to their lowest level in more than a year.

Moves by retail investors, including demand for bars and coins, resulted in a net inflow of 232 tons (7.46 million ounces) in the third quarter, compared to 105 tons in the same time frame a year ago.

The figures, compiled independently for the council by GFMS Ltd, a precious metals consultancy, show strong bar and coin buying in Swiss, German and U.S. markets.
Meanwhile, gold holdings in exchange-traded funds rose 150 tons, compared with an increase of 4 tons in the second quarter and 139.5 tons in the third quarter a year ago. The peak in ETF inflows occurred in late September after the collapse of Lehman Brothers.

Including industrial and dental use, physical gold demand in dollar value hit an all-time high of $31.8 billion in the third quarter, the WGC reported. In tonnage terms, it stood at 647.6 tons, the highest since the second quarter of 2007.

China PBOC Mulls Raising Gold Reserve By 4,000 Tons
BEIJING (Dow Jones)--China's central bank is considering raising its gold reserve by 4,000 metric tons from 600 tons to diversify risks brought by the country's huge foreign exchange reserves, the Guangzhou Daily reported, citing unnamed industry people in Hong Kong.

The Guangzhou-based newspaper didn't elaborate on the plan.

China's forex reserves, at US$1.9056 trillion at the end of September, is the world's largest. U.S. dollar-denominated assets, including U.S. treasury bonds and mortgage agency bonds, account for a big proportion of the forex reserves.

Transitory Trading Puckering Prices
“Time is nature’s way of keeping everything from happening at once.” – Unknown

Gold and silver prices do not turn around on a dime or, a dollar. First they must correct and sell. Then, price seeks a new base. Sometimes this base travels sideways for many days or weeks. The longer we go sideways after a major correction, the higher and more violent the follow-on rally becomes. Today, we sit in sideways Transition City. Tomorrow we’re on a precious metals rally to the moon. Have patience.
-Roger Wiegand

Today, 11/19/2008, I boldly predict that Oil is within 5% of it's low. Oil closed today at 54.88 on

A move below 86 on the Dollar Index will set in motion a correction in the Dollar to at least 81.50 and a minimum 15% rally in the price of Gold will result.

A move back above 8150 in the DOW could set this scenario in motion.

Tuesday, November 18, 2008

Quantitative Easing?

Ron Paul Questions Bernanke at House Financial Services Committee This Morning

This exchange between Ron Paul and Bumbling Ben Bernanke is priceless. Bumbling Ben claims that the US Dollar is NOT dead, claiming that recent appreciation in the value of the busted buck proves that it is a safe haven. If I had not just heard it with my own ears...Bernanke is one smug POS. He is also full of sh*t.

Gold Investors "Will Buy the Dips" as Fed Moves to Quantitative Easing; Middle Eastern Buying & Mining Accelerates
"Looking forward, we think the need for safe-haven investments will grow," says the latest analysis from Scotia Mocatta, the London-based precious metals dealer, "while at the same time the level of distressed selling may ease."

[That] is likely to see Gold Prices trend higher again. If fresh weakness is seen, then expect dips to attract even more buying."

"Gold is caught between being a safe haven investment and being weighed down by the US Dollar," reckons Zhu Lv, head of research at the Shanghai Tonglian Futures Company, speaking today to Bloomberg News.

"Trade has been lackluster of late because of this lack of direction."

Meantime in Washington, "the two top salesmen for the $700 billion financial bailout are in for a grilling by Capitol Hill lawmakers" today, reports the AP, "just one week after the administration officially ditched the original strategy behind the rescue."

US Treasury secretary and Fed chairman Ben Bernanke have already lent and gifted $3.45 trillion in emergency aid to the banking on some estimates, "and that's before a likely handout for the auto industry," notes Tech Ticker.

"The Fed's focus has now shifted from easing the interest rate to increasing the quantity of money," agrees John Kemp at Reuters, noting how total sum of Fed credit extended to private banks jumped in the week-ending Nov. 12th to $2.2 trillion from the previous weekly average of $0.9trn – a clear policy of "quantitative easing".

