Sunday, December 21, 2008

Points To Ponder

The Greatest Wealth Transfer in the History of Mankind Starts Now!
Right now, the Treasury, the Federal Reserve, and the banking system seem to be gearing up for an event the likes of which has never been seen. I believe the crisis that will unfold over the next few years will add up to the biggest economic event in history. The scale of what is happening will dwarf all other economic events combined. The Tulip mania of 1637, John Law's "Mississippi Scheme" of 1720, and the dot-com / tech bubble of 1999 will pale by comparison. Even the hyperinflation in Weimar Germany in 1923 and the Great Depression will seem like a walk in the park compared to what is coming.
http://marketoracle.co.uk/Article7880.html

GOLDMAN SACHS MAKES MASSIVE COVERING OF GOLD SHORTS - GOES NET LONG!
In the December 18 session on the TOCOM Goldman Sachs COVERED an absolutely gob-smacking 1,307 gold short contracts which reduces their short position to just 495 contracts and leaves their long position unchanged at 1,337 contracts and makes them NET LONG – REPEAT, NET LONG 842 contracts. This is an absolutely stunning development! This is the largest net long position they have held ever since I have been tracking the TOCOM data which is almost 3 years. Considering Goldman’s role in the Cartel and links to the Treasury this is of earth shattering significance. It should also be noted that for ANY trader to be buying 1.3 tonnes of gold in a single day it deserves attention, when it is Goldman Sachs it has special significance.
http://www.lemetropolecafe.com/guests.cfm

Fed Fights to Weaken Dollar
by Axel Merk
Faced with the threat of deflation, the Federal Reserve (Fed) may be trying to drive the dollar lower to spur inflation. As policy makers don't want home prices to deteriorate further, an alternative is to inflate the prices of all other goods and services: as a result, the relative prices of homes would be less expensive. Weakening the dollar is an effective policy tool to drive up inflation as the cost of import goes up. Just be careful: the Fed may be getting more than it is bargaining for. Fed Chairman Bernanke believes that a weaker dollar will only drive up inflation modestly; in our humble opinion, we believe he may be mistaken. Foreigners have a limit on how much margin pressure they can absorb before they have to pass on the higher cost of doing business. We saw this phenomenon in the spring time, when higher commodity prices forced Asian exporters to drive up prices; import prices into the U.S. were up over 20% year over year (and still up substantially after factoring out what was soaring oil prices at the time). No country has ever depreciated itself into prosperity and the U.S. is unlikely to be the first.
http://www.safehaven.com/article-12104.htm

Battle of the Flations
by Bud Conrad
One of the most hotly debated topics among financial talking heads these days is, "Deflation or inflation, what is it going to be?"

There is no question that we are currently experiencing asset price deflation and economic slowing. But we, the editors of The Casey Report, see this as a transitional phase. In our analysis, the truly extraordinary and historic levels of government spending and bailouts being deployed to keep the economy afloat are certain to lead to inflation in the not-too-distant future.

While our long-term view remains solidly in the inflation camp, over the past four months, the U.S.'s financial problems have caused deflation in many important asset classes. Put another way, a reduction in asset prices amounting to about $14 trillion (in housing, equities, etc.) is bigger than the government's countervailing actions of around $3 trillion -- the total, so far, arrived at by combining the measures taken by the Fed with the federal government bailouts.

But there are important differences between a sharp collapse in asset prices and the potentially leveraged stimulus packages.

The Fed's actions, if taken in normal times, would be multiplied throughout the banking system as banks used the new money to increase their lending and, in so doing, leveraged the funds throughout the entire economy. This time around, however, while the Fed has been extremely accommodating to the banks, even going so far as to make direct loans to them, the effect is moderated. That's because of tighter lending standards, the need to replenish capital, and the demise of many complex structures, which were previously available for securitizing and selling loans on to others.

As a result, the banking system as a whole is not responding to the stimulus. It can be thought of as pushing on a string. Simply, as large as the stimulus has been to date, it has not yet been enough to offset the effects of the economic collapse. The resulting deflationary pressure increases concern over a downward spiral in the economy.

