Monday, May 28, 2012

JP Morgan: Where There's Smoke, There's Fire

The recent weakness in Gold..."it's all beginning to make sense now..."

USTBond Tower of Babel Teeters
By: Jim Willie CB,

The Biblical story is told of a tower built ever higher in order to achieve contact with the heavens, lest they be scattered upon the earth. They were scattered when the tower fell. Fast forward to today, where the earth has a multitude of tribes, languages, and several major alphabets. When the Lehman Brothers failure occurred, and the Fannie Mae and AIG activities were to be concealed under court orders, the land turned barren, and a financial plague befell the Western nations led by the United States. They were after all, the keepers of the ark (printing press for USDollars). But a plague of debt locusts was cast upon the US nation, with annual $1.5 trillion deficits. The Americans in their unending arrogance, chose to speak from the tower top and to proclaim 0% forever, suspending gravity. They have attempted to force free money to finance their USGovt debts, to preserve power, to ensure privilege, but in doing so they defy nature in testing gravity itself.

The recent losses from JPMorgan have proved to be much more based upon suspending gravity with 0% official rates in the Delta-Hedging complex game tied to the vast over-burdened Interest Rate Swap contracts, rather than the European sovereign bonds as first claimed. The Jackass is on record on May 11th, aided by the indefatigable forensic analyst Rob Kirby, in pointing to Interest Rate Swap stresses from the sudden March and April movement in the 10-year USTreasurys within the strained bloated USGovt sovereign bond market. The IRSwap setbacks were the underlying cause of the JPM losses. The giant bank does not want attention give to this derivative tool which controls the bond market in a devious artificial manner. As far as debt is concerned, the United States is Greece times 100. It is Italy times 20. It receives a pass from the bond market, precisely because the nation prints the money and controls the vast Interest Rate Swap support mechanism. But the tower is finally exposed.

The IRSwaps act like giant buttresses to support the evergrowing USTreasury Tower of Babel that stretches to the sky. Every year, the expansive tower grows another $1.5 trillion higher. Every year, the challenge grows exponentially for the JPMorgan master financial engineers to apply their control panel magic to achieve equilibrium. Every year, the degree of difficulty becomes more arduous. Every year, the tower must withstand the high winds from Europe, where the bond market is doing more than undergoing stress. It is crumbling before our eyes. In a way, Europe helps to conceal the great strains from the broken USTreasury Bond market, held together by interest derivatives. Few analysts connect the failure of the Draghi LTRO funds to the JPMorgan losses. They do not grasp the gravity of the USTBond problem. They prefer to focus on FINREG for regulatory changes centered on the Volcker Rule, or on the division of proprietary trading. They focus on the personalities of the so-called Whale. Now a new verb has entered the lexicon, as a firm was just "Iksil-ed" to mean they suffered massive leveraged losses in a high risk game of playing god in the financial markets. JPMorgan cannot hedge since THEY ARE THE MARKET. What the Whale or JPMorgan do is attempt to maintain balance of the USTreasury Tower of Babel, which grows every year to try to touch the sky, to achieve the perfect world. They scrape the devil's attic door instead.


Without any doubt whatsoever, the ultimate problem is that the bond market cannot defy the natural forces (gravity on the tower) from enormous new supply coming to the USTBond market (higher tower) in the form of $1.5 trillion deficits, and keep the bond yield at 0% for the FedFunds and under 2.0% on the TNX. Essentially the 0% rate is an engineering display of the most extreme arrogance. It is tantamount to placing the buttress support structure at a very low position. The sovereign bonds of Southern Europe with their 5% or 6% bond yields have the equivalent of buttresses place in very high positions, sufficient to endure the whips and sways from the high winds and routine vagaries dealt by the never-ending global financial crisis. In my opinion, the global financial crisis is far more than that. It is instead a global monetary war, to preserve the USDollar supremacy at all costs, with victims being the Western banking systems and the Western economies. The entire platform that supports the major fiat currencies is collapsing, namely the sovereign bonds. The platform is breaking at its weakest points, where it has non-homogeneous planks in Southern Europe that do not fit together. Imagine how the USTreasury Bond market would look if all 50 states had their own sovereign debt as components to the entire USGovt. Imagine each year the $1.5 trillion in debt were apportioned as 15% to California, 4% to Texas, 8% to New York, 8% to Florida, in shared responsibility. Imagine each state had its own bond traded in a market that strived for equilibrium, each with a unique bond yield, all tethered to the USDollar. The United States would fracture in six months from the stress, not the least factor for which would be the apportionment of syndicate banker benefit and divvying up the war costs. That is Europe in parallel.


Back to the ultimate problem. The USTreasury Bond market cannot defy the natural forces from enormous new supply coming to the USTBond market in the form of $1.5 trillion deficits, and keep the bond yield at 0% for the FedFunds and under 2.0% on the TNX. To add strain to the tower, the foreign buyers have removed themselves due to the grand debasement of the USDollar from the program. Too much hidden USDollar output comes behind the curtains. They are disgusted that the US bankers make unilateral decisions on central bank monetary policy, like setting the 0% rate, like monetizing another $1 trillion in USTBonds or USAgency Mortgage Bonds, like consenting to lavish executive bonuses to those responsible for fracturing the global financial ramparts, all done without consulting foreign creditors. Their significant US$-based bond holdings are eroding in value, not earning a yield in compensation for risk. The 0% payout is an insult to creditors, especially during constant QE initiatives. The published CPI measure of 2% to 3% is another insult, when 8% to 10% is the reality.

Many inexperienced observers, naive bank analysts, clueless fund managers, and deceptive news anchors fail to ask the basic question of how the USTBond market can continue with 0% when supply is an annual flood of $1.5 trillion in new debt while the demand is vanishing from the absent foreign creditors. It is hardly a mystery. The visible piece is the USFed itself with its awkwardly named Quantitative Easing initiatives, which make it sound so sophisticated and professional. Its bond monetization is highly destructive, since it is effectively pure hyper monetary inflation. The wayward financial market mavens crave even more QE, even more monetary inflation flows to aid the market, without realizing the utter destruction of capital. They might notice out of the corner of the eye some rising costs, but they minimize them in their mental process. They deceive themselves into thinking that the financial assets will rise in value also. Except valuation is greatly distorted. The end result is that the cost structure is rising without benefit of rising incomes. In many cases, where liquidation is often the rule, the end products are not rising in price. So profit margins are squeezed, businesses are shut down, equipment is taking offline, and workers are cut along with incomes. The zinger is the globalization concept, when China hit the scene. The Western economies cannot withstand the competition. The West has in effect replaced much of its legitimate income sources with debt from dubious areas like home equity. The home foreclosure movement is a direct consequence of Chinese industrialization.


The hidden tool to maintain the 0% interest rate when supply grows by $1.5 trillion annually, and when dependence on the USFed for bond monetization picks up the slack, is the Interest Rate Swap contract. JPMorgan would prefer that the public not learn about it. Back in December 2010, Morgan Stanley added $8 trillion to its Interest Rate Swap book in a single quarter. Look to see the wondrous effect from that lever pulled behind the curtain. Bear in mind that the accounting for the derivative book, listed in the Office of the Controller to the Currency, is quarterly and tallies the past quarter of activity. My belief is there is more lag to the proper accounting. Notice how the 10-year USTreasury Bond yield (aka TNX) went from a threat to the 4.0% mark in early 2010 and rallied hard all the way down to the 2.4% mark by summer's end. The US financial press hailed a grand flight to safety in the USGovt Bond securities. No such flight to safety like a thundering herd was part of the reality landscape. Let the chart be shown with GREEN text to reflect the application of USDollars from the financial engineering rooms.