Quantitative easing has begun
Quietly, without fanfare, the Federal Reserve has turned on the printing presses. The central bank is flooding the market with enough excess liquidity to refloat the banking system — and hopes to generate an upturn in both economic activity and inflation in the next 12-18 months to prevent the economy falling into a prolonged slump.

Since the banking crisis intensified in September, the Fed has been rapidly expanding the credit side of its balance sheet, providing an ever-increasing array of facilities to support the financial system (repos, term auction credit, primary discount credit, broker-dealer credit, commercial paper funding, money market mutual fund liquidity and term securities lending).

Total credit extended by the central bank has surged from an average of $885 billion in the week ending August 27 to $2.198 trillion in the week ending November 12. Credit extensions surged another $142 billion last week alone — mostly in form of increased term auction credit (+$114 billion) and other miscellaneous credits the central bank does not break out (+$41 billion).

Until fairly recently, the expansion on the asset side of the Fed’s balance sheet was matched by increased non-bank liabilities, mostly in the form of higher balances deposited by the US Treasury into its regular and special supplementary financing accounts at the central bank.

Since the Treasury was borrowing this money in the open market by issuing cash management bills, the impact of the Fed’s balance sheet expansion was being fully sterilized.

The Fed was providing liquidity in the narrow sense (helping commercial banks cover short-term funding problems arising from illiquid assets on their books) but not in the broader sense of inflating the money supply (money in circulation plus vault cash plus reserve balances).

But in the last three weeks, something very significant has happened. The non-bank part of the Fed’s liabilities has stopped expanding: combined Treasury deposits with the Fed plus cash in circulation has actually fallen from $1.517 trillion in the week ending Oct 29 to $1.467 trillion in the week ending Nov 12.

Instead, the Fed’s increased lending to the financial system over the last two weeks (+$325 billion) has been matched by an increase in the volume of deposits the commercial banks are hold with the Fed (+$331 billion).

In other words, the Fed is now lending to the banks, which are now lending the funds back to the central bank. The Fed is no longer supplying just narrow liquidity needed to enable the market to function. It is now supplying excess funds (more than the banks need) which are being recycled back into the central bank.

The volume of reserve balances with the Fed, which had jumped from $8 billion at end Aug to $280 billion by mid Oct, has now surged again to a staggering $592 billion in the week ending Nov 12.The Fed is now very deliberately supplying more liquidity than the banks need (or are willing to lend on to other banks, corporations or homeowners). By paying a low but positive interest rate on these reserve balances, it can ensure that the federal funds rate remains above zero (currently about 35 basis points) even as it floods the banking system with excess funds.

There are several startling implications:

(1) The central bank has successfully driven a wedge between interest rate policy (the target fed funds rate) and the quantity of money created (cash plus reserve balances). This was the explicit aim, foreshadowed a recent paper by the Federal Reserve Bank of New York ( 4n2/0809keis.pdf). The Fed is now free to expand bank reserves almost without limit while maintaining the fed funds target (at least very loosely).

(2) The Fed’s focus has now shifted from easing the interest rate to increasing the quantity of money, and the aim of supplying funds is no longer to ease concerns about narrow liquidity but to increase the overall money supply, thereby easing concern about the stability of the banks, while hoping to engineer an eventual upturn in lending, activity and (whisper it quietly) inflation.

This is precisely the radical strategy adopted by the Bank of Japan in the late 1990s and early part of the current decade, when it was described as “quantitative easing”. Fed Chairman Ben Bernanke, a keen student of liquidity traps during the Great Depression and Japan’s decade long banking and economic slump, threatened some time ago that the Fed could always increase the quantity of money by manipulating the size and composition of its balance sheet.

Can Central Bankers Prevent the Great Depression?
Amid the worst financial crisis and market meltdowns since the 1930’s, the world’s top-20 central bankers and finance ministers are busy at work, inflating the world’s money supply, slashing lending rates, and crafting stimulus packages, in order to prevent a normal recession from morphing into a Great Depression. The ECB has cut interest rates by 100-basis points to 3.25% since early October, and is telegraphing another 50 basis point cut at the next policy meeting in December.

