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Sunday, March 13, 2011

Gold World News Flash

Gold World News Flash

International Forecaster March 2011 (#3) - Gold, Silver, Economy + More

Posted: 13 Mar 2011 05:02 AM PDT

Wall Street at least temporarily relieved of the burden of having to buy Treasuries & Agency bonds, is looking at the jump in oil prices as nothing more than an irritant to their plans for a higher market. Bill Dudley of the NY Fed, a most powerful member, continues to make a vigorous defense of Federal Reserve policies. He, and a few other Fed participants, and Chairman Bernanke believe liquidity is the key for solving problems. That is not only in the realm of debt purchases, but in the relief it brings to Wall Street and banking.


A Comeback for Gold-Backed Money?

Posted: 13 Mar 2011 05:00 AM PDT

Several legislative initiatives caught our attention recently. All of them are related to the monetary role of gold and range from proposals to return to the gold standard, to minting gold and silver as an alternative currency, to having all state transactions carried out in gold and silver coins, to permitting citizens to run their own mints.


The Commodity Price Rollercoaster and the CRB Golden Ratio Failure

Posted: 13 Mar 2011 04:30 AM PDT

Commodity prices have been on a rollercoaster ride as central banks have pumped trillions in liquidity into the global system, trying to prevent a deflationary long wave debt collapse from delivering the economic coup de gras, and driving the global economy into a natural Kondratieff (aka Kondratiev) long wave winter season bottom. Commodities are the ingredients of global economic production; they go into almost everything you buy. Investors in commodities, stocks, bonds and gold should all take note of the most powerful resistance line the CRB Index has encountered since the 2009 bottom.


In The News Today

Posted: 12 Mar 2011 06:42 PM PST

View the original post at jsmineset.com... March 12, 2011 10:23 PM Thought for Saturday Many people are speculating what will happen to the Comex because of the short silver position. What they should be doing is extrapolating a failure on the Comex to commodity ETFs that are holding significant paper, and not physical. A failure on the Comex in silver futures regarding delivery will cause a run on Gold and Silver ETFs.   Jim Sinclair’s Commentary This picture was taken today in beautiful downtown Sharon, Connecticut. With the downward pressure on the economy as it begins to stutter anyway, the ability to stop QE does not exist. Jim Sinclair’s Commentary No bees and no bats leads to no food at affordable prices. Honeybee End? From: Andy Soos, ENN Published March 11, 2011 01:45 PM The mysterious collapse of honey-bee colonies is becoming a global phenomenon. Declines in managed bee colonies, seen increasingly in Europe and the US in the past dec...


Jim?s Mailbox

Posted: 12 Mar 2011 06:42 PM PST

View the original post at jsmineset.com... March 12, 2011 10:19 PM Dear Jim, Every once in a while they like to push the end of the QE card hard and tank the stock market to buy the dollar and bonds as well as show questioning politicians what they’re capable of… CIGA determination Dear Determined, They might, but then they see the result of it and start again with a vengeance. They will never close the back door. If not QE, who will buy the US medium and long bond? A strong dollar is counter-productive for balance of trade. Regards, Jim...


Richard Russell: Gold is the Safest Currency

Posted: 12 Mar 2011 06:02 PM PST

Speaking at the Casey Research Gold and Resource Summit, Richard Russell told the audience, "I'd feel much better holding everything I own in gold. Holding dollars means holding a depreciating asset and I feel much more confident holding gold."


"If There Were a Reactor Meltdown or Major Leak at Fukushima, the Radioactive Cloud Would Likely be Blown Out ... Towards the US West Coast"

Posted: 12 Mar 2011 05:29 PM PST


→ Washington’s Blog

Agence-France Presse notes:

California is closely monitoring efforts to contain leaks from a quake-damaged Japanese nuclear plant, a spokesman said Saturday, as experts said radiation could be blown out across the Pacific.

 

***

 

"At present there is no danger to California. However we are monitoring the situation closely in conjunction with our federal partners," Michael Sicilia, spokesman for

 

California Department of Public Health, told AFP.

"California does have radioactivity monitoring systems in place for air, water and the food supply and can enhance that monitoring if a danger exists," he added.

 

***

 

Experts have suggested that, if there were a reactor meltdown or major leak at Fukushima, the radioactive cloud would likely be blown out east across the Pacific, towards the US West Coast.

 

***

 

"The wind direction for the time being seems to point the (nuclear) pollution towards the Pacific," said Andre-Claude Lacoste of the French Nuclear Safety Authority, briefing journalists in Paris on the Japanese crisis.

 

***

 

Earlier the NRC said it was "examining all available information as part of the effort to analyze the event and understand its implications both for Japan and the United States."

The winds could shift at any time, blowing radiation into Tokyo or other parts of Japan.

However, even if the prevailing winds remain off-shore - towards California and Washington - those American states are still a long way away. As AFP notes:

While US nuclear experts acknowledged the seriousness of Japan's reactor crisis, some stressed that taking steps in the United States such as distributing iodine tablets -- which prevent iodine 131 from being absorbed into the body -- would be "vastly premature."

 

"It's a big ocean. These (radiation) releases are essentially going to be at ground level," said Ken Bergeron, a physicist who has worked on nuclear reactor accident simulation.

 

"We should not confuse it with health issues in the United States."

 

Japan is roughly 5,000 miles (8,000 kilometers) from the US West Coast.

But while the great distances make the risk of radiation exposure to Californians and Washingtonians small, it is not zero.

For example, pollution from Chinese coal factories routinely hits California. For example, Mongabay noted in 2008:

Previous studies have documented that dust from Asia — especially from deserts and industrial regions of China — routinely crosses the Pacific Ocean on prevailing winds to sully the air over the western U.S.

And see this and this.

As as the Lawrence Berkeley National Laboratory wrote last December:

About a third of the airborne lead particles recently collected at two sites in the San Francisco Bay Area came from Asia, a finding that underscores the far-flung impacts of air pollution and heralds a new way to learn more about its journey across vast distances.

In a first-of-its-kind study, scientists from the U.S. Department of Energy’s Lawrence Berkeley National Laboratory and the California Air Resources Board tracked variations in the amount of lead transported across the Pacific over time.

***

It’s well known that particles and other aerosols cover long distances through the Earth’s atmosphere. But the details of this transport, such as that of the lead particles’ 7,000-mile journey from the smokestacks of China to the west coast of North America, are largely unknown.

Jim's Mailbox

Posted: 12 Mar 2011 05:19 PM PST

Dear Jim,

Every once in a while they like to push the end of the QE card hard and tank the stock market to buy the dollar and bonds as well as show questioning politicians what they're capable of…

CIGA determination

Dear Determined,

They might, but then they see the result of it and start again with a vengeance. They will never close the back door. If not QE, who will buy the US medium and long bond? A strong dollar is counter-productive for balance of trade.