What the Interest Rate Swap does is to create artificial demand for the end product USTBond, no real buyer, in a magnificent display of 50:1 leverage, sometimes as much as 100:1 leverage. Repeat that -- no real buyer of the USTBond, all artificial, all coming from the IRSwap device. Few bond experts even realize this fact of bond life. The pronounced effect on the US bond market brought about a change in sentiment, and reinforced the phony notion that investors were flocking to the USTBond market for safety. The reality was the exact opposite. Bill Gross of PIMCO was exiting the USTBond market. A slew of foreign creditors exited the USTBond market. The bank analysts were confused, unable to explain the rally in USTBonds and falling bond yields when supply was growing in a big way, but demand was vanishing. The USFed had to admit its bond purchases within its QE initiative in order to explain the inconsistency. The huge annual deficits and departure of bond buyers forced the USFed into the open, where they had to admit their QE and its hyper monetary inflation.


In early August 2011, the debt rating agency Standard & Poors downgraded the USGovt debt. It was an insult of high order, delivered during the Greek Govt Bond crisis, as the Southern European bond market was under great scrutiny and strain. The JPMorgan situation room was obviously tipped off, pressed into action, and ready at the Interest Rate Swap lever. The result was profound as the TNX fell from 3.2% down to under 2.0% by the time the dust cleared. Notice a near accident in June in the USTBond market just before the big decline in bond yields, a big oops! The TNX jumped from 2.88% to 3.20% in a single week, a hefty 32 basis point scare. The JPM situation room responded quickly. Word leaked out about the S&P debt downgrade, the first in US history. The market move was becoming clear, a selloff. The Interest Rate Swap lever was yanked, and the effect pulled down the TNX significantly, as the financial press obediently proclaimed a victory over the S&P defiant downgrade. It was all phony, again!! The USGovt barkers even pounded the tables to point out a grand market contradiction of the Standard & Poor debt downgrade of the USGovt debt. Victory over the marketplace was won, and no big debt insurance contract rise either. All hail the IRSwap weapon in private Wall Street offices, of course without recognition of its heavy usage.

By this time, in late summer 2011, the financial market sentiment had solidified its phony psychological notion of the USTreasury Bond being a reliable safe & secure place to hide. The USFed was repeating its assured interest yield paid to Excess Bank Reserves, another false story. In reality, the USFed was paying the big US banks to place their Loan Loss Reserves at the USFed in order to conceal the insolvency of the USFed balance sheet. The big US banks compounded the flagrancy of the action by removing loss reserves later, calling them profit, in order to conceal their own business decline and deep deterioration. They did so because they became dangerous illiquid.


Something happened in March 2012. It is not entirely clear. Perhaps it was simply the stupidity of the Bernanke Fed in declaring the need to embark on an Exit Strategy at some point soon. Once more, Professor Bernanke is a poor economist, unaware that he is stuck in the 0% corner forever. That bears repeating. THE USFED IS STUCK WITH AN OFFICIAL ZERO PERCENT RATE FOREVER, NEVER TO RISE. It can never rise due to the extreme increase in borrowing costs that would hit the USGovt deficit tally. The amount would equal the endless war costs. However, the USFed is stuck at 0% forever, due also to a very different hidden market force. Any rise, even a moderate rise, in the USTBond yield would result in multi-$trillion losses from the derivatives hidden at work. The vast Interest Rate Swap would deliver massive blows like a machete across the entire financial sector. Every big US bank involved in heavy IRSwap enforcement as bond market intervention would suffer losses in the multiple $trillions. That process is starting to be seen. The Jackass has warned about the potential losses for three years, explaining the permanent corner the USFed has found itself, a result of its own failure. The USFed talked about an Exit Strategy in 2009, and the Jackass correctly rejected the notion as lunatic wishful thinking. The USFed backed off, and worse, assured the banking sector of zero percent policy almost forever. You see, the big US banks are earning easy money in the USTreasury carry trade, borrowing short and investing long. If the USFed were to hike rates, they would remove the US bank income stream, since they sure are not earning it the old fashioned way, with IPOs and debt offerings. They are not so much investment banks anymore, just plain speculative houses. They love their High Frequency Trades in the stock market too.

The USEconomy has lost its potential traction, since it forfeited the bulk of its industry to China in the last decade, after forfeiting much more in the 1980 and 1990 decade. Back then it was called the migration to the Pacific Rim. Therefore, the USEconomy cannot respond to 0% rate, does not take advantage of the low rate to expand business investment, to kick start the various industries as it did in past recessions. This recession is both permanent and a march to the cemetery. At the end of this current cycle is a massive implosion of the big US banks, followed by global isolation of the USDollar, ending with an inevitable USGovt debt default. The implosion of the big US banks has begun, with JPMorgan making its defensive deceptive admissions of serious loss and worse, lost control. The isolation of the USDollar is a new chapter underway, in response to the ill-fated Iran sanctions. The East is mobilizing.

The USGovt debt default, laughed off by the same clowns who expected the subprime mortgage mess to be contained, will come in the form of global rejection of USTBond debt and a grand summit conference to restructure the debt. The many debt downgrades handed out in recent months to Europe, today to Japan, and elsewhere have carefully avoided the United States. The second downgrade will come, this time with the Interest Rate Swap machine in view at the side of the stage, and with JPMorgan executives at center stage. They will be fumbling to explain their losses and the backlash of the IRSwap machinery. It is their special tool (buttress) to hold the sprawling USTBond Tower of Babel upright, and to prevent it from falling in a heavily populated urban location.


Again, something happened in March 2012. It is not entirely clear. Perhaps it was simply the stupidity of the Bernanke Fed declaring the need to embark on an Exit Strategy at some point in the not too distant future. Bond investors might have sold bonds in heavy volume in anticipation of the lunatic professor actually hiking rates in the face of annual $1.5 trillion deficits and a vast overhang of derivatives. They might have feared a great unwind of leverage that could have gone out of control easily. Perhaps the USFed itself conducted some active Stress Tests on the derivative complex, with some arrogant assurance from JPMorgan's CIO office that they could handle anything that came their way. Perhaps the arrival of Volcker Rule adaptations, reorganizations, and disruptions took the JPM IRSwap team off guard. Perhaps something more sinister occurred, like China acting to kick one leg from under the stool, selling a vast block of USTBonds to awaken the Wall Street megalomaniacs. It could be that China sold a big block of USTBonds without malice of forethought, but instead expedience in dealing with its own economic slowdown and pervasive banking holes. Maybe they just did some rebalancing of their huge SAFE Fund and other sovereign wealth funds that must be approaching $3 trillion in size.

On May 10th, the JPMorgan machine issued some deceptive public comments in response to a large estimated $2 billion loss. The deception was from putting blame on the European sovereign bonds and their instability, wreckage, and chain effects. The other deception was not admitting the fuller extent of losses, and giving empty assurance of being in control. The JPMorgan machinery could not properly and accurately assess and measure their losses unless a full audit were to be conducted that spanned three months at least. They have lost control. In a radio interview with Turd Ferguson (CLICK HERE), the Jackass pointed a finger at the USTreasury Bond tower, the Interest Rate Swap support mechanism, and offered an argument that the losses for JPMorgan were closer to $18 billion. Furthermore, an argument was made that the losses would top $100 billion in a year's time. Tyler Durden of Zero Hedge correctly boasts that their excellent publication first broke the story of the outsized JPMorgan losses, even the possibility of greater losses. But it was the Jackass that first pointed to the Interest Rate Swap to defend the outrageous USTBond tower during a March whipsaw event. The Jackass pointed to the tame European sovereign bond yields during the six weeks in question where JPMorgan offered their typical deception. PIGS bond yields were tame over those six weeks. During the interview, a big hat tip was given to Rob Kirby who exposed me to the tame bond market in Europe, and with emphasis to the whipsaw of high winds against the USTBond market in March. He identified the location of the source of disturbance. It caused a big shock wave that knocked the JPM machine off its footing. It has been suffering from loose cargo ever since.