Last week, the Bank of England slashed its base rate a whopping 150-basis points to 3%, its lowest in 53-years, and signaling more easing ahead. With new construction in China collapsing to its worst level in a decade, Beijing pledged to spend $600-billion over the next two-years, for new housing, road and rail infrastructure, agricultural subsidies, health care and social welfare. The stimulus package equals 16% of China’s total economic output.

But the dreaded “D” words – “Deflation and Depression,” are whispered quietly by the “Group of 20” central bankers, behind closed doors. Traditional monetary tools such as lowering interest rates are not working, because banks are hoarding cash and not passing along the lower costs. There is no light at the end of the tunnel until home prices finally stop falling, and banks can stop writing-off big losses.

“What this crisis reveals is a broken financial system like no other in my lifetime,” said former Fed chief Paul Volcker on Nov 17th. “Normal monetary policy is not able to get money flowing. The trouble is that, even with all this government protection, the market is not moving again. I don’t think anybody thinks we’re going to get through this recession in a hurry,” he warned.

The sub-prime crisis has morphed into a diabolical monster, spreading its tentacles across the globe. Bank credit remains tight in the United States and Europe, even for top-notch investment-grade companies, who are confronted with borrowing costs that are indicative of junk bonds. And the unregulated $55 trillion credit default swap market is a nuclear time-bomb, which can explode at a moment’s notice.

Fed officials see economic gloom, policy bind
Financial markets fully price a one-quarter percentage point cut to the benchmark federal funds rate at the final FOMC meeting for 2008, to 0.75 percent, and assess a strong chance the rate will be slashed all the way to 0.5 percent.

The funds rate has already been cut from 5.25 percent since September 2007 in an attempt to shore up the sagging economy and jump-start credit market activity.

However, Plosser told reporters that technical problems confront the Fed in potentially pushing the rate any lower and he is "comfortable" with rates as they stand.

Cutting the rate below 1 percent creates problems for investors and mutual funds in short-term money markets -- "technical ramifications" that become more complex the closer the rate gets to zero.

"There are a lot of questions we're going to have to grapple with going forward," Plosser said.

"You have to think about what this means for policy, market functioning, how we manage reserves."

Stern said with the federal funds rate already at 1 percent, the U.S. central bank would be pushed into a regime of "quantitative easing," or flooding markets with enough liquidity to keep the effective funds rate well below the official target rate.

Many analysts concede that quantitative easing is well under way given a massive increase in the Fed's balance sheet over the past several weeks.

Plosser and Stern both stressed the temporary nature of the Fed's efforts to get credit markets moving, and the need to reverse those moves when conditions allow.
The Fed must be ready to shrink its balance sheet, but that process "might not be easy," Plosser said.

Similarly, Stern said "it will be difficult to unwind" all of the new programs and lending facilities the Fed has put in place since the credit crisis erupted in August 2007, whipped up by the collapse of the U.S. market for subprime mortgages.

Quantitative easing then, is a fancy way of saying the Fed has a "magic" way of increasing the money supply and forcing money into the system without further cuts to the Federal Funds Rate. Inflation in the "price" of things may be dropping, and the "fear of deflation" may be running rampant, but the monetary base [the supply of money] is increasing at an alarming rate. This current, and behind the scenes, increasing supply of money will eventually lead to a new round of price increases that will make the just concluded 2005-2008 period of price inflation look like a walk in the park. Never forget, rising prices are a symptom of an increasing [inflating] supply of money. The savvy investor is accumulating tangible assets like Gold and Silver during times like the present. The Fed's present tact is certain to, in time, lead to the destruction of the US Dollar.

Under this developing scenario, Gold could very well be a frustrating asset to own, let alone trade, over the next 12 to 18 months as this "new money" is pushed into the system. However frustrating, it offers an excellent opportunity, and a second chance, to accumulate this Precious Metal at sale prices relative to it's potential two years down the road. It's no secret what the Fed is up to today. They're buying time today, and preparing for financial Armageddon in the months ahead. For Gold Bugs, it's time to buy protection.

Sunday, November 16, 2008

G20: G-WHIZ!

The NON-event of this perpetually unfolding global financial crisis has to be this weekends G20 summit. Agreeing to agree, nothing substantive or productive was accomplished by this gathering of floundering politicos. We can sum up the meeting in one sentence: "We can't let this happen again."