Regards,
Jim

Problems at 6 Japanese Nuclear Reactors ... 2 Have Already Likely Melted Down

Posted: 12 Mar 2011 05:01 PM PST



Early this morning, the Fukushima I nuclear power plant melted down:

           

           

And see this.

Now, MSNBC reports:

        

A partial meltdown is likely under way at second quake-stricken  nuclear reactor [the Fukushima III reactor], Japan's top government spokesman said Sunday.    

     

Fuel rods were briefly exposed and radiation levels briefly rose  above the legal limit at the nuclear plant where both reactors are  located, said Chief Cabinet Secretary Yukio Edano.

His statement came after Japan's largest electric utility started  releasing steam Sunday at the second nuclear reactor while trying to  stop a meltdown that began a day earlier in another.

Hopefully, the problems at the 4 other troubled Japanese nuclear reactors will be contained.

Many experts have said the disaster is not as bad as Chernobyl.  But Forbes' William Pentland notes, nuclear expert Kevin Kamp says:

"Given the large quantity of irradiated nuclear fuel in the pool, the  radioactivity release could be worse than the Chernobyl nuclear reactor  catastrophe of 25 years ago.”

And the Telegraph writes:

Tokyo,  at least, appeared to have got away without the scale of casualties  seen in other parts of Japan. That was before news of an explosion, and  warnings of a possible "meltdown", at the Fukushima nuclear power plant.  As the evening turned to night, the world's second-largest metropolis  was still waiting to know whether it had been exposed to what would be  perhaps the world's worst nuclear disaster.

The Duration Paradox (Part Two of Two)

Posted: 12 Mar 2011 04:15 PM PST

If Treasury bond yields do not currently provide investors with fair, market-determined compensation for the growing risks of inflation and dollar devaluation, what are investors to do? There are several potential options.

First, investors can hold cash instead of bonds. But if price inflation begins to pick up–at present it shows every sign of doing do–sitting in cash for a long period of time begins to look rather unattractive. Moreover, cash does not protect investors from the risk of a weaker dollar which, with an uncertain magnitude and time lag, is going to push up inflation and erode purchasing power.

Second, investors can hold foreign instead of domestic bonds. The Japanese and euro-area bond markets are comparable in size to that for US Treasuries. But interest rates are also so low in both Japan and the euro area that the Duration Paradox is also in effect, holding down long-term yields. So while there might be some diversification benefits to be had in this way, investing in these bonds does not get to the root of the problem.

Third, rather than hold bonds, investors can hold equities. Indeed, it would appear that, in late summer 2010, as the Fed indicated that it would be implementing QE2, global equity markets received a boost. But is this likely to continue? We have written recently about the equity market and have concluded that it appears substantially overvalued in any reasonable historical comparison. Moreover, there is growing evidence of a severe margin squeeze or 'crush' now underway which is highly likely to hurt corporate profitability in the coming quarters. The combination of high valuations and disappointing profit growth could be particularly nasty for equity markets in the coming months.

There are also other potential negatives for equity markets at present. China, India, Russia, South Korea, Indonesia and other relatively dynamic economies are all raising interest rates to slow growth and get inflation under control. Last week, even the European Central Bank (ECB) indicated that it, too, is about to begin raising rates. Another potential negative, although difficult to quantify is the increasingly hostile tax and regulatory environment in the US and to a lesser extent elsewhere. So-called 'regime uncertainty' tends to weigh on equity valuations. We don't deny that, according to history, equities tend to outperform bonds in an inflationary environment. But from the current starting point, the potential relative outperformance might not be that substantial. Indeed, the performance of both bonds and stocks could well be negative for a period as financial markets adjust to what is a historically unusually hostile environment for financial assets generally. (Incidentally, one of the most famous bond fund managers in the world, Bill Gross, appears to hold this view.)

If financial assets in general currently fail to provide investors with attractive ways in which to protect their capital, what are the alternatives? Historically, real assets, including property, have held their value in inflationary periods better than financial assets. One rather obvious problem with property today, however, is that a bubble in property valuations in the US and elsewhere was a key ingredient in the financial crisis of 2008 and there remains a legacy of oversupply of various forms of property on the market. (While the US residential property bubble may now have been somewhat deflated, there is less evidence that this is the case with commercial property, in particular retail space and office space in major financial centers.)

Historically, precious metals have offered investors an alternative store of value. Indeed they have served as money itself.  While metals (and other commodities) do not provide investors with an income, in that they are not productive assets producing either rent (as with property) or other economic goods (as with capital goods), that is precisely the point: When financial assets in general are overvalued in historical, purchasing-power adjusted terms, and even property is still de-bubbling, the best way to protect wealth is to eschew cash flows entirely. Looked at from another angle, if economic activity is being artificially stimulated in various ways by soaring government deficit spending and highly expansionary central bank monetary policy, do investors really want to chase cash flows when those cash flows are demonstrably distorted and necessarily unsustainable?

But the alternatives do not end there. Global commodities markets can provide investors with far greater liquid, real asset diversification alternatives. Gold, silver and mining shares are normally highly correlated with each other, limiting diversification potential. Yet in a highly uncertain world, diversification is of paramount concern. Investors should be after all they can get. As such, the world's most widely traded commodity, crude oil, with only about a 65% correlation to the price of gold, is an obvious place to look. Oil distillates, such as unleaded petrol and heating oil, have an even lower correlation to the gold price. Industrial or base metals also trade widely. That said, they tend to be more highly correlated to global equity markets and, as such, are likely to decline in price in the event of a major equity market correction.

Historically, the greatest diversification benefits are provided by agricultural and so-called 'soft' commodities. The prices for these are driven by random factors such as the weather. These commodities have correlations with gold and silver of only around 30% or so. That said, some of them are quite expensive from an investment standpoint, due to their perishable nature and commensurately high storage costs. As an alternative, investors could consider a diversified basket of agricultural equities, which would pay a modest dividend.

As the unsustainable sovereign debt burdens grow alongside massive worldwide money supply growth, preserving wealth is not going to get any easier. The pure uncertainty associated with debt and monetary crises continues to grow as policymakers stumble from one unsustainable policy to the next. History demonstrates that this is not going to end well. But end it will. When it does, those who have managed to preserve at least some portion of their wealth will be in an excellent position to exploit what are likely to be the best investment opportunities for at least a generation and possibly several.

Faced with growing adversity at home, peoples have occasionally sought to migrate to more promising lands, notwithstanding the tremendous uncertainty of doing so. Why? Because high uncertainty elsewhere is better than certain suffering at home, however familiar. Before doing so, they gather together into an ark or wagon their most precious possessions and, of course, necessary supplies for the risky journey ahead. Some possessions are going to be lost along the way and most supplies consumed, hopefully not to run out entirely.

The so-called '49ers' of American lore needed to ford dangerously fast, near-freezing rivers and traverse high mountain passes to make it to California. Many lost everything along the way, including friends and family members. But those who made it in one piece found a vast, lush, mineral-rich land and many great fortunes were made by those who had nothing left on arrival but the shirt on their back. There is a lesson there.