Another way to view this is that consumers and businesses alike are now anticipating deflation, which makes saving and survival the primary goal (in an inflation, spending becomes the primary goal, unloading the money before it can lose value). Of course, a cutback in spending and demand drives down the price of things, at least temporarily.

But the longer-term expectation is that Bernanke's assertion - an assertion now backed up by action - that the government can and will print new money to any extent needed is the more important force.

http://www.safehaven.com/article-12122.htm

The International Forecaster

What is a self-respecting, megalomaniacal, Illuminist miscreant-reprobate-sociopath to do under such horrifying circumstances? We'll tell you what they did.

The first problem was that Bernanke was flooding the system with money and credit to keep it afloat as the credit-crunch went wild, with M3 at 14% to 16%. This was highly inflationary. How can you lower borrowing rates to increase spreads when inflation is out of control? Answer: you can't, if you want to retain some semblance of credibility. So the Illuminati took advantage of the US sheople's ignorance concerning economics. They know that people look at prices to gage inflation, when it is really the money supply that controls the level of inflation. Prices are the symptom, not the cause. So they ran up all commodities, even gold and silver, for a time so that they could bring about a dramatic drop in prices later to give the perception that inflation was under control and that deflation might be setting in. This is how they justified the near-zero interest rates you now see, which can yield a huge spread of about 5%, which is more than five times what was available before all the trouble started.

In the meanwhile, the Fed arranged to accelerate the payment of interest on hoarded bank capital on reserve with the Fed. This bank capital will now be deployed, but it will be used for elitist speculation and insider trading, not for the opening of credit markets to consumers. The idea is to keep the salaries, bonuses, dividends and spreads going in order to line the pockets of elitists, not to save the middle class. They are going to throw your money, via taxpayer-funded bailouts, down a rat-hole, the exit for which comes out into their back pockets. They will become fabulously wealthy, while you are hyper-inflated into oblivion, as your dollars are thrown at insolvent elitist companies that are being artificially animated like zombies. Taxpayer-owned equities, received in exchange for bailout money, are absolutely worthless. They will re-inflate after they have destroyed the auto industry and as many non-Illuminist companies as they can to eliminate competition. The loan money will not be available for these unfortunate souls and entities. Ford may absorb GM and Chrysler before it also succumbs, and then it will be nationalized as our Communist Comrade Obama uses members of the former Clinton Administration to destroy what is left of our economy. Does he really expect change from these people? Of course not. He did not pick them. They were chosen for him. http://news.goldseek.com/InternationalForecaster/1229888346.php

Rock, Paper, Scissors

RUNNING into YEAR-END 2008 with a hatful of fears, losses, hope and questions?

Here's another puzzler to ponder as the $3 trillion of tax-funded bailouts now promised worldwide slowly roasts every bond-holder's goose over Christmas...

As a proportion of global investable assets, Gold hasn't been this strongly-weighted for the last 15 years.

But seeing how this financial crisis is the ugliest since the Great Depression, World War I or perhaps even earlier (depending on which political hack, wonk or meddler you speak to), it could still double again – if not rise more than ten-fold.

Either that, or the value of paper assets – meaning stocks and bonds – could tumble in half. If not sink by more than nine-tenths.

...comparing all the gold-in-the-world against stocks and bonds shows a far less than "extreme reading" for investor stress. So far, at least.

Back in 1980, for instance – when the Iranian crisis and war in Afghanistan last sent gold to a nominal peak at $850 an ounce – "the $1.6 trillion invested in gold exceeded the market value of $1.4 trillion in US stocks," according to Peter Bernstein in his classic tome, The Power of Gold.

US equities today stand closer to $13 trillion. Every ounce of gold ever mined is worth barely one-third.

Put another way (and yes, the numbers are rough once again), "We calculate the market cap of all above ground gold, including central bank reserves, equals about 1.4% of global financial assets," wrote Tocqueville's John Hathaway almost three years ago.

"In 1934 and 1982, when investor stress reached extreme readings, that percentage was between 20% to 25%."