Sadly amusing, we must point out that the present global financial crisis is far from being behind us yet, and these political hacks are worried about stopping the next one. What in the hell do they plan to do about this one? Oh, print more money and make credit easier to get. Hey! How about more of the same that got the world in this mess.

Transparency seemed to be a word bandied about a lot this weekend. I wonder if Bumbling Ben Bernanke and Hanky Panky Paulson were in the room for that discussion. Transparency is not in these two crooks vocabulary. The greatest feat accomplished over this "short" weekend summit was the restraint of world leaders not to point the finger squarely at the source of this global financial fiasco: The United States Federal Reserve, with abundant assistance from the United States Treasury Department. How these guys managed to bite their tongues on this obvious "problem" for the world financial system going forward is anybody's guess. Perhaps they were told before dinner that if they talked outrageously during the meal, they would get no dessert.

It would appear then, that for the immediate future we can expect more of the same from the world financial community. More bailouts and monetary infusions as the worlds central banks continue in their efforts to simply "manage" the unraveling of the global financial system via under the table inflation. Don't get too used to $2 a gallon gasoline, the inflation monster is incubating, soon to be unleashed upon an unsuspecting global consumer.

G-20 Summit: Little Action, Many Promises
Expectations for the weekend summit of global leaders from the Group of 20 countries in Washington, D.C., were low. And they were fully met.

After a state dinner at the White House on Friday night, Nov. 14, and five hours of meetings on Saturday, Nov. 15, the heads of state from nearly two dozen countries agreed to continue working closely together to take the needed steps to bring stability back to the global financial system.

"Our nations agree that we must make the financial markets more transparent and accountable," said President George W. Bush soon after the summit drew to a close. "We agree that we need to improve our regulation and to ensure that markets, firms, and financial products are subject to proper regulation and oversight."

All of the leaders backed the importance of continued monetary and fiscal stimulus to juice the globe's staggering economies. And there was plenty of agreement on the need to improve regulatory regimes—in individual countries as well as the coordination between countries—so that all financial markets, financial players, and financial products are better regulated. There was much talk, too, of how critical markets, such as credit default swaps, or critical players, such as giant global banks and the influential credit ratings agencies, are regulated and monitored both nationally and internationally.

That's great Mr. Lame duck President. Does that mean the Fed will be coming clean this week regarding the toxic waste they have been absorbing from American banks? Probably not. The world has learned a tough lesson from the United States: The laws apply to everyone BUT the United States. That, and US officials tend to lie a lot. Listening to Hanky Panky Paulson the past 18 months would make you wonder if this guy is absolutely full of sh*t or completely clueless.

-April 20 2007 — "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained."

-March 16, 2008 — "I have great, great confidence in our capital markets and in our financial institutions. Our financial institutions, banks and investment banks, are strong. Our capital markets are resilient. They're efficient. They're flexible."

-May 16, 2008 — "Looking forward, I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions and, specifically, by the recovery of the housing sector."

-November 12, 2008 — "This market has for all practical purposes ground to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy."

And that is just a handful of Paulson's verbal flotsam. Has the man gotten anything right throughout this entire crisis? Not in the eyes of the American taxpayer he hasn't, but for his banking buddies on Wall Street he is more popular than the tooth fairy. This man is a criminal of the highest order. He has stolen trillions from the US taxpayer and handed it to his fellow crooks on Wall Street. As he prepares to leave office one can only imagine the more damage he can do to this country's balance sheet.

Government Bailouts Multiply as Paulson Prepares to Leave Washington
Hank Paulson knows he has two months left until he leaves Washington. Therefore, he must feel he needs to pass out as much free cash to his friends in banking and finance before he leaves town. Or, at least so it seems.

The US banking system is certainly in need of recapitalization. But I must confess this looks a lot like crony capitalism.

Look at who is in line for free money from the U.S. government:

-Banks have gone to the Federal Reserve with dodgy assets and received trillions of dollars in loans at low rates (Fed Funds is 1% now) in return. However, the Federal Reserve refuses to reveal what assets it is taking on. Bloomberg News has sued to find out.