It is hard sometimes to be optimistic, but we do try.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Duration Paradox (Part Two of Two) originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

. . . AND BUY SILVER!!!!

Posted: 12 Mar 2011 02:43 PM PST

WI Firefighters Spark "Move Your Money" Moment MK: Just moving you money from one crooked bank to another crooked bank accomplishes nothing. See the whole picture. Understand something about how the economy and Wall St. works. If you really want to put these crooks out of business, help take Silver over $50 an Oz. Share [...]


More Freegold Fodder

Posted: 12 Mar 2011 02:21 PM PST

This is a continuation of the last post. Freegold fodder for a lively and relevant discussion! Part of what makes the following comments so interesting (aside from their mind-bending, perspective-altering content) is that they were all posted in the 48 hours leading up to the Washington Agreement on Gold, the first CBGA which took place at the IMF annual meeting in Washington DC on Sunday, Sept.


IAEA Refutes Reactor 3 Cooling Problems, Provides Fukushima Status Update; Credibility Schism Developing In Japan

Posted: 12 Mar 2011 12:56 PM PST


Contrary to earlier reports that cooling at Reactor 3 at Fukushima has failed (as per CNN and Reuters) and there is now a state of emergency for three reactors at the site, the IAEA has released a report refuting these rumors. It appears that there is a split in news reporting in Japan: on one hand we have the Nuclear and Industrial Safety Agency which seems to present a downside case, while the government is obviously spinning news in a favorable direction. While the Japanese government is likely not to be trusted much with truthful data dissemination, jumping the shark on rumor spreading is probably not in anyone's favor either. That said, with the government losing credibility (see prior Stratfor post), the question is just whom can the public trust, if not the Japanese government and media? Furthermore, if there is another accident at Fukushima, and the government's credibility is completely destroyed, what happens next: after all the BoJ needs as much "market faith" as it can muster ahead of its decision on Monday to flood the money markets with JPY2 trillion (sound familiar). If the government eats up all the street cred of Shirakawa, the BOJ rush to action may end up doing far more bad than good.

From the IAEA:

Japanese authorities have informed the IAEA that Units 1, 2, and 4 at the Fukushima Daini retain off-site power but are experiencing increased pressure in each reactor. Plant operators have vented the containment at each of the three units and are considering further venting to alleviate the increase in pressure.

Daini Unit 3 is in a safe, cold shutdown, according to Japanese officials.

Japanese authorities have reported some casualties to nuclear plant workers.  At Fukushima Daichi, four workers were injured by the explosion at the Unit 1 reactor, and there are three other reported injuries in other incidents. In addition, one worker was exposed to higher-than-normal radiation levels that fall below the IAEA guidance for emergency situations. At Fukushima Daini, one worker has died in a crane operation accident and four others have been injured.

In partnership with the World Meteorological Organization, the IAEA is providing its member states with weather forecasts for the affected areas in Japan.  The latest predictions have indicated winds moving to the Northeast, away from Japanese coast over the next three days.

The IAEA continues to liaise with the Japanese authorities and is monitoring the situation as it evolves.

 

Stratfor: Japan Government Confirms Meltdown

Posted: 12 Mar 2011 12:40 PM PST


From Stratfor:

Japan’s Nuclear and Industrial Safety Agency (NISA) said March 12 that the explosion at the Fukushima Daiichi No. 1 nuclear plant could only have been caused by a meltdown of the reactor core, Japanese daily Nikkei reported. This statement seemed somewhat at odds with Japanese Chief Cabinet Secretary Yukio Edano’s comments earlier March 12, in which he said “the walls of the building containing the reactor were destroyed, meaning that the metal container encasing the reactor did not explode.”

NISA’s statement is significant because it is the government agency that reports to the Agency for Natural Resources and Energy within the Ministry of Economy, Trade and Industry. NISA works in conjunction with the Atomic Energy Commission. Its role is to provide oversight to the industry and is responsible for signing off construction of new plants, among other things. It has been criticized for approving nuclear plants on geological fault lines and for an alleged conflict of interest in regulating the nuclear sector. It was NISA that issued the order for the opening of the valve to release pressure — and thus allegedly some radiation — from the Fukushima power plant.

NISA has also overseen the entire government response to the nuclear reactor problems following the Tohoku earthquake and tsunami. It is difficult to determine at this point whether the NISA statement is accurate, as the Nikkei report has not been corroborated by others. It is also not clear from the context whether NISA is stating the conclusions of an official assessment or simply making a statement. However, the Tokyo Electric Power Co. (TEPCO), the operator of the Fukushima nuclear plant, also said that although it had relieved pressure, nevertheless some nuclear fuel had melted and further action was necessary to contain the pressure.

If this report is accurate, it would not be the first time statements by NISA and Edano have diverged. When Edano earlier claimed that radiation levels had fallen at the site after the depressurization efforts, NISA claimed they had risen due to the release of radioactive vapors

 

Sprott Money: The Price of Silver Could Explode

Posted: 12 Mar 2011 11:50 AM PST

The Gold Report submits:

Sprott Money executives Eric Sprott (chairman) and Larisa Sprott (president), sing the praises of the "poor man's gold" in this exclusive interview with The Gold Report. "All the data supports the thesis that silver is undervalued," says Eric—who serves as chairman of Sprott Inc., as well as CEO, CIO and senior portfolio manager of Sprott Asset Management LP. "We'll certainly see a three-digit price," he adds. Larisa explains how the company's business model differs from others in the space and reveals plans to open Sprott Money USA within the year.

The Gold Report: Your Markets at a Glance commentary last November said it seemed unlikely that silver would stay under $30 for long. Four months later, the spot price is about $35. Are you surprised by how quickly your prediction came true?

Eric Sprott: Not really. Based on fundamental evidence, technical evidence and other things going on in the markets,


Complete Story »


Using Gold and Silver to Evaluate the Direction of the Economy

Posted: 12 Mar 2011 11:30 AM PST

David I. Templeton submits:

Given what seems like a parabolic increase in gold and silver prices, many investors are attracted to these metals as investment opportunities. We have a difficult time evaluating whether these metals are overvalued or undervalued. The difficulty arises from the fact these metals do not generate any cash flow. We value investments we make for our client accounts based in large part on the cash flows generated by particular investments. Consequently, at this point in time we do not have a direct allocation to either gold or silver for our client accounts.

On the other hand, we do evaluate gold and silver prices as they are an important input into our analysis of the future direction of economic growth. Gold tends to be a safe haven investment for investors with events like those occurring in the Middle East impacting the price of gold. During times of improving economic activity though,


Complete Story »


MELTDOWN

Posted: 12 Mar 2011 10:30 AM PST

The Japanese Nuclear agency says it is a meltdown. As usual, the government has been lying. Meltdown Caused Nuke Plant Explosion: Safety Body TOKYO (Nikkei)–The Nuclear and Industrial Safety Agency (NISA) said Saturday afternoon the explosion at the Fukushima No. 1 nuclear plant could only have been caused by a meltdown of the reactor core. [...]