One must ask a preliminary question, of why with national security exceptions, the JPMorgan loss had to be admitted at all. It could have been swept under the rug, doctored on the balance sheet with the help of the USDept Treasury and USFed. The regulators would look the other way as they always do. Something unusual in the parental rules has occurred, and it is not certain. My guess is a new sheriff is in town, fresh off a jet from the East, who read the riot act to its wayward debtor, and did so recently. What else has changed? To be sure, the big US banks are operating under big illiquidity problems from European sovereign debt, along with troubles in FOREX currencies, drainage from mortgage bonds, even litigation costs from bond investor lawsuits. They suffer from a panoply of losses. A private source reports the big money center banks in New York are all under great strain from lack of cash, as in they are broke. The trouble with standing as insolvent structures is the grand risk of an illiquidity bout. The longstanding rule in banking is that INSOLVENCY plus ILLIQUIDITY equals BANKRUPTCY. Last and hardly least, the JPMorgan losses and financial strains admitted confirm something for a Grand Jury. They scream out a Prima Facie case for the MFGlobal client fund thefts, establishing a motive.

Some truly devastating implications. My European banker source shared a dire opinion. He fully expects the total loss to be several 100 $billion in JPM losses. He shared his $18 billion figure two weeks ago that tipped me and Rob Kirby off. That figure seems to be the target being approached. Early last week, the JPMorgan talking heads revealed they are struggling to provide an accurate estimate of their outsized loss. In truth, they cannot estimate it, since the IRSwap and other Delta-Hedging mechanisms are dynamic and too complex. They revealed the loss was closer to $3 billion, not the original $2 billion cited. At least they have started the process of upgrades toward truth. Then late last week, the Wall Street Journal reported that the loss might be around $8 billion. But the WSJ revealed something more important, that the loss stemmed from the Delta-Hedging program that involves the Interest Rate Swap contracts in their vast derivative book. The JPMorgan derivatives contain about $57.5 trillion in interest rate derivatives. They are teetering, like the USTBond Tower of Babel. Bingo!! The IRSwap is on the table as the culprit in the outsized JPM losses, precisely as the Jackass (and RKirby) concluded on May 11th.

My European banker source shared an update this week. He believes the ultimate JPM loss will reach several hundred $billion and grow with time. He mentioned a trigger having gone off in a chain reaction that is not stoppable, which will bring down the USTreasury Bond market and topple the USDollar. Refer to the USTBond Tower of Babel.

Notice the progression of truths. Within one week, JPM admitted the loss was $3 billion, but difficult to calculate. One week later, CEO Dimon admitted Interest Rate Swaps involved in Delta-hedging to defend with the Interest Rate Swap, as the estimated loss reached $5 billion. A few days later, Zero Hedge dissected the post-LTRO2 loss, as they called it, with an updated estimate of $8 billion and some dire warnings of still naked unhedged huge positions. Let me share my own overall impression of the IRSwap and its handiwork.


Never lose sight of the fact that 0% is absurd in the USTreasury Bond market with annual $1.5 trillion deficits, held together with the USFed monetary inflation glue. Never lose sight of the fact that negative real interest rates (actual rate minus price inflation) is the powerful fuel for the gold bull market. It is no coincidence that the gold bull market began with the advent of negative real rates back in 2002 when the Greenspasm Fed pushed the FedFunds rate down hard to avoid a financial sector collapse. The negative real rate of interest has remained, and even gone more negative, since the Quantitative Easing programs hit in 2010.


Ferguson is an alert analyst, capable of piecing the puzzle together. Some call it connecting the dots. He has come up with a simple deduction. The New York Fed as part of their shoddy Bank Stress Tests this January made a conclusion (directive) that JPM would have to suspend their stock buyback and dividend payouts, IF THEIR DERIVATIVE LOSSES EXCEEDED $31.5 BILLION. Well lookie here!! The JPMorgan colossus just announced no more stock buyback or dividends. Although not a necessary & sufficient condition of the outsized losses, we have an indication of over $31.5 billion in losses. It will all come out gradually, especially since the trigger has been hit. The internal breakdown of the USTBond reserve banking system from has been hit with a shock, and the internal breakdown of the USDollar toll taker system from has been hit with mounting defection and avoidance. The alternative trade settlement systems are coming online, with bilateral swap facilities, settlement in gold, and eventually a rival method to the SWIFT bank settlement. Nations are actively seeking out the alternatives.


A great urgent need has come for a rally to 1.5% in the TNX (10-year USTreasury yield) in order to save the IRSwaps from implosion. The Tower of Babel is teetering. A bond rally would thus render the tower wider at the base. The final losses will be in the hundreds of $billions in the next several months, eventually possibly to top the $1 trillion mark by next year. My source from Europe wrote, "An event driven chain reaction has been triggered deep inside the system, with Interest Rate Swaps at the center. This has already gone viral. They will have to trigger some mega-crises, most likely in Europe & Greece, as a diversionary tactic. They need to have something to blame things on. Once Greece implodes, so will the big French banks and likely some Italian banks. It is all so obvious and predictable."

Look also for losses to London banks, enough to topple one or more. Hats off to Rob Kirby for correctly concluding the Interest Rate Swaps were at the center of the mega mushrooming JPM losses. It is coming to light slowly. Many analysts naively believe the USFed can monetize whatever ails the system. Not so, when the biggest credit market in the world (USTBonds) is involved. They can use the 0% money to paper over the hurricane for a while. In the May Hat Trick Letter report, several times it was repeated that the central problem is 0% rate with annual $1.5 trillion deficits, held together by hyper monetary inflation at the hands of the USFed central bank. The report contains a full 12-page chapter on JPMorgan alone and its events, traps, and basis for future loss. The USTBond Tower of Babel is very narrow and tall, like a tower that grows higher and higher each year, subject to the heavy winds. The recent bond market volatility has acted like slamming a hedge hammer into the Babel Tower base when strong winds from Europe hit the sides. The vagaries and complexity and wreckage of the sovereign bond market have begun to topple the tower. The tower will fall, and fall in a heavily populated urban area. It is going to be the most dangerous and exciting event in modern financial history, that climaxes with the death of the USDollar and announcement of the USGovt debt default. The main tough questions are timing of events. But as usual, the sequence will be from an event schedule. It has begun, and cannot stop.

When the USTBond tower topples, it will lead to the great release upward in the Gold price. A grand Gold bull market is near. As the safety and security of the USTreasury Bond market is unmasked (an asset bubble), enduring a devastating wreck, the global funds will flock into Gold. The timing will be simultaneous with the rejection of the USDollar in trade settlement, and the end of the famed Petro-Dollar. The Gold cartel cannot stop the price rise, because they will have no physical gold. They are being raided of their gold bullion by the East, to the tune of 5000 (five thousand) metric tons since the end of February. That figure was confirmed by my source, who also claims that the major banks are short well over 20,000 metric tons after illegally grabbing the Allocated gold accounts held in their custody. Law suits are occurring in Switzerland to this effect.

It's been two weeks since we last visited with Jim Willie. In the time since, the JPM derivative fiasco has come into sharper focus and, of course, the global financial condition has continued to deteriorate. In this podcast, Jim has a forum to discuss these issues at length. Though it's about 55 minutes long, at least 50 minutes are of Jim talking in a stream of consciousness that will keep your attention. Please make time over this 3-day weekend to listen to the podcast in its entirety. You won't be disappointed.

Got Gold You Can Hold?
Got Silver You Can Squeeze?