-Money center banks received $125 billion in equity capital under TARP.

-Regional and local banks received another $125 billion dollars in equity capital.
AIG) has received $40 billion in equity capital and a line of credit of $150 billion. See my post, "Doubling down at AIG."

-Morgan Stanly and Goldman Sachs (GS) became bank holding companies in order to secure low cost funding.

-American Express (AXP) became a bank holding company for the same reason
GJM) and GE Capital (GE) want to be bank holding companies for the same reason. Last time I checked. GMAC was a auto finance company and GE Capital was a private equity shop. They are not banks.

-GE Capital has received a blanket guarantee for $139 billion in debt from the FDIC which regulates and makes money available for depositary institutions. GE Capital is not a depositary institution.

This whole charade is a bit of a head scratcher because it confirms the notion that financial interests are clearly winning out over consumer interests. How many people do you know getting mortgage loan modifications or debt relief? Not may I suspect. Wall Street is still getting a lot more dosh than Main Street. And it's all happen right under our noses in plain view for all to see.

The Humpty Dumpty Economy
By: Peter Schiff, Euro Pacific Capital, Inc.
Before the current economic crisis became apparent to all, the most popular fable used to describe America’s uncanny economic resiliency was the story of Goldilocks. It was argued that our economy was skipping down a sunny path of moderate growth, low inflation and rising asset prices. However, a much better parable for our economy over the last decade would have been the story of Humpty Dumpty: a bloated, fragile shell perched on the top of a dangerously high stone wall. This week, all the government’s horses and all of its men scrambled to put Humpty Dumpty back together again. Here is a look at some of this week’s highlights:

No doubt prodded by the administration, Fannie Mae and Freddie Mac announced a new attempt to stop the fall in home prices and foreclosures through a loan modification program that would cap mortgage payments so that a homeowner’s total housing expenses would not exceed 38% of household income for home owners who are 90 days delinquent.

With the Big Three auto makers now in a plainly visible death spiral, the automotive bailout debate is kicking into overdrive. The disagreement hinges on whether a bailout is necessary to support an important industry or whether the unprofitable dinosaurs of the past should be allowed to fail as America focuses on an information-age, service sector, and alternative energy future.

This week, the bankruptcy filing by Circuit City and a profit warning from Best Buy, served as proof positive that America’s national shopping spree is over. As I have long said, the business model of importing cheap goods for Americans to buy with credit cards was unsustainable. We were told to “Shop till we dropped,” and we did.

Americans two primary sources of spending money, home equity extractions and unlimited credit card availability, have been shut down. With only dwindling paychecks to rely on, Americans are justifiably economizing. As a result, many more retailers will file for bankruptcy over the next few years, and those that remain solvent will only do so by drastically cutting their capacity.

In a desperate move to arrest this necessary process, Treasury Secretary Paulson announced his intention to use part of the $700 billion TARP (Troubled Asset Recovery Program) funds to re-liquefy consumer lending.

Reminiscent of his Bazooka maneuver, quick draw Paulson reversed course quickly with his decision to not use any TARP funds to buy the assets that the plan was specifically funded to procure. Instead, he will simply dole out the loot to his buddies on Wall Street and use it for whatever seemingly worthy initiative strikes his fancy.

Although Congress loves to grandstand about oversight, it has thus far shown no courage to interfere, or even question, the change in strategy. Paulson claims that he is simply rolling with the punches. The truth however, is that the original plan was flawed from inception, as I clearly pointed out in a string of commentaries following his proposal. How could the Treasury

Department, with all its funding and PhD’s, not make similar predictions? Paulson is either a liar or completely incompetent. My guess is he is both.
It is mindboggling to consider that all of these developments took place in just one week. As the remnants of America’s shattered economy continue to ooze out over the pavement, look for even more bizarre, draconian, unworkable, and downright dangerous policies to emerge from Washington.

Stable Money Is the Key to Recovery
At the bottom of the world financial crisis is international monetary disorder. Ever since the post-World War II Bretton Woods system -- anchored by a gold-convertible dollar -- ended in August 1971, the cause of free trade has been compromised by sovereign monetary-policy indulgence.