HOLE

Posted: 12 Mar 2011 10:09 AM PST

Blythe Masters of JP Morgue Rides The Silver Rocket Share this:


S&P 500 Versus The Fed's Balance Sheet

Posted: 12 Mar 2011 09:03 AM PST

Dear Friends,

You have both heard and read Jim speaking of the phrase which he coined, "QE to Infinity". Here in pictorial form is the reason for this.

Please note carefully the chart I have created here detailing the growth in the Federal Reserve Balance Sheet in comparison to the level of the S&P 500, the broader level of the US equity markets. I should point out here that I have chosen to use the actual amount of Securities being held by the Fed as representative of its entire balance sheet since it is mainly these that we are interested in for our purposes instead of overall reserve credit. The reason for this is because all of the growth in the Fed's balance sheet has either come from the purchase of MBS securities, Treasuries and US Agency Debt.

The first thing to note about this chart are the two points noted on the chart; where QE1 began and then when QE2 was announced and then later commenced.

When the credit crisis erupted in the summer of 2008 and the S&P 500 began to crash, you will notice that the Fed's Balance sheet was flatlining at a very low level for the remainder of that year and on into early 2009. It was at that point that QE 1 began in which the Fed began buying up these MBS securities (Mortgage Backed Securities) that were the derivatives behind the collapse of several major institutions and brokerage houses.

Notice that was the exact bottom in the S&P 500 index which then began a nearly uninterrupted run higher from near the 700 level to near the 1100 level in January 2010. It then moved lower but found further buying running to 1200 in April 2010 where it stalled out and fell off quite sharply surrendering nearly 200 points before it bottomed again in July 2010. If you notice just after its fall the growth in the Fed's Balance Sheet began flatlining once again and actually began to shrink somewhat.

The reason for the plummet in the S&P 500 was the fact that the Fed's first Quantitative Easing program was coming to an end and traders began to fear the worst as it meant the end of the liquidity injections into the banking system that the Fed had been providing. It was this liquidity which had fueled the enormous rally in US stock markets over the course of the past year.

From that April 2010 to August 2010, the stock market went basically nowhere. Traders were believing that the worst of the credit crisis fallout was behind them but they could not see any signs of strong economic growth, at least growth in sufficient size to justify taking the stock indices any higher. You might remember that it was during the time preceding the April 2010 drop in stock prices that the phrase, "green shoots" was in vogue. Those green shoots died on the vine when it appeared that QE1 was ending and there was nothing to take its place. Note once again, during this time frame the Balance Sheet of the Federal Reserve was shrinking.

Enter the Fed to the rescue of the markets once again. In September 2010 it was announced that since the economy was still encountering strong headwinds, another tool would be needed to stave off deflationary pressures and provide more liquidity to "gradually increase inflationary pressures" which would be necessary to break any deflationary mindset. Even though the QE2 program was not to be implemented until November 2010, the stock markets went giddy with delight immediately launching into another rally which took the S&P 500 past the old April high and onto new heights near 1300 where it now currently sits.

Again, you will notice that the correlation between the further expansion of the Fed's Balance Sheet with QE2 and the upward movement of the S&P 500 is nearly exact.

The conclusion we can draw through all of this is very simple – it is the expansion of the Fed's Balance Sheet through both QE1 and QE2 which has supplied the liquidity driving equity markets higher. Without this liquidity the economic expansion has been far too fragile to continue on its own merits. For any talk about the Fed supposedly withdrawing this liquidity one has to believe that the economic recovery is of sufficient strength to hold its own without it. Just look at what happened to the S&P 500 in April 2010 when QE 1 was drawing to a close and the economic data showed an economy going nowhere without any signs of another QE program on the way -  it plummeted 16% in 3 months time!

But even this is only a half truth. The other side of that coin is that it is one thing to not have any further liquidity injections; it is an altogether different matter to actually begin WITHDRAWING what was in place. In other words, just as the Fed has been attempting to keep interest rates artificially low and make credit cheap and plentiful (hasn't worked by the way) any attempt to withdraw the liquidity by selling off the Treasuries they hold as a result of the QE purchases will have the opposite effect and push UP RATES beyond the short end of the curve. That will have the effect of tightening credit and slowing its growth precisely at a time in which higher energy costs as crimping both businesses and consumers. In other words, the rising crude oil price is acting as a drag on the entire economy and slowing growth which is EXACTLY THE LAST THING that this economy needs.

Can anyone seriously believe that if crude oil prices remain near current levels and gasoline subsequently stays closer to $4.00 that the Fed is going to actually attempt to shrink the size of its balance sheet by selling off Treasuries which will have the effect of lowering bank reserves and pushing up interest rates?  How does one think this will impact the moribund real estate sector which stubbornly refuses to respond to stimulus? If you think the rate of job hiring is anemic now, just wait and see what happens if interest rates start moving higher on some supposed withdrawal of liquidity.

The other last point I wish to make and is a bit unrelated to this but is relevant – The unstated purpose of the Fed's QE2 program was to keep interest rates low to LOWER BORROWING COSTS for the US federal government. When your national debt is over $14 TRILLION and rising, when annual budget deficits are above the $ ONE TRILLION mark and the rate of economic growth is not generating sufficient tax revenues to give any hope of seriously closing these budget deficits in the immediate future, it becomes a simple exercise in math that the cost of servicing this huge sum of debt is far easier in a low interest rate environment. When you dealing with numbers of this magnitude, a measly 1% raise in rates carries enormous consequences for US borrowing costs and interest rate payments.

I am not so sure that Mr. Bernanke would long hold his current position were he to actually attempt to withdraw any liquidity by shrinking the balance sheet of the Fed. If he were foolish enough to try in the current environment, every politician in the country would take aim at him with both barrels and begin blaming their budgetary woes and any economic woes on rising interest rates. What a convenient scapegoat he would then become.

The situation is that the Fed is stuck. It cannot withdraw any liquidity without creating an entirely new set of problems that would more than likely have to be once again dealt with by adding more liquidity and repeating the cycle. Lather, Rinse, Repeat!

If this were not already enough, the Japanese are now selling US Treasuries to repatriate money back to their country for rebuilding purposes (Japanese insurance companies hold large numbers of US Treasuries which they will need to sell and convert to yen to pay claims – that is the reason for the big rally in the yen on Friday and the weakness in the Treasuries). Toss in the fact that if China were to float the yuan higher upwardly revaluing it as some US politicians are demanding – a move which they think will shrink the US trade deficit with China – and US imports of Chinese goods were to then follow such a move by shrinking, China would need to purchase less US Treasuries to sterilize a shrinking trade surplus with the US. We would then have a situation where the TWO LARGEST BUYERS OF US TREASURIES would be curtailing purchases or outright selling Treasuries at the same time that the Fed might be wanting to begin selling what is going to eventually end up being over $1.5 TRILLION IN Treasury holdings. Just who in the world is going to buy them all? Bill Gross?

