The recent weakness in Gold..."it's all beginning to make sense now..."
By: Jim Willie CB, GoldenJackass.com
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.
THE ULTIMATE PROBLEM
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.
HIDDEN TOOL WITH GRAND DECEPTION
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.
ENGINEERED FLIGHT TO SAFETY
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.
ENGINEERED REJECTION OF USGOVT DEBT DOWNGRADE
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.
USFED STUCK AT 0% FOREVER
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.
SPRING HIGH WINDS HIT THE TOWER OF BABEL
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.
THE ZERO PERCENT PURE FUEL
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.
JPMORGAN AND ITS INTEREST RATE SWAPS ARE A DYNAMIC ENGINE OF CAPITAL DESTRUCTION WHOSE EXHAUST EFFLUENT IS THE PURE FUEL OF NEGATIVE INTEREST RATES THAT POWERS THE GOLD BULL.
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.
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IT'S NOT TOO LATE TO ACCUMULATE!!!