Today, a soupy mix of currencies sloshes investment capital around the world, channeling it into stagnant pools while productive endeavor is left high and dry. Entrepreneurs in countries with overvalued currencies are unable to attract the foreign investment that should logically flow in their direction, while scam artists in countries with undervalued currencies lure global financial resources into brackish puddles.

To speak of "overvalued" or "undervalued" currencies is to raise the question: Why can't we just have money that works -- a meaningful unit of account to provide accurate price signals to producers and consumers across the globe?

Consider this: The total outstanding notional amount of financial derivatives, according to the Bank for International Settlements, is $684 trillion (as of June 2008) -- over 12 times the world's nominal gross domestic product. Derivatives make it possible to place bets on future monetary policy or exchange-rate movements. More than 66% of those financial derivatives are interest-rate contracts: swaps, options or forward-rate agreements. Another 9% are foreign-exchange contracts.

In other words, some three-quarters of the massive derivatives market, which has wreaked the most havoc across global financial markets, derives its investment allure from the capricious monetary policies of central banks and the chaotic movements of currencies.
In the absence of a rational monetary system, investment responds to the perverse incentives of paper profits. Meanwhile, price signals in the global marketplace are hopelessly distorted.

If we are to "build together the capitalism of the future," as Mr. Sarkozy puts it, the world needs sound money. Does that mean going back to a gold standard, or gold-based international monetary system? Perhaps so; it's hard to imagine a more universally accepted standard of value.

COMEX Commercials Least Net Short Gold In Years
ATLANTA ( -- Regardless of whether or not the world is near the end of the giant financial “Charlie Foxtrot” we have all endured up to now, the largest of the largest traders of gold futures now have the fewest bets that the U.S. dollar price of gold will fall further than they have had in years.

As of Tuesday, November 4, traders classed by the Commodities Futures Trading Commission (CFTC) as commercial held a collective net short position (LCNS) of just 76,406 out of a total 303,908 contracts on the COMEX, division of NYMEX in New York. A net short position means that the trader profits if the commodity goes lower in price.

Yes, the current COMEX commercial gold net short positioning is the lowest in years. Indeed, we have to go all the way back to June 7, 2005 to find a reporting week which shows a lower LCNS (67,052 then), back when gold closed at $424.87.

That doesn’t mean that gold can’t go lower still, it can. It just means that the big dogs in the futures trading arena are not positioning like they think it will. To the contrary.

Gold seldom performs well after these big G-Whiz pow-wows. We expect more of the same this week. However, bear in mind that the December futures contracts in Gold, Silver, and Oil expire on Thursday. This "could" prove to be a major turning point in commodities prices. However with the threat of further hedge fund liquidations into the year end, expectations of a big rally in Gold any time soon should be tempered going forward. Volatility will most likely remain with us for the near term. A bullish case for both Gold and Silver can not be endorsed until Gold convincingly takes out 776 and Silver clears 10.50. Until then, continue to accumulate at sale prices.

Thursday, November 13, 2008

The Heat Begins To Rise In The Kitchen

I'm so dizzy, my head is spinnin'...

Lawmakers, Investors Ask Fed for Lending Disclosure
Nov. 13 (Bloomberg) -- Members of Congress, taxpayers and investors urged the Federal Reserve to provide details of almost $2 trillion in emergency loans and the collateral it has accepted to protect against losses.

At least five Republican members of Congress yesterday called for the Fed to disclose which financial institutions are borrowing taxpayer money and what troubled assets the central bank is accepting as collateral. More than 300 more investors and taxpayers also pressed for more disclosure in e-mails and interviews with Bloomberg News.

``There cannot be accountability in government and in our financial institutions without transparency,'' Texas Senator John Cornyn said in a statement. ``Many of the financial problems we are facing today are the direct result of too much secrecy and too little accountability.''

European Central Bank President Jean-Claude Trichet today urged greater disclosure to help strengthen the global financial system.

``Despite all regulatory advances and progress in information technology, the financial system has been characterized by a lack of transparency about the ultimate allocation of risks,'' Trichet wrote in today's Financial Times. He cited as examples ``the sheer complexity of structured financial products, which even sophisticated investors are not able to assess properly, and the lack of regulation of certain financial institutions.''