Click chart to enlarge in PDF format with commentary from Trader Dan Norcini

For further market analysis and commentary, please see Trader Dan's website at www.traderdan.net

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Guest Post: Thoughts On Japan

Posted: 12 Mar 2011 07:32 AM PST


Submitted by Charles Hugh Smith from Of Two Minds

Thoughts on Japan

I suspect the consequences of Japan's massive earthquake will be much more transformational than most now imagine.

Long-time readers know that I studied Japanese language, culture, literature and geography in college, and that we have many friends there.

Thus it is not just an academic exercise for me to ponder the longer term consequences for Japan and the world as the full extent of the damage is toted up. Emails are trickling in from our friends in Japan, and so far everyone is OK. (Here's a photo of me and one of our Japanese friends during a camping trip to Big Sur.)

Photos of Japan always spark memories of our extensive travels there. As those of you who have visited Japan know, it is incredibly rich in scenery, and though it may appear small on a world map it is quite "large" visually.

I have also studied Korea and China for decades, both formally in university and informally, and we have traveled extensively in both China and Korea and have many friends in each country. So it is with some "on the ground" knowledge, personal friendships and formal study that I say that though all East Asian societies share characteristics drawn from China's ancient culture, each is unique in many ways.

From the Western perspective, Asian cultures offer up numerous paradoxes (or apparent paradoxes). For example, in extremely polite Japan you might yourself rudely crammed into a train. The refinement of the Japanese aesthetic visible in everything from architecture to furniture to gift-wrapping vanishes in the visually manic page layouts of magazines and adverts. A stable, basically conservative society is also the breeding ground for the most absurd and extreme fads in clothing, gadgets, etc.

A relentlessly high-tech economy remains firmly rooted in agricultural and food-related traditions. Here is a photo of

drying persimmons (kaki) I took in our friends' home in Nagano.

A key feature of Asian culture is the distinction between public "face" and private lives. Thus the Japanese appear stoic in public, as one's private emotions are reserved for life beyond the public eye (unless one gets drunk, of course, and behavior while drunk is set aside in a special category. I have seen drunks shouting and pushing police in Japan--behavior that would get them tasered or shot in the U.S. The cops just calm the guy down; after all, he's just drunk.)


But this stoicism also reflects the deep reserves of resilience built into Japanese culture. People endure: shoganai, it can't be helped.

Japan is a wealthy nation, with deep reserves of finance, talent and determination. It is impossible to say who works harder and longer, the Chinese, Japanese or Koreans: all three societies demand workloads that would crush most Americans and other Westerners. Much of the "economic miracles" wrought by each of these countries results from this tremendous work ethic.

If you watch many films from China and Japan, you will note that sacrifice is often a theme: individuals sacrificing for the family (children or parents) or for the nation.

Here is a photo of our friend's delightful nieces, before they blossomed into young teens.

Despite the many strengths of Japanese society and culture, and the tremendous reserves of talent, dedication and self-sacrifice of its people, my gut feeling is that this series of devastating earthquakes will have more enduring consequences on the world economy than most observers seem to expect.

Japan has managed to sustain a 20-year Keynesian experiment in central government borrowing and spending "stimulus" rather than force the insolvency of its vast banking and insurance sectors. What allowed this endless piling up of debt is the people's willingness (channeled by regulations and limitations on other investments, of course) to buy low-yield Japanese bonds.

But Japan's demographics are changing. The Baby Boom generation which sunk their prodigious savings into bonds is retiring, and instead of buying more bonds they are selling assets to fund their retirements and healthcare.

On the surface--in public--Japan appears to be entirely stable financially. It's as if the national debt, currently about 200% of GDP, could rise to 300% or 400% or 1,000% without any consequence or breakdown. But demographics changes all sorts of things, and the added financial burdens of funding trillions of yen in rebuilding costs could push Japan's public finances over some unseen edge.

Should Japan be unable to self-fund its ever-rising debt, then it would have to compete globally for bond buyers. Interest rates would have to rise, and that would eventually trigger a collapse in public finances, as the costs of servicing that rising debt exceeds the government's ability to borrow money.

Japan's Status Quo--its "Establishment"--has clung on to various structural imbalances for the past two decades, refusing to threaten powerful financial and political fiefdoms with fundamental reforms. The Status Quo has played "extend and pretend" on a vast scale for an entire generation, and this has pushed Japan to a financial precipice.

All this makes me wonder if the initial "let's work together, it can't be helped" stoicism and self-sacrifice will erode at some point and trigger a social earthquake: a sudden demand for real reforms rather than more facsimiles of reform that change nothing in the power structures of the economy and government.

Some analysts have reckoned that Japan will consume less oil and resources in the wake of the quake, but if we look out a bit further, we see that rebuilding will require monumental amounts of energy and materials. Japan's consumption of commodities will rise, not fall.

Though China gets all the media attention, Japan is still a critical supplier of numerous high-tech parts in the global supply chain. The Japanese global corporations have learned from experience that anything they make in China will soon be pirated, so they have withdrawn all the really high-tech manufacturing to the home islands.

I suspect most analysts are complacent about the possible global ripple effects of these quakes, simply because Kansai and Tokyo were largely spared.

Given its great stability and wealth, Japan seems an unlikely candidate for social or financial changes triggered by a natural disaster. I am not so sure it is immune to these forces, given the fragility of its central State and local government finances and its sclerotic Power Elites and political machinery.

The quiet stoicism of the next few months may give way to more systemic and possibly transformational forces than most observers believe possible.

QE is dead! Long live QE!

Posted: 12 Mar 2011 06:38 AM PST

"One has to wonder just how long JPMorgan is going to beat the snot out of silver...with Friday's price action being a classic example of the mark of the beast." Yesterday in Gold and Silver The gold price was up about seven bucks shortly after London opened on Friday morning...and then suffered the same fate as silver, but to a much lesser degree...as it was obvious that the bullion banks were really going after the white metal. The low came at noon in London, with a secondary low around 9:30 a.m. in New York...and then, it too, climbed to its high of the day [$1,425.50 spot] just minutes after the Comex close...but gave up a lot of those gains, as it got sold off in electronic trading. Well, the cliff that JPMorgan manufactured for silver to dive off early yesterday morning, found a bottom at the daily London silver fix at twelve o'clock noon GMT...7:00 a.m. in New York. The silver price recovered from there, had a secondary bot...


Cyclical Trends in the XAU & S&P500

Posted: 12 Mar 2011 06:32 AM PST

The XAU gold/silver index has an adverse conflict of cycles between the the daily and weekly trends. This development is of primary importance for trading purposes. To read more, [COLOR=#e06666]click here.[/COLOR] ...