Wednesday, May 23, 2012


“All propaganda must be popular and its intellectual level must be adjusted to the most limited intelligence among those it is addressed to. Consequently, the greater the mass it is intended to reach, the lower its purely intellectual level will have to be.” –Adolf Hitler

US unemployment data is a lie....the entire country knows it...and the Fed not only believes the data is accurate, but they base their monetary policy decisions on it too?  

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

Fed’s Kocherlakota:Higher Inflation Means Economy Closer To Max Employment
By Steven K. Beckner

(MNI) – Minneapolis Federal Reserve Bank President Narayana
Kocherlakota Wednesday warned there may be less slack in the labor
market than the employment data suggest, potentially resulting in more
inflation to which the Fed would have to respond.

The Fed’s policymaking Federal Open Market Committee is charged
with seeking “maximum employment” along with “price stability,” but
Kocherlakota said the FOMC faces “especially large uncertainty” about
the maximum level of unemployment that monetary policy can actually

He said the maximum employment level the Fed can expect to attain
through monetary stimulus may well have been reduced (or the
unemployment rate increased) because of a “considerable deterioration”
in labor market efficiency.

Citing the increased difficulty firms are having filling job
openings in the face of reduced labor force participation, Kocherlakota
said some of the high unemployment may be “persistent,” not
“reversible.” If that is the case, he suggested, there is less
justification for further monetary accommodation.

Kocherlakota, who twice dissented against easing measures last
year, said above-target inflation is suggesting that the economy is
closer to “maximum” employment than many think and said the Fed “should
be responsive to such signals.”

Other policymakers, he acknowledged, believe that the kind of
“structural” labor market problems he mentioned are minimal and that
most unemployment is “reversible” and hence are more inclined to support
further monetary easing.

Kocherlakota pointed out that, in its statement of longer-run goals
and monetary policy strategy issued in January, the FOMC said it could
not set an unemployment target because “the maximum level of employment
is largely determined by nonmonetary factors that affect the structure
and dynamics of the job market.”

Kocherlakota emphasized that “the FOMC has no control over these
nonmonetary factors,” including such things as “population trends, the
incentives built into the tax system, the incentives built into social
insurance safety nets, the returns to human capital accumulation for
young people, and simply social norms.”

And he said changes in such nonmonetary factors “generate
fluctuations in the level of maximum employment achievable through
monetary policy — fluctuations that are often hard to gauge on a
real-time basis.”

And so, he said, the FOMC “currently faces an especially large
amount of uncertainty about the level of maximum employment that it can
hope to achieve.”

By way of illustration, Kocherlakota pointed to “a sharp decline”
in the employment/population ratio and to an “accelerated” decline in
the labor force participation rate.

Whereas firms usually hire more workers in a recovering economy, in
the recent period there has been “a decline in the ability of the labor
market to form mutually beneficial matches between workers and firms.”

“In that sense, the labor market is less efficient,” he said.
“Firms can’t fill their available job openings as readily as we would
have expected in light of the high unemployment rate.”

As a result, “labor market outcomes do remain notably worse than
prior to the recession,” he said.

Although the unemployment rate has come down, so has the labor
force participation rate, and there has been “considerable deterioration
in labor market matching efficiency,” he said.

Kocherlakota pointed to research showing that Sweden has suffered a
“permanent” increase in unemployment since its “triple crisis” of the
early 1990s and said “Sweden’s experience forces us to contemplate the
possibility that the erosion in labor market performance that we’ve seen
in the United States over the past five years may be highly persistent,
even under appropriate monetary policy.”

There are important policy implications for the Fed, he said.

The debate over whether labor market changes are “largely
reversible under appropriate monetary policy” or are “likely to be
highly persistent” means that “the FOMC is confronted with an unusually
high degree of uncertainty about the level of ‘maximum employment’ it
can achieve,” he said.

“This uncertainty translates directly into a corresponding
uncertainty about the appropriate approach to policy,” he continued. “In
particular, policymakers who see the deterioration in labor market
performance as reversible using monetary policy will typically favor
more accommodative policy than those who view the deterioration as more

Kocherlakota said that, for him, the inflation rate is key to
determining how close the Fed is to the maximum achievable level of
employment or the minimum achievable level of unemployment. And the
signals are not good, he suggested.

“Inflation was distinctly higher in 2011 than in 2010 and continues
to run above the FOMC’s target of 2%,” he noted. “Even core measures of
inflation, which strip out energy goods and services, and food, went up

“I see these changes as a signal that our country’s current labor
market performance is much closer to ‘maximum employment,’ given the
tools available to the FOMC, than the post-World War II U.S. data alone
would suggest,” he said.

And he added, “appropriate monetary policy should be responsive to
such signals.”


NDAA 2013: Congress approves domestic propaganda

Propaganda is the transfer of information, ideas or rumors to purposely help or harm a person, and governments use such tactics to manipulate people’s thoughts and opinions. The United States spends approximately $4 billion per year for propaganda efforts in countries such as Iraq and Afghanistan, but now a new defense bill is hoping to increase the budget to implement propaganda in America. Lucy Steigerwald, associate editor for Reason Magazine, joins us with her thoughts on the issue.

Ask yourself:  Is Greece really the biggest threat to the World Economy?

No, but the TPTB [The Powers That Be] are determined that you believe this is so.


Because the biggest threat to the World Economy is the TPTB themselves.  Why else is the unraveling of JP Morgan's $70 TRILLION derivatives position being kept in the dark while we are bombarded 24/7 with the   "horrific prospect" of Greece leaving the Euro?

Did you know that there are 27 countries in the European Union, and ONLY 17, the Euro Zone, of them "presently" use the Euro as their currency?

European Union

The European Union (EU) i/ˌjʊrəˈpənˈjnjən/ is an economic and political union or confederation[10][11] of 27 member states which are located primarily in Europe.[12] The EU traces its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), formed by six countries in 1958. In the intervening years the EU has grown in size by the accession of new member statesand in power by the addition of policy areas to its remit. The Maastricht Treaty established the European Union under its current name in 1993.[13] The latest amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into force in 2009.

The EU operates through a system of supranational independent institutions and intergovernmental negotiated decisions by the member states.[14][15][16] Important institutions of the EU include the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, and the European Central Bank. The European Parliament is elected every five years by EU citizens.

The EU has developed a single market through a standardised system of laws which apply in all member states. Within the Schengen Area (which includes EU and non-EU states) passport controls have been abolished.[17] EU policies aim to ensure the free movement of people, goods, services, and capital,[18] enact legislation in justice and home affairs, and maintain common policies on trade,[19] agriculture,[20] fisheries and regional development.[21] A monetary union, the eurozone, was established in 1999 and, as of January 2012, is composed of 17 member states. Through the Common Foreign and Security Policy the EU has developed a limited role in external relations and defence. Permanent diplomatic missions have been established around the world. The EU is represented at the United Nations, the WTO, the G8 and the G-20.

With a combined population of over 500 million inhabitants,[22] or 7.3% of the world population,[23] the EU generated a nominal GDP of 16,242 billion US dollars in 2010, which represents an estimated 20% of the global GDP when measured in terms of purchasing power parity.[24]


The eurozone ( pronunciation (help·info)), officially called the euro area,[7] is an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Most other EU states are obliged to join once they meet the criteria to do so. No state has left and there are no provisions to do so or to be expelled.

Monetary policy of the zone is the responsibility of the European Central Bank (ECB) which is governed by a president and a board of the heads of national central banks. The principal task of the ECB is to keep inflation under control. Though there is no common representation, governance or fiscal policy for the currency union, some co-operation does take place through the Euro Group, which makes political decisions regarding the eurozone and the euro. The Euro Group is composed of the finance ministers of eurozone states, however in emergencies, national leaders also form the Euro Group.