In short, the mass people choosing to Buy Gold today remains tiny compared to the value which the world still puts on paper. And it's only when paper collapses in value – an event you might expect during the worst post-WWII crisis – that gold is likely to hit its true peak for this investment cycle. http://news.goldseek.com/BullionVault/1229710394.php


The Idiocy of Bernanke's Bubbles and CNBS
Treasury seems to think they can issue essentially limitless debt to bail out banks and others, having committed nearly $7 trillion thus far. Most of that has been issued through various short-term paper which has a near-zero (or actually zero!) interest rate - that is, up until now that debt issue has been essentially free!

What happens when this bubble bursts?

You think it won't? Like hell it won't. And when it does - that is, when Mr. Market calls the bet and forces Bernanke to actually make good by starting to unload all these "accumulated" Treasuries into his gaping maw, we will see "shock and awe" of another sort.

See, if the selling starts rates go up. To stop that Ben has to take up the supply. This causes him to print more money (expand his balance sheet) which means that the full faith and credit he relies on is further damaged. That in turn causes more people to get the idea that they better sell now which in turn causes him to buy more which...

Remember the waterfall in September and October in stocks?

The same thing can happen in the Treasury market, and if it does it will force a political decision to be taken - risk the destruction of the dollar and our government or remove - by immediate statutory change (and force if that is resisted) The Fed's authority.

The argument keeps being made that "we had to do this" to save the system. But what's not being talked about is what the real problem was, and who we're trying to save.

The political class keeps trying to tell us that "we have to do this for mainstreet" and "we have to help homeowners."

Oh really?

Let's look at a few facts, shall we?

First, total mortgage debt outstanding. Its about $14 trillion dollars.

With the $7 trillion dollars we have committed we could have literally given every homeowner with a mortgage a fifty percent reduction in the principal outstanding.

This would have instantaneously stopped all of the foreclosures by putting all (essentially) homes into positive equity - overnight!

So why wasn't this done?

Because the goal was never saving homeowners or Main Street.

In point of fact the problem that the government is "trying to solve" is instead the unregulated bets that were made in the OTC CDS space which were backed by exactly nothing; there was no capital behind any of these bets!

There is no fix for this problem; your leverage is effectively infinite if you have no capital behind your positions. You are limited only by your testosterone level and there's been far too much of that on Wall Street over the last decade.

This was not an accident; in fact Henry Paulson himself lobbied for the removal of the previous leverage limits as I have noted when he was Chairman of Goldman Sachs. Between that and the complete refusal to regulate anything or anyone by the SEC, OTS, OCC, The Fed or anyone else we have built what amounts to a pyramid scheme based on nothing other than debt.

What Bernanke and Paulson are in fact trying to do - and what they have been trying to do since this crisis began - is paper over the bad bets that companies like Citibank, Lehman, Bear Stearns and AIG made with zero (or nearly so) capital behind them.

That is why we have committed $7 trillion dollars, it is why Paulson keeps changing how the "TARP" is going to work and what it is going to do, it is why AIG has gotten bolus of money after bolus as its bets have deteriorated further and in fact it is why The Fed took the arguably-illegal step of buying the assets against which AIG wrote the bets (so it could null them out; you own both sides of a bet there is no bet at all - but the loss on the underlying is now yours!)

The problem with this strategy is that it hasn't changed a damn thing, because with the exception of Lehman (which was allowed to blow up) these contracts were never extinguished; a loss is a loss and when you own both sides you're guaranteed to be the sucker who eats the grenade. All we have done is change where the leverage lies; we have taken the 30 or 50:1 leverage from the investment and commercial banks and moved it onto the balance sheet of The Federal Reserve!

This explains why The Fed is "resisting" Bloomberg's FOIA and has forced Bloomberg to file a lawsuit; laying bare the "assets" being held would allow independent evaluation of their value. This is extraordinarily dangerous to The Fed because if "we the people" (or worse, foreigners who have loaned us those trillions of dollars) were to get a look inside these "assets" and found that they were in fact so-called "AAA" mortgage bundles that have forty percent default rates embedded in them (as was found in one particular WaMu securitization I and Mish Shedlock were writing about earlier in the year) fair-minded people might conclude that The Federal Reserve is in fact broke and lying about their own solvency!

http://www.321gold.com/editorials/denninger/denninger121808.html

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