The ¥4.3 Trillion Japanese Government Earthquake Liability Cap: A Deep Dive Into The Mechanics Of Japanese Earthquake (Re)Insurance

Posted: 12 Mar 2011 05:26 AM PST


After private Property and Casualty reinsurance companies got whacked on Friday on broad yet unquantified concerns about imminent losses, it is time for a deeper dive into the structure of how prepared Japan is to handle what are sure to be tens of billions in earthquake insurance claims. Using information from the Non-Life Insurance Rating Organization of Japan, we find that there is a clean distinction between the liabilities borne out by the private P&C sector and where reinsurance companies step in to fund losses on residential earthquake losses. A more nuanced breakdown comes from JPMorgan's Siddharth Parameswaran: "In Japan there is coverage provided for earthquake, through two distinct forms: 1) Coverage for losses of residences (governed by "Earthquake Insurance Law," It is covered by the domestic insurance industry and the Japanese Earthquake Reinsurance ("JER") Commission); and 2) Coverage for commercial losses internally insured and externally reinsured without involvement of the government." Of the former two, the first is far more important due to the pervasive losses of real estate in most of the northeastern coastal areas, which according to some estimates will reach in the tens of billions. The three numbers to keep in mind when evaluating potential liabilities are ¥115 billion (or $1.4 billion) which is the threshold for 100% private insurance coverage; next is ¥1.925 trillion ($23 billion), which is the limit on a 50/50 split between losses for private insurers and the JER (or $11.5 billion each), and lastly, ¥5.5 trillion through which 95% of all losses are borne by the government, and 5% by the private industry. In other words the total possible private losses to private P&Cs before reinsurance funding kicks in is about $16.5 billion, while the government stand to lose at most ¥4.3 trillion (or $52 billion). At this point losses are capped, and claims are pro-rated among all claimants. Should total losses surpass about $64 billion in real estate values (at various loss thresholds), claimants will have to settle for pennies on the dollar.

Below is a brief schematic of the general function of the JER from Goldman's Philippa Rogers:

Structure

Private insurance companies selling earthquake insurance inside Japan cede 100% of earthquake insurance to Japan earthquake reinsurer (JER). JER then reinsures risk with the government of part of the reinsurance liability.

Coverage

  • Buildings for residential use
  • Household goods

Risk covered

  • Earthquake, volcanic eruptions, tsunami

Coverage condition

  • Buildings: Total loss/Half loss/Partial loss
  • Household goods: Total loss/Half loss/Partial loss
  • Payment proportion of insurance claim (for the amount insured)
  • Total loss: 100%
  • Half loss: 50%
  • Partial loss: 5%

Attachment proportion

  • 30%-50% of amount insured of fire insurance to which it is attached

Limit of insurable amount

  • Buildings: ¥50 mn
  • Household goods: ¥10 mn
  • Limit of total amount of insurance claim to be paid due to a single earthquake: ¥5.5 trillion
  • Of which covered by the government reinsurance: ¥4.3 trillion
  • Of which covered by the private sector: ¥1.2 trillion

A deeper dive in the JER mechanics comes from JPMorgan's Sid Parameswaran, who was in such a scramble to write this report he copied and pasted verbatim from Wikipedia:

Coverage for losses of residences

  • The government of Japan created the "Japanese Earthquake Reinsurance (JER)" scheme in 1966 which governs insurance coverage for homeowners and storekeepers under the Earthquake Insurance Law. Under this law,  homeowners can buy earthquake insurance from an insurance company as an optional rider to a fire insurance policy to cover both property damage to their dwelling as well as contents. The perils covered include fire, destruction, burying and washing-away caused by earthquake, volcanic eruption or tidal wave resulting there from (tsunami). The amount insured for earthquakes is limited to 30-50% of the amount insured under the comprehensive insurance policy, subject to a further limit of JPY50m for buildings and JPY10m for contents (source: Non-Life Insurance Rating Organization of Japan). There is a further scaledown based on the extent of the loss. A "total loss" will trigger a 100% payout of the insured amount for catastrophe, but it will be scaled back to 50% for a "half loss" and 5% for a "partial loss." As such, it appears that a majority of property losses are likely to fall on individuals themselves unless they suffer total loss.
  • Insurers enrolled in the JER scheme who have to pay earthquake claims to homeowners share the risk among themselves and also the government, through the JER.

A visual summary of the flow of funds in the JER:

Next, JPM proves that using a 114 USDJPY exchange rate is perfectly normaly when copying and pasting from Wikipedia:

The JER (backstopped by the government) pays a much larger proportion of the claims if a single earthquake causes aggregate damage of over about 1 trillion yen (about US $8.75 billion) (source: Wikipedia). The maximum payout in a single year to all JER insurance claim filers is 5.5 trillion yen; if claims exceed this amount, then the claims are pro-rated among all claimants.


This insurance is NOT reinsured with overseas markets. It still could have some impact on global capacity. As a point of reference, Japan accounts for about 6% of world P&C insurance premiums (Net Earned Premium JPY6,971,058m, of which Foreign insurers have 5.6%, according to the General Insurance Association of Japan). At the end of March 2010, 46.5% of dwelling risk policies had earthquake insurance. As such, our initial thoughts are that the impact on global capital is likely to be limited.

Visually, this looks as follows:

Commercial losses can also be claimed, although here the private industry is entirely on its own:

Unlike householder’s coverage, commercial earthquake coverage is provided by private insurers and not by the government or a government-run fund. Earthquake coverage is an extension of the main fire policy which is available for an additional premium. However, due to very restrictive terms and conditions and the price associated with coverage many policyholders do not purchase this coverage – take-up levels have been described as “modest” in an Aon Benfield report (“When the Earth Moves: Mega-earthquakes to come?”). Further to this, coverage also is on a first loss basis rather than a full value basis, meaning the sum insured covered by the policy is less (potentially as little as 15%) of the full value of the property at risk.

In an extreme loss scenario, the combination of the modest take-up of earthquake insurance extensions and limited sum insured values, this restricts the loss to an insurance company.

JPM's conclusions appear rather spot on:

Implications for Global Insurance Industry

It appears to us that all the losses in Japan on residential houses are likely to remain within the country, given the nature of their coverage and the lack of use of external reinsurance. Japanese premiums account for about 6% of the insurance market as well, so the spillover impact on global insurance markets and capital from won't be inconsequential but will likely be limited. Also, given the limited coverage actually provided to households, it appears individuals  (even those with insurance) will bare a substantial proportion of the costs.

In terms of commercial coverage, it appears from our exploration of industry publications that coverage is limited. As such, we conclude that two effects are likely to be seen: (a) some losses will hit balance sheets of global reinsurance companies, and (b) the losses, in our view, are unlikely to be large enough to cause an upturn in the premium rate cycle.