Since the late-2000s financial crisis, the eurozone has established and used provisions for granting emergency loans to member states in return for the enactment of economic reforms. The eurozone has also enacted some limited fiscal integration, for example in peer review of each other's national budgets. The issue is highly political and in a state of flux as of 2011 in terms of what further provisions will be agreed for eurozone reform.

On occasion the eurozone is taken to include non-EU members who use the euro as their official currency. Some of these countries, like San Marino, have concluded formal agreements with the EU to use the currency and mint their own coins.[8] Others, like Kosovo and Montenegro, have adopted the euro unilaterally. However, these countries do not formally form part of the eurozone and do not have representation in the ECB or the Euro Group.[9]

The probability that the expulsion of Greece from the Euro Zone will cause the demise of the World Economy is ABSOLUTE BULLSHIT!

Greece is a smokescreen, the ultimate in PROPAGANDA.  Greek debt pales in comparison to the debt bombs residing behind the curtains of the like of JP Morgan, Goldman Sachs, Citi Bank, Morgan Stanley, and Bank Of America.

Stop and consider for just a moment:

Why should the people of Greece...or Spain, Portugal, Italy, forced to make good on the losses of banks Dumb enough to loan people money they knew couldn't pay it back?

Why have American Taxpayers been forced to bail out banks dumb enough to loan people money to buy homes they knew couldn't afford to pay those loans back?

The only way to end and overcome the Global Financial Crisis is for the people of the world to give the banks the one finger salute!

Austerity has failed. You won’t see that in any of the headlines from the media propaganda machine, and for a very good reason: our intellectually bankrupt governments have no "Plan B." … Jeff Neilson


Who you gonna believe?

To all; the simple answer to the title?...The Austrians. Why? Because they have been right since before 1999 (really since 1913) AND for all the correct reasons. Yes, it was the Austrians who screamed "bubble" in 1998 and '99 about technology, it was the Austrians screamed "bubble" from 2004 to 2006 about real estate and it has been the Austrians screaming at the top of their lungs about the debt bubbles engulfing the globe. The thing is, the Austrians (like Ron Paul) have been demeaned, slandered and laughed at for years and years while all the while being absolutely correct (many times quite early) for all the right reasons.

Right now, we are exactly "where" the Austrians said we would arrive. The banking system is upside down, individuals are either bankrupt, going bankrupt or cannot and will not take on more debt. Sovereign governments have literally bankrupted themselves over the last 5 years trying to prolong and continue a system that in fact is a Ponzi scheme and cannot survive. It has been and still is the Austrian schoolers (scholars) that maintain that the problem is "the money" or the fact that the "money" that is used today is fake and in the end, utterly worthless. It was the Austrians who foretold of today's economic agonies, not the Keynesians, not the Monetarists, not CNBC's cheerleaders, no, just the Austrians and those who use just plain common sense.

So why do point this out and toot the horn of Austrian economics? Because what is happening now will affect you and your families fortunes for several generations and you need to follow the words of those who have been right for the right reasons and forecast the current endgame. If you did nothing else other than scratching the surface to find out the investment of choice currently of the Austrians it would be worth it. As you know, their "investment of choice" is Gold and Silver. They choose Gold and Silver because they ARE money in it's truest and most raw form.

Today, the Dollar is trading up versus the Euro which historically puts price pressure on commodities and sometimes Gold and Silver because at times they are viewed as commodities. With where we are and what is happening currently, Gold and Silver are NOT commodities. They are monies and the only monies that will save "investors" from what is happening. Europe is now in a currency crisis. This will be followed by Britain, Japan and let's not forget the "root of the problem", Dollars.

I am writing this because short term ANYTHING can happen from here and you MUST NOT be fooled into giving up your insurance. Truly, the ONLY monetary assets today that have true intrinsic value are Gold and Silver, NOTHING else does. Not Dollars, not Euros, Pounds, Yen or soon to be Drachmas, not certificates of deposit, not T-Bills or any other sovereign paper, NOTHING. Even if through paper games and margin calls, were Gold to trade down $200-300 or more, you cannot give it away for ANYTHING paper. Paper everything and anything can and will default either outright or through debasement, metals cannot and will not.

For Gold and Silver to be "down" based on the possibility that a bankrupt country may or may not exit a bankrupt currency union is a joke. A joke especially when the "chosen" alternative is another currency that is even more bankrupt and more fraudulent. Everything that "we" (Austrians) have told you all along have come true (given some patience), this final chapter where Gold and Silver become "re-monetized" during sovereign defaults will be no different. Have patience, have conviction and relax, don't let yourself get panicked out of the only assets that will save your butts when the current monetary system collapses into worthlessness. Regards, Bill H.

Key Comex Dates For Gold In the Next Two Weeks

Here are some key dates on the Comex for the Gold Futures and Options.

Tomorrow is the June Gold Options Last Trade and Settlement Date

Next week is the Last Trade and Settlement for the Gold futures contract.

This is historically a heavy physical delivery period for gold and silver.

I suspect that this latest price action is less about Europe and Greece, and more about Chicago and New York.

May 24
OG - June 2012 Gold American Options - Last Trade Date
OG - June 2012 Gold American Options - Settlement Date

May 29
QO - June 2012 COMEX miNY Gold - Last Trade Date
QO - June 2012 COMEX miNY Gold - Settlement Date
GC - May 2012 Gold - Last Trade Date
GC - May 2012 Gold - Settlement Date

May 31
GC - May 2012 Gold - Last Delivery Date
GC - June 2012 Gold - First Notice Date

June 1
GC - June 2012 Gold - First Delivery Date

Got Gold You Can Hold?

Got Silver You Can Squeeze?


Tuesday, May 22, 2012

The G-8 Circle Jerk...and even MORE REASONS TO OWN GOLD

President Obama told reporters at Camp David:

“Europe has taken significant steps to manage the crisis. And there’s now an
emerging consensus that more must be done to promote growth and job creation
right now in the context of these fiscal and structural reforms.”

This is code for, "we are gonna print a shit load of money."

Inflation will be spun and sold to the masses as "growth"...after all, the
US Government and the Fed have fooled Americans into believing that
Inflation = Growth for over 40 years now...why not the rest of the World?

INFLATION IS NOT GROWTH, this will end in global economic catastrophe.

 “As expected, the G-8 led to little concrete measures on how to stimulate
growth, particularly in Europe,” said Thomas Costerg, an economist at
Standard Chartered Bank in London.

The whole thing was just another shameless effort to CON the public into
believing that the western governments can "solve the crisis"...another
feeble attempt to "boost confidence".

And what do the first three letters of the word confidence spell?  CON!

The whole lot of them at the G-8 are at a loss for what to do...their desperation now

Painfully, it must be pointed out that there is yet another summit tomorrow, this time where the European heads of state will sit down [by themselves] and also decide that, shockingly, they want Greece in Europe, and that increased growth and employment are imperative.

A reminder of Europe's summit mentality courtesy of David Einhorn circa last year:

Sprott sees great things for gold and silver

An expectedly upbeat presentation on gold and silver in New York from Eric Sprott pointed to a large number of factors supporting his premise that gold, and silver even more so, will revert back to their rising paths.
Author: Lawrence Williams
Posted: Monday , 21 May 2012
LONDON (Mineweb) -    

In his keynote presentation to last week's New York Hard Assets Investment Conference, Eric Sprott, as usual as a precious metals believer, gave an upbeat presentation on the long term prospects for gold and silver.

He opened his address by pointing to a big change in the markets since he presented at the same event a year earlier when, as he pointed out, the silver price was around $49.50 "until they bombed it" and gold was shortly to see $1900 plus. But overall he pointed to the huge sea change in the precious metals markets over the past 12 years and that the 12 month correction we are currently seeing is a temporary phenomenon and that he reckons the physical market in gold and silver is actually still in great shape.