Separately, lawmakers are also pressing Bernanke and Paulson to better explain how the Treasury is implementing the $700 billion emergency rescue. In a letter to the Fed chairman and Treasury secretary yesterday, Senator Charles Grassley demanded details about how Treasury has chosen which banks got about $250 billion in cash infusions, what they are doing with that money and any contracts the department has signed to help implement the law.

``I am a strong believer that sunlight is the best disinfectant and think it is important that the process of implementing the Act be as transparent as possible, especially when taxpayer money is being used,'' Grassley said in the letter.

``This constitutes exactly the scenario which landed these banks in their dilemma in the first place. The Fed is making sub- prime loans to these banks and taking their portfolio of subprime loans as collateral,'' said William Nein, an accountant from Woodland Park, Colorado, in an e-mail to Bloomberg. ``Where and when does this stop?''
Nein was among the readers who wrote to Bloomberg saying they want to know more about the Fed's loan programs.

``Our government officials never seem to be held accountable for their actions and the American taxpayers are always the ones to pay the price,'' said Kathy Cunningham, a legal secretary in San Angelo, Texas.

``It's pretty obvious the government has sold us out,'' said Jeff Pasko, a quality control engineer in Minneapolis.

YEAH BABY! Turn up the heat on these Rat Bastids! It's high time we "disinfect" the American financial system. Perhaps with luck, this will eventually lead to the US Federal Reserve being disbanded by Congress with the repeal of the "constitutionally illegal" Federal Reserve Act of 1913. We can only hope...

Jobless claims jump unexpectedly to 7-year high
WASHINGTON (AP) -- The number of newly laid-off individuals seeking unemployment benefits has jumped to a level not seen since just after the Sept. 11, 2001, terrorist attacks, as companies cut more jobs in the face of a slowing economy.

The Labor Department on Thursday reported that jobless claims last week increased by 32,000 to a seasonally adjusted 516,000. That nearly matched the 517,000 claims reported seven years ago, and is only the second time since 1992 that claims have topped 500,000.

The total also was much higher than analysts expected. Wall Street economists surveyed by Thomson Reuters expected claims to increase only slightly to 484,000. Initial claims from two weeks ago were revised upward Thursday by 3,000 to 484,000.

The increase puts jobless claims at levels similar to the recession of the early 1990s. The four-week average of claims, which smooths out fluctuations, increased to 491,000, the highest in more than 17 years.

Unexpected? LOL! What a rediculous notion. I'll go out on a limb here and "expect" them to get a lot worse before they get better. Unexpected? LOOOOOOOOOOOL! Please, stop, you're killing me!

U.S. Shifts Focus in Credit Bailout to the Consumer
WASHINGTON — The Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers.

But with a little more than two months left before President Bush leaves office, Treasury Secretary Henry M. Paulson Jr. is hoping to put in place a major new lending program that would be run by the Federal Reserve and aimed at unlocking the frozen consumer credit market.

The program, still in the planning stages, would for the first time use bailout funds specifically to help consumers instead of banks, savings and loans and Wall Street firms.

Treasury officials said they hoped to invest about $50 billion from the bailout fund into the new loan facility, with the aim of helping companies that issue credit cards, make student loans and finance car purchases.

DAMN! Hank Paulson is going to buy me a new car? Where's the line?

No sh*t Sherlock the banks are as unwilling as ever to lend to consumers. Let's see now, you own a bank, some knuckle head in charge of your loan portfolio loans out millions, maybe billions, to people who could never pay it back. Do really think, after getting taken to the cleaners in a mountain of bad debt, that banks are going to just open their windows and loan money "again" to people who have no hope in hell of ever paying it back?

Great idea Hank. Let's "force" the banks to make bad loans. Yeah that's the ticket! That will fix EVERYTHING and jump start the economy. Brilliant! When can I pick up my new car? I'd like a new Mustang GT.