Broader Market Implications

There is likely to be liquidation of some funds by the JER and insurers in Japan to fund the earthquake. They probably would have invested some of their funds outside of Japan to avoid the negative correlation risk between their liabilities (Japan Earthquake) and their assets.

There also may be a further issuance of bonds by the Japanese government to fund their liabilities.

Companies in Japan and individuals in Japan may be bearing a significant proportion of the financial costs of the events (not to mention the human costs).

For what it's worth our take is that while international reinsurers, especially those from Europe, got hit badly on Friday, the market will realize that their liability is most in the commercial side. On the other hand, with potential losses of up to ¥4.3 trillion, the Japanese government itself will likely be forced to scramble to provide funding should Japan have pulled an "America" and left the reserve for the JER dangerously underfunded (obviously, should losses surpass this limit, the Japanese government will be facing many unhappy citizens, who suddenly realize they will face a discount on their insurance proceeds). That said, for Japan, a ¥4.3 trillion number is absolutely massive and should it have to pay out some or all of this amount, it will be left with no liability reserve for any future aftershock escalations. Unfortunately trying to glean some additional data on this critical variable proves impossible. From an overview of the "Earthquake Insurance System in Japan"

Liability Reserves

The frequency of occurrence of earthquake disasters is low, and besides, although they sometimes cause massive losses, it is impossible to predict when they will occur. Therefore, as for insurance premiums paid by policyholders, both insurance companies and the Government are obligated by the law to accumulate the total amount of such, excluding the portion of necessary expenses for contracts, as liability reserves in preparation for future earthquake disasters.

Additionally, it is obligated that all the investment profits from the accumulated liability reserves also be accumulated as liability reserves. Respective insurance companies are respectively accumulating the insurance premiums distributed in accordance with the respective burden of share as liability reserves, and are also accumulating all the investment profits from the accumulated liability reserves as liability reserves. The J.E.R. is managing and performing investment of these liability reserves in lump sum so as to pay insurance claims quickly to the victims of earthquake disasters. Investment of these liability reserves is limited to savings, national bonds, public bonds and corporate bonds, etc., since liquidity and safety of investment are required at the time of earthquake disasters.

The Government is accumulating the reinsurance premiums obtained and all the investment profits from the liability reserves as liability reserves. These liability reserves are accumulated separately from general accounting, under the Law concerning Special Accounts.

Alas, in an environment in which the world's biggest bank copies and pastes from Wikipedia, it is clear that few if any have any idea how this tragedy will play out, suffice to say that it will require a massive issuance of new paper at both the public and private sectors, most certainly accompanied by further rounds of quantitative easing on all sides of the Pacific (and Atlantic). Unfortunately, we expect sovereign paper volatility, especially that of Japan to add to the already chaotic picture come Monday when the market evaluates the implications of what has just transpired.

Full overview of the Japanese Earthquake Insurance System from the NIRO.

 


Nuclear Meltdown in Japan Would Have Worldwide Implications

Posted: 12 Mar 2011 04:00 AM PST

The concerns continue to mount after Japan's devastating earthquake and subsequent tsunami, which may further heighten recent anxiety in the financial markets. An explosion near the No. 1 reactor at the Fukushima Dai-Ichi nuclear power station ... Read More...



Trader Dan Norcini doesn't believe silver COT report anymore

Posted: 12 Mar 2011 03:14 AM PST

11:10a ET Saturday, March 12, 2011

Dear Friend of GATA and old (and Silver):

The weekly precious metals market review at King World News with Bill Haynes of CMI Gold and Silver and futures trader Dan Norcini finds Norcini remarking that he doesn't believe the weekly commitment-of-traders report in the silver market anymore. The program is 18 minutes long and you can listen to it at King World News here:

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/12_KWN_W...

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


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Prophecy Resource Spins Off Platinum/Palladium Venture:
World-Class PGM Deposit in Yukon

Company Press Release, January 18, 2011

VANCOUVER, British Columbia -- Prophecy Resource Corp. (TSX-V:PCY)and Pacific Coast Nickel Corp. announce that they have agreed that PCNC will acquire Prophecy's Nickel PGM projects by issuing common shares to Prophecy.

PCNC will acquire the Wellgreen PGM Ni-Cu and Lynn Lake nickel projects in the Yukon Territory and Manitoba respectively by issuing up to 550 million common shares of PCNC to Prophecy. PCNC has 55.7 million shares outstanding.

Following the transaction:

-- Prophecy will own approximately 90 percent of PCNC.

-- PCNC will consolidate its share capital on a 10 old for one new basis.

-- Prophecy will change its name to Prophecy Coal Corp. and PCNC will be renamed Prophecy Platinum Corp.

-- Prophecy intends to distribute half of its PCNC shares to shareholders pro-rata in accordance with their holdings.

Based on the closing price of the common shares of PCNC on January 17, $0.195 per share, the gross value of the transaction is $107,250,000.

For the complete announcement, please visit:

http://prophecyresource.com/news_2011_jan18.php

Support GATA by purchasing a colorful GATA T-shirt:

http://gata.org/tshirts

Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:

http://gata.org/node/wallstreetjournal

Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon:

http://www.goldrush21.com/

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

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Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit, Extending the Mineralization of the Southwest Vein on the Property

Company Press Release, October 27, 2010

VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:

-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.

-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.

-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.

Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface.

"The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."

For the company's full press release, please visit:

http://sonaresources.com/_resources/news/SONA_NR19_2010.pdf

The Winner of This Year’s Daily Reckoning Dodo Derby

Posted: 12 Mar 2011 03:00 AM PST

It's time, Fellow Reckoner…time to announce the winner of this year's "The-name-of-the-guy-who-came-up-with-the-idea-of-evolution-but-who's-name-we-cannot-use-due-to-trademark-infringement-constraints-Award!"

Or, for short…

The winner of our inaugural Daily Reckoning Dodo Derby.

Let's start where all good evolutionary tales start: at the beginning…

This year, 44 of America's united states will deliver a combined 2012 budget shortfall of approximately $125 billion. They are broke, in other words, and determinedly bureaucratizing themselves ever closer to outright insolvency…the financial equivalent of the dinosaurs' tar pit.

By way of honoring their commitment to financial evolution – that is, by rendering themselves extinct so that newer, more adaptive and innovative concepts of trade and freedom can take their place – we featured a handful of these states during recent Daily Reckoning musings.

First, in last weekend's edition, we narrowed the field to ten finalists – California, Connecticut, Illinois, Louisiana, Massachusetts, Mississippi, New Jersey, New York, Ohio and Wisconsin.

Then, on Monday and Tuesday, we awarded special mentions to Connecticut and New Jersey for their commitment to wasteful state government spending. Next, we bestowed first and second runners-up honors on California and Massachusetts, respectively.

And now, today, it's time to announce the winner of our shamelessly non-scientific, mostly tongue-in-cheek, change-the-name-halfway-through-the-competition competition.