He sees markets in general being distorted by manipulation by governments - examples being homeowner tax credits, cash for clunkers, TARP, QE1, QE2, LTROs, unlimited swap lines, etc. A veritable litany of stimuli to prevent what should be happening from happening. He quoted a recent interview with Jim Grant - the highly respected economic commentator - who stated that "all markets are manipulated". Sprott pointed in particular to interest rates "which for sure are manipulated" and gave credit too to GATA who came out with the statement that markets were being manipulated long before the theme has been picked up by a number of commentators including Jim Grant. He very strongly concurs with this view pointing out that government stimuli have been designed to try and elicit some strength in stock markets and a degree of suppression in the precious metals markets which they do not want to go up as this indicates the relative weakness in fiat currencies.

Sprott touched on a number of facets affecting the markets at the moment - JP Morgan and its big derivatives losses, financial repression, Sovereign debt - describing the latter as being in a Minsky Moment who said "If you continue to expand your economy by increasing the amount of debt, there comes a time when the productive capacity cannot handle the debt". Greece is seen as a great example of this, He sees Spain as the next one on the list, although Portugal is probably in an even worse position. He sees this as the dominoes which are going to fall one after the other and, in his mind, there is no question that they will fall.

The potential effects on the banking system are drastic. He reminded the audience that at the peak of the 2008 financial collapse Treasury Secretary Paulson said that he was within hours of shutting the banking system down! "Please never forget those words" said Sprott. The system is vulnerable and has got close to this several times since.

For gold he feels that as people realise how vulnerable, flawed and over-levered and risky the banking system is they will want to withdraw their money and put it somewhere which they will see as keeping its value.

There are a number of other factors he sees as being particularly positive for the gold market. These include:
The zero interest rate policy
China's dramatic increase in gold imports
Chinese and Russian mined gold (two of the world's major producers) never gets to the free market
Central Bank buying seemingly increasing

This effectively means a large percentage of global gold supply is being taken off the market. "If these trends persist", said Sprott," the price of gold will not stay down".

The physical market supply thus has Sprott asking "Where is the gold coming from". The only source which he sees as likely is that Central Banks are selling gold surreptitiously, perhaps by leasing it so that any decline does not show on their books.

Silver: When it reached $49.50 there was suddenly 1 billion ounces of ‘paper' silver released onto the market. Sprott is convinced that certain people in the market with very big short positions manipulated the price down. "We see very strange things happening in the silver market" said Sprott.

He couldn't understand also why people in Europe were not buying gold given their financial system is collapsing around them.

Why does Sprott like silver so much? People buy 50 times more silver than gold and while paper silver may be ruling the market, the day of physical will come. "When currencies fail" said Sprott "gold will become a part of the official reserve currency and silver will have a very, very major role again."

Sprott concluded by saying while he loves gold, loves the data, that silver will still be the investment of the decade. "Stay the course" he said. Even though Central Banks et al may be working against you gold and silver will ultimately prevail as fiat currencies continue to decline in value.

Gene Arensberg: Trading data indicates bottom for monetary metals

Monday, May 21, 2012

CFTC - Managed Money Short Positioning High for Gold, Silver

Could be 100 Octane Rally Fuel for precious metals.

SOUTHEAST TEXAS – Taking a break from the grueling, demanding and intense quest for things with fins and scales for a half day* today, we thought we would share with everyone a couple of the more interesting charts which surfaced in the latest Commodity Futures Trading Commission (CFTC) commitments of traders report (COT). The report was released Friday, May 18, with data as of Tuesday, May 15.

According to the CFTC, as of Tuesday of last week, large traders the CFTC classes as Managed Money (“MMs,” hedge funds, commodity trading advisors and other funds that trade futures on behalf of others), increased their short positions in gold futures by 9,837 contracts to show 32,822 contracts short. That is the highest pure short position for the “funds” since September 16, 2008, during the height of the 2008 panic with gold then in the $770s. One week later, on September 23, gold closed at $891.90, about $122 higher as the MMs covered or offset more than 20,000 of those short positions (not a misprint).

Source for all graphs CFTC for COT data, Cash market for gold and silver.


Very high pure short positions for the usually net long Managed Money traders very often correspond with important turning lows for gold. To confirm that notion simply look at the graph above and note that the spikes to the upside for the blue line (short positions) often correspond closely with bottoms in the pink price of gold.

The graph above is in part why we say that large MM short positions are “100-octane rally fuel” for the price of gold. The typically long side of the battlefield likely uses short positions to temporarily “hedge” existing long positions they do not wish to close. Their short positions are just like any other shorts, they have to be covered (bought back) at some point prior to expiry. Higher short positions are “buying pressure in a bottle” more or less.

Remember that the positioning above was on Tuesday with gold then trading in the $1,540s. Gold has indeed advanced since then and is currently trading in the $1,590 region as we write on Monday, May 21, 2012.

That high short position is in part why the Managed Money no-spread net position shows the lowest net long positioning (80,098 contracts) since December 16 of 2008 (73,332 contracts net long then with $858 gold). On Tuesday Managed Money traders were the least net long gold futures since the global panic of 2008 in other words.

So, to conclude this brief look at the Managed Money gold futures positioning, it’s pretty clear that “the funds” decided to “hedge” their long trades by adding shorts up to last Tuesday. With gold moving back to the upside, we can expect with little doubt, that the MM’s pure short positioning will be considerably lower and their net long positioning will therefore be higher in the next COT report. The only question is by how much. That is, of course, unless gold does something weird by the close tomorrow, Tuesday, the cutoff for the next COT report.

Similar Story for Silver

Turning to an interesting graph for silver futures, take a close look at the graph below and, given what we just shared about gold futures, answer the question: What does this high pure short positioning by the usually net long “funds” mean?

Well, what it usually means is that silver is getting close to a bottom if history is any guide. To quantify the chart above, Managed Money reported an increase of about 3,700 new contracts short over the past two reporting weeks, to show a relatively high 12,518 lots short, with 3,334 contracts of that increase coming in the May 8 reporting week with silver then closing at $29.43.

That is actually the highest pure short positioning for the “funds” since the September 16, 2008 report (arrow), when they showed 13,171 short contracts with silver then at $10.48. One week later, on September 23 silver closed at $13.26, but the funds only covered 1,538 of those short contracts. That was an ill omen that the funds did not cover more of that short position then and indeed silver was not yet done with its waterfall panic, rush to liquidity plunge. By late October silver was back under $10 and did not forge a sure-enough bottom until the beginning of December, 2008. Interestingly, by the time silver did indeed make its seminal turning low in December, the MMs had pared their pure short positions down to just 5,384 lots on December 9. )

The high short position for Managed Money traders is in part the reason that their collective net long futures positioning was so low in this May 15 report. As shown in the chart below traders the CFTC classes as Managed Money reported holding a combined net long position of just 5,703 lots – not very much higher than the 4,752 contacts net long they reported at the end of 2011 in the December 27 COT report with silver then at $28.67.

As should be clear from the chart above, when the combined net long position for Managed Money traders (blue line) reaches the lower limits of the chart it often corresponds with lows in the price of silver.

Sure enough, since Tuesday silver briefly tested a $26 handle before catching a bit of a bounce. Silver is currently trading in the $28.30s as we write (a little above the May 15 cutoff of $27.69) and it will be extremely interesting to see if the “funds” have seen fit to begin covering some of those “temporary hedges,” and if so, how many of them.

Silver is testing “The Green” or the area we have been looking for support to show. We strongly suspect the MMs are covering some of their shorts, opportunistically, but we, like everyone else, will have to wait until the Friday release of the COT for confirmation of that notion.