Haven't the geniuses of "high" finance figured it out yet? The "American Dream" was a scam, the greatest Ponzi Scheme of all time. American "wealth" was built on a stack of Wimpy Burgers: "I'll gladly pay you Tuesday, for a hamburger today." HANK, the buy now pay later days are OVER! Life as we knew it no longer exists. The live now pay later generation has hit a brick wall, and all your Monopoly Money isn't going to change that fact. Hank, unless you plan to just give people money, with NO STRINGS ATTACHED, there is not going to be a resurgence in the economy anytime soon. The banks are long past the time they should have stopped making bad loans. For that matter, why were banks ever making bad loans in the first place?

One thing Hank always fails to mention is that even if his plan to make money easy to borrow again was to work, it would detonate the inflation bomb that is now lurking behind all this deflation talk. Once all the money Hank and his pals have been "secretly" funneling to the banks reaches the street and is put to work, prices will begin to rise. And rise exponentially in relation to the amount of money that becomes available and spent. This is when the price of commodities AND Gold will explode. So in some sense, we'd like to see Hank succeed in coercing the banks to give his money away. But then again, the consequences...

Text of Paulson remarks on TARP
WASHINGTON (MarketWatch) - Here is the prepared text of remarks by Treasury Secretary Henry Paulson on Wednesday about the financial rescue package, as released by the Treasury Department.

Goldman big winner in government's revised bailout of AIG
Banks in the U.S. and abroad are among the biggest winners in the federal government's revamped $150 billion bailout of American International Group Inc.

Many banks that previously bought protection from the insurer on securities backed by now-troubled mortgage assets stand to recoup the bulk of their investments under a plan by AIG and the Federal Reserve Bank of New York to buy around $70 billion of those securities via a new company. These securities are collateralized debt obligations backed by subprime-mortgage bonds, commercial-mortgage loans and other assets.

Banks in the U.S., Europe, and Canada bought credit-default swaps on these securities from AIG, which in turn promised to compensate them if the securities defaulted. Defaults haven't been a major problem, but the market values of these CDOs fell sharply over the past year or so.

That enabled the banks to pry roughly $35 billion in collateral from AIG as a result of those declines and downgrades in AIG's own credit ratings. The banks that have sought and received collateral from AIG include Goldman Sachs Group Inc., Merrill Lynch & Co., UBS AG, Deutsche Bank AG, and others.

Throughout its AIG rescue efforts during the past two months, the government has had the banks in its sights; it made its initial bailout of AIG in part to avoid potential bank losses that might have threatened the broader financial system.

Under the plan announced Monday, the banks will get to keep the collateral they received from AIG, much of which came when the government made funds available to AIG in September. The banks also will sell the CDOs to the new facility at market prices averaging 50 cents on the dollar. The banks that participate will be compensated for the securities' full, or par, value in exchange for allowing AIG to unwind the credit-default swaps it wrote.

"It's like a home run for some of the banks," says Carlos Mendez, a senior managing director at ICP Capital, a fixed-income investment firm in New York. "They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back."

The contract cancellations will free the insurer from additional collateral calls on those swaps, which also have been responsible for billions of dollars in write-downs that AIG has logged in recent quarters. The plan is analogous to an insurer buying a house it provided fire insurance on, negating the need for an insurance policy on the home.

( in a Church Lady voice): "Now isn't that special."

Note on today's markets: Take note that the general equities market reversal today came following President Bush's impassioned speech regarding this weekends big "financial summit". The American financial wizards are scared sh*itless that the rest of the world is going to show up loaded for bear with visions of excommunicating the US Dollar from the world financial order. President Bush is hoping that he can change their minds. Good luck Mr. President...

Wishful thinking has lead to too many failed market rallies the past several weeks. With the DOW up today, the Dollar got hammered and Gold prices rose. Follow thru in any of these rallies has been, to date, absent. The Dollar is very overbought, and the chart, for what it's worth, is quite bearish now with a double top forming up around 88 on the Dollar Index. Gold, Silver, and Oil...commodities in general, are all very oversold, and their charts, for what their worth, paint a very bullish scenario developing with double bottoms in these markets sprouting across the landscape. Follow thru in the general equities market will bring severe pressure to bear on the US Dollar. And absent pressure on the Dollar, Gold and Silver are going nowhere anytime soon. Breakout points in Gold remain at 776 Gold, and 10.50 Silver. Until these levels are breached, continue accumulating .