Meanwhile, in a contrary sense, the COT data suggests that gold and silver are very close to a bottom, if one has not already been put in last week. In part because of the data shown above, yes, but also because of the positioning of the usual Big Hedgers, but that story will have to wait for another time. We have run out of “break time” and have to get back to our grueling, demanding and intense quest for things with fins and scales…

As we send this off to be posted we note that the AMEX Gold Bugs Index or HUI is up about 2.5% to the 405 level, and there has been little in the way of meaningful retreat for the precious metals on an up day for the Big Markets.

That just might be some continued short covering underway – into dips. If so, it ought to be visible in the next COT report and would be an unmistakable signal to traders and speculators who follow the COT data consistently.

Hold down the fort, help is on the way…

*We are between fishing events, but on relatively “low power” personally.

By The Time Operation Twist 1 Is Over, The Fed Will Have Quietly Completed 40% Of Operation Twist 2 As Well

Tyler Durden's picture

By the time Operation Twist (1) ends in just over 40 days time, on June 30, Fed Chairman Ben Bernanke, according to his previously announced "loose" target, will hope to have extended the average maturity of all bonds in the System Open Market Account (SOMA) to a record of roughly 100 months from 75 month at the onset of the program in October 2011. After all the sole purpose of Twist was to load up the Fed's portfolio with duration, forcing the rest of the market to shift its investing curve even further into risky assets, as the Fed will have effectively onboarded the bulk of securities in the 3-4% return interval. Now as we showed back in early April, hopes that the Fed will simply continue with Operation Twist 2 after the end of "season" 1, as suggested by some clueless "access journalists" who merely relay what they are told by higher powers, are completely misguided as the Fed simply does not have enough short-term securities (1-3 years) to sell, and would have at most 2 months of inventory for a continued sterilized operation. Which however, does not mean that the Fed can not be quietly ramping up its operations in the ongoing Twisting episode. Because as Stone McCarthy demonstrates, as of the past week, the Fed has already surpassed its 100 month maturity target of 100 months, and is at 102.82 months as of May 16. And this is with 6 more weeks of Twist to go: at the current rate of SOMA purchases, the Fed will have a total portfolio average maturity of just shy of 110 months by June 30! Which means that contrary to market expectations of what the Fed's own stated goal may have been, Bernanke will have gobbled up nearly 40% more long-dated Flow relative to estimates! In other words, Ben does not need to do a full blown Operation Twist 2 episode: by the time Twist 1 is over, he will have attained nearly 40% of the goals of the next potential sterilized operation.

Why is this important? Well, recall that over a month ago Goldman Sachs itself admitted what we have been saying for over 3 years: it is not stock that matters... it is flow. Recall the Goldman punchline:

...we have found some evidence that at the very long end of the yield curve, where Operation Twist is concentrated, it may be not just the stock of securities held by the Fed but also the ongoing flow of purchases that matters for yields...

And there you have it.

What the finding above means is that the Fed has been ramping risk assets, read the S&P even more than where it should have been, based on simple flow models, and that contrary to market expectations, the S&P500 should have been about 40% lower compared to where it will be on June 30 if the Fed has pursued its stated goal, and targeted solely a 100 month average maturity.

Which has a rather scary implication for the stock market: if and when Ben announces that Twist ends on June 30 with no successor program, stocks will immediately react, and realize that the Fed's SOMA account holds well more than the expected long-end, and that without further "flow" forcing more 30 year paper into the gaping maw of Bernanke, stocks will have no reason at all to maintain their prior epic surge (all else equal, whcih it won't be).

It also means that unless Bernanke is willing to see the stock market plunge ahead of the Obama re-election, which he isn't, or at least the President most certainly isn't, that the June Fed statement will be quite interesting, as not only will Bernanke have to maintain a program which is now uncovered to have been monetizing the long-end at a rate 40% higher than estimated, but will still have just two more months of capacity left for any potential future sterilized market propping experiments.

Which only leaves the Fed with one option: that of making Bill Gross, and all those others who are loading up on duration-sensitive securities which will benefit from an LSAP based episode, very, very happy. Of course, the list of such assets most definitely includes gold.

DJ Fed's Lockhart: Sustained Monetary Accommodation Warranted

Mon May 21 05:15:00 2012 EDT

NEW YORK(Dow Jones)--Given the modest economic progress in the U.S., the Federal Reserve should continue with its policy of monetary accommodation, said a top central banker on Monday.
"Circumstances today in the United States call for continued measured efforts to quicken the pace of recovery and shrink unemployment, while keeping inflation controlled and close to the [Federal Open Market Committee's] official target of 2%," said Federal Reserve Bank of Atlanta President Dennis Lockhart.
Lockhart's comments came from the text of an address prepared for delivery before the Institute of Regulation and Risk, North Asia, in Tokyo. Lockhart is a voting member of the Fed's monetary policy-setting FOMC, which kept the current course of monetary policy unchanged at its latest meeting.
The Fed continues to expect short-term interest rates will be kept near 0% until late 2014, while continuing forward with an effort to move out the average maturity of the central bank's $2.9 trillion balance sheet.
"Current economic data continue to be a mix of positives and negatives," Lockhart said. "Consumer activity is continuing to grow, and manufacturing is expanding. At the same time, we've seen a recent slowdown in business investment, and the pace of job creation has weakened."
Lockhart said his economic outlook calls for "only modest growth over the next few years."
Such a recovery and meager job growth is keeping wage growth "subdued and inflation expectations reasonably well-anchored," he said, noting his outlook for inflation remains steady at around 2% over the forecast horizon.
Among the biggest risks for the U.S. economy are the spillover effects from Europe, Lockhart said. This is why, he said, the risks to the U.S. outlook are "tilted modestly to the downside."
The challenge policymakers face is judging the appropriateness of a tool for particular circumstances, Lockhart said. He reiterated that he doesn't see the need right now for the Fed to embark on balance-sheet-expanding bond purchases most in the market refer to as a stimulus policy called QE3.
Still, the option can't be taken off the table, he said.
While another round of quantitative easing would work under the right circumstances, "I don't believe such circumstances prevail at this time," Lockhart said.
By Matt Taibbi
It doesn’t happen often, but sometimes God smiles on us. Last week, he smiled on investigative reporters everywhere, when the lawyers for Goldman, Sachs slipped on one whopper of a legal banana peel, inadvertently delivering some of the bank’s darker secrets into the hands of the public.

The lawyers for Goldman and Bank of America/Merrill Lynch have been involved in a legal battle for some time – primarily with the retail giant, but also with Rolling Stone, the Economist, Bloomberg, and the New York Times. The banks have been fighting us to keep sealed certain documents that surfaced in the discovery process of an ultimately unsuccessful lawsuit filed by Overstock against the banks.

Last week, in response to an motion to unseal certain documents, the banks’ lawyers, apparently accidentally, filed an unredacted version of Overstock’s motion as an exhibit in their declaration of opposition to that motion. In doing so, they inadvertently entered into the public record a sort of greatest-hits selection of the very material they’ve been fighting for years to keep sealed.

I contacted Morgan Lewis, the firm that represents Goldman in this matter, earlier today, but they haven’t commented as of yet. I wonder if the poor lawyer who FUBARred this thing has already had his organs harvested; his panic is almost palpable in the air. It is both terrible and hilarious to contemplate. The bank has spent a fortune in legal fees trying to keep this material out of the public eye, and here one of their own lawyers goes and dumps it out on the street.

The lawsuit between Overstock and the banks concerned a phenomenon called naked short-selling, a kind of high-finance counterfeiting that, especially prior to the introduction of new regulations in 2008, short-sellers could use to artificially depress the value of the stocks they’ve bet against. The subject of naked short-selling is a) highly technical, and b) very controversial on Wall Street, with many pundits in the financial press for years treating the phenomenon as the stuff of myths and conspiracy theories.

Now, however, through the magic of this unredacted document, the public will be able to see for itself what the banks’ attitudes are not just toward the "mythical" practice of naked short selling (hint: they volubly confess to the activity, in writing), but toward regulations and laws in general.

"Fuck the compliance area – procedures, schmecedures," chirps Peter Melz, former president of Merrill Lynch Professional Clearing Corp. (a.k.a. Merrill Pro), when a subordinate worries about the company failing to comply with the rules governing short sales.

We also find out here how Wall Street professionals manipulated public opinion by buying off and/or intimidating experts in their respective fields. In one email made public in this document, a lobbyist for SIFMA, the Securities Industry and Financial Markets Association, tells a Goldman executive how to engage an expert who otherwise would go work for “our more powerful enemies,” i.e. would work with Overstock on the company’s lawsuit.

"He should be someone we can work with, especially if he sees that cooperation results in resources, both data and funding," the lobbyist writes, "while resistance results in isolation."

There are even more troubling passages, some of which should raise a few eyebrows, in light of former Goldman executive Greg Smith's recent public resignation, in which he complained that the firm routinely screwed its own clients and denigrated them (by calling them "Muppets," among other things).

Here, the plaintiff’s motion refers to an "exhibit 96,” which refers to “an email from [Goldman executive] John Masterson that sends nonpublic data concerning customer short positions in Overstock and four other hard-to-borrow stocks to Maverick Capital, a large hedge fund that sells stocks short.”

Was Goldman really disclosing “nonpublic data concerning customer short positions” to its big hedge fund clients? That would be something its smaller, “Muppet” customers would probably want to hear about.

When I contacted Goldman and asked if it was true that Masterson had shared nonpublic customer information with a big hedge fund client, their spokesperson Michael Duvally offered this explanation:

Among other services it provides, Securities Lending at Goldman provides market color information to clients regarding various activity in the securities lending marketplace on a security specific or sector specific basis. In accordance with the group's guidelines concerning the provision of market color, Mr. Masterson provided a client with certain aggregate information regarding short balances in certain securities. The information did not contain reference to any particular clients' short positions.

You can draw your own conclusions from that answer, but it's safe to say we'd like to hear more about these practices.

Anyway, the document is full of other interesting disclosures. Among the more compelling is the specter of executives from numerous companies admitting openly to engaging in naked short selling, a practice that, again, was often dismissed as mythical or unimportant.

A quick primer on what naked short selling is. First of all, short selling, which is a completely legal and often beneficial activity, is when an investor bets that the value of a stock will decline. You do this by first borrowing and then selling the stock at its current price; then, after the price drops, you go out, buy the same number of shares at the reduced price, and return the shares to your original lender. You then earn a profit on the difference between the original price and the new, lower price.

What matters here is the technical issue of how you borrow the stock. Typically, if you’re a hedge fund and you want to short a company, you go to some big-shot investment bank like Goldman or Morgan Stanley and place the order. They then go out into the world, find the shares of the stock you want to short, borrow them for you, then physically settle the trade later.

But sometimes it’s not easy to find those shares to borrow. Sometimes the shares are controlled by investors who might have no interest in lending them out. Sometimes there’s such scarcity of borrowable shares that banks/brokers like Goldman have to pay a fee just to borrow the stock.

These hard-to-borrow stocks, stocks that cost money to borrow, are called negative rebate stocks. In some cases, these negative rebate stocks cost so much just to borrow that a short-seller would need to see a real price drop of 35 percent in the stock just to break even. So how do you short a stock when you can’t find shares to borrow? Well, one solution is, you don’t even bother to borrow them. And then, when the trade is done, you don’t bother to deliver them. You just do the trade anyway without physically locating the stock.

Thus in this document we have another former Merrill Pro president, Thomas Tranfaglia, saying in a 2005 email: “We are NOT borrowing negatives… I have made that clear from the beginning. Why would we want to borrow them? We want to fail them.”

Trafaglia, in other words, didn’t want to bother paying the high cost of borrowing “negative rebate” stocks. Instead, he preferred to just sell stock he didn’t actually possess. That is what is meant by, “We want to fail them.” Trafaglia was talking about creating “fails” or “failed trades,” which is what happens when you don’t actually locate and borrow the stock within the time the law allows for trades to be settled.

If this sounds complicated, just focus on this: naked short selling, in essence, is selling stock you do not have. If you don’t have to actually locate and borrow stock before you short it, you’re creating an artificial supply of stock shares.

In this case, that resulted in absurdities like the following disclosure in this document, in which a Goldman executive admits in a 2006 email that just a little bit too much trading in Overstock was going on: “Two months ago 107% of the floating was short!”

In other words, 107% of all Overstock shares available for trade were short – a physical impossibility, unless someone was somehow creating artificial supply in the stock.

Goldman clearly knew there was a discrepancy between what it was telling regulators, and what it was actually doing. “We have to be careful not to link locates to fails [because] we have told the regulators we can’t,” one executive is quoted as saying, in the document.

One of the companies Goldman used to facilitate these trades was called SBA Trading, whose chief, Scott Arenstein, was fined $3.6 million in 2007 by the former American Stock Exchange for naked short selling.

The process of how banks circumvented federal clearing regulations is highly technical and incredibly difficult to follow. These companies were using obscure loopholes in regulations that allowed them to short companies by trading in shadows, or echoes, of real shares in their stock. They manipulated rules to avoid having to disclose these “failed” trades to regulators.

The import of this is that it made it cheaper and easier to bet down the value of a stock, while simultaneously devaluing the same stock by adding fake supply. This makes it easier to make money by destroying value, and is another example of how the over-financialization of the economy makes real, job-creating growth more difficult.

In any case, this document all by itself shows numerous executives from companies like Goldman Sachs Execution and Clearing (GSEC) and Merrill Pro talking about a conscious strategy of “failing” trades – in other words, not bothering to locate, borrow, and deliver stock within the time alotted for legal settlement. For instance, in one email, GSEC tells a client, Wolverine Trading, “We will let you fail.”

More damning is an email from a Goldman, Sachs hedge fund client, who remarked that when wanting to “short an impossible name and fully expecting not to receive it” he would then be “shocked to learn that [Goldman’s representative] could get it for us.”

Meaning: when an experienced hedge funder wanted to trade a very hard-to-find stock, he was continually surprised to find that Goldman, magically, could locate the stock. Obviously, it is not hard to locate a stock if you’re just saying you located it, without really doing it.

As a hilarious side-note: when I contacted Goldman about this story, they couldn't resist using their usual P.R. playbook. In this case, Goldman hastened to point out that Overstock lost this lawsuit (it was dismissed because of a jurisdictional issue), and then had this to say about Overstock:

Overstock pursued the lawsuit as part of its longstanding self-described "Jihad" designed to distract attention from its own failure to meet its projected growth and profitability goals and the resulting sharp drop in its stock price during the 2005-2006 period.

Good old Goldman -- they can't answer any criticism without describing their critics as losers, conspiracy theorists, or, most frequently, both. Incidentally, Overstock rebounded from the 2005-2006 short attack to become a profitable company again, during the same period when Goldman was needing hundreds of billions of dollars in emergency Fed lending and federal bailouts to stave off extinction.

Anyway, this galactic screwup by usually-slick banker lawyers gives us a rare peek into the internal mindset of these companies, and their attitude toward regulations, the markets, even their own clients. The fact that they wanted to keep all of this information sealed is not surprising, since it’s incredibly embarrassing stuff, if you understand the context.

More to come: until then, here’s the motion, and pay particular attention to pages 14-19.

UPDATE: Well, I guess I shouldn't feel too badly for the lawyer who stepped on this land mine. For Morgan Lewis counsel Joe Floren, karma, it seems, really is a bitch.
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