But first, the stats…

Population: 12.88 million.
Unemployed: 603,000.
Food stamp recipients: 1.97 million.
Total debt: $143 billion.
Debt/GDP ratio: 22%…

And, here's the kicker…

Total state debt per man woman and child – whether working or not: $11,138!

Yes, Fellow Reckoner, this year's winning state, occasionally referred to as Land of Lincoln or The Prairie State, home of the president of the country with the largest total debt the world has ever seen, is…

Illinois.

Congratulations Illinois. Here are your residents:

"I think I'll chime in," begins our first Reckoner, kicking things off. "I live in Illinois and, like Wisconsin, our day of reckoning will be coming soon. Picking on the middle class will result in a mutiny of grand proportions.

"Start taking a look at the School Boards where they vote themselves raises and plum retirement benefits… The politicians and judges who get automatic raises each year or ever other year… The City Councils who bicker of not making enough… The special stipends these people get so they can hire family members… Raises and promotions for those who have contributed to the funds of those running for re-election… Get with the State Comptroller's Office and investigate who gets what in payroll. Politicians SHOULD also increase their contribution to Health Care. Eliminate state positions that crossover and are duplicating waste and make sure that all building contracts come within budget. Reduce and/or eliminate nepotism within state offices."

And here's reckoner Bob, with a few specific tales of local waste…

"Here in Chicago IL, at Piotrowski Park, they demolished a nice playground area and replaced it with a greatly inferior playground. Then, in the field house, they installed an elevator that goes from the ground floor to the locker room one floor below, as if the stairs were not enough. Oh…and they tore out the field house reception area just so they could rebuild it. In the playing field, they tore out perfectly good water fountains just to replace them."

Adds Reckoner Charles…

"I live in Illinois too, where instead of postponing two overpasses across the railroad tracks, they are going ahead with it. That would cut costs buy over $2,000,000 just by putting it off for a while. The overpasses are NOT needed. Just that some council person wants a few more votes."

And this, from Reckoner John…

"Illinois has an interesting strategy for funding teacher salaries and retirement. Illinois schools and teacher salaries are funded by property taxes, but the taxes remain in the community where they are collected. There is no statewide distribution. The rich get richer…

"Then there are the pensions. The Illinois Taxpayers Union has lists of the top 100 educator pensions on a county-by-county basis. In Cook County, the top 100 pensions run from $238K to $146K annually. Pensions range from 60% to 120% of the average salary for the last four years of employment. These are for primary and secondary educators in suburban Cook County. An 'educator' from the National Education Association is #2 on the list at $235K.

"The top 100 Community College educator pensions in Cook County have a slightly lower range – $208K-$102K. Guess who picks up the tab for pensions?"

And finally, an appropriately named Reckoner "Cost" sounds off…

"They are now going after the residents for online purchases made from retailers located outside the state with no in-state presence, but used/consumed within the state, to the tune of a 6.25% tax rate. Ludicrous. And they are offering amnesty going back to 2004 along with the option of using the estimated tax table if you don't have records. The tables are heavily skewed to the State's favor (assuming, for example, that if your gross income was $75-100K, you would have spent $1,000 online for such purchases.) Keep in mind, though, that this is the State that also lets residents voluntarily pay cigarette taxes for purchases made outside the State. Go Illinois!"

Go Illinois, indeed.

Thanks again to the hundreds of readers who wrote in from around the nation will tales of waste and incompetence at their individual state levels. And congratulations again to our finalists and, of course, this year's winner.

Joel Bowman
for The Daily Reckoning

The Winner of This Year's Daily Reckoning Dodo Derby originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

Letting No Disaster Go To Waste, SEC Prepares To Let Lehman Executives Walk For Repo 105 Fraud

Posted: 12 Mar 2011 02:55 AM PST


And while the general public frets over the latest geopolitical disasters, the SEC proves Rahm Emanuel correct once again, and letting no disaster go to waste, man-made or natural, the world's most incompetent (but massively underpaid, or so they claim) regulator is preparing to let Dick Fuld completely off the hook for last spring's stunning Repo 105 report by Anton Valukas, whose findings even the bankruptcy expert said were probably cause for civil lawsuits. The WSJ reports: "In recent months, Securities and Exchange Commission officials have grown increasingly doubtful they can prove that Lehman violated U.S. laws by using an accounting maneuver to move as much as $50 billion in assets off its balance sheet, which made it appear that the securities firm had reduced its debt levels....After zeroing in last summer on the battered real-estate portfolio and an accounting move known as Repo 105, SEC officials have grown more worried they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn't necessarily illegal." Oh no, illegal it is. The problem is that should the SEC actually pursue it and win, that act would open up the floodgates for hundreds of lawsuits against everyone from Bank of America and Citi, which have also disclosed they used comparable tactics to misrepresent the true status of their books, to shady accounts like Ernst & Young, all the way to FASB at the very top of the corruption pyramid. And with hundreds of millions if not billions in legal fees about to be paid out if the fraudclosure back door settlement fails, the SEC simply can not allow the pursuit of justice to threaten the viability of America's only national interest: that of its criminal banking syndicate.

From the WSJ:

A year ago, it looked as if the SEC and federal prosecutors had a road map to use against Lehman's former top executives. Last March, the Repo 105 transactions were condemned by court-appointed examiner Anton R. Valukas, who said in a report that they enabled Lehman to "paint a misleading picture of its financial condition."

In the transactions, Lehman swapped fixed-income assets for cash shortly before the securities firm reported quarterly results, promising to buy back the securities later. The cash was used to pay down the company's debts. Emails sent by executives at the company referred to Repo 105 as a "drug" and "basically window dressing."

Mr. Valukas concluded there were "colorable," or credible, legal claims against Ernst & Young, Mr. Fuld and former finance chiefs Ian Lowitt, Erin Callan and Christopher O'Meara.

People close to the investigation cautioned that no decision has been reached on whether to bring civil charges, adding that new evidence still could emerge. Investigators are reviewing thousands of documents turned over to the SEC since it began its probe shortly after Lehman tumbled into bankruptcy in September 2008 and was sold off in pieces. Officials also have questioned a number of former Lehman executives, some of them multiple times, the people said.

But after zeroing in last summer on the battered real-estate portfolio and an accounting move known as Repo 105, SEC officials have grown more worried they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn't necessarily illegal.

In a possible sign that the probe has slowed, the SEC hasn't issued a Wells notice to Lehman's longtime auditor, Ernst & Young, according to people familiar with the situation. The firm had concluded that the accounting in the Repo 105 transactions was acceptable. Wells notices are a formal signal that the SEC's enforcement staff has decided it might file civil charges against the recipient.

The snags are the latest sign of trouble for the SEC and other U.S. regulators trying to punish companies and executives at the center of the financial crisis. So far, no high-profile executives have been successfully prosecuted. Last month, a federal criminal investigation of former Countrywide Financial Corp. Chief Executive Angelo Mozilo was closed without charges.

The punchline:

It isn't clear what the Lehman executives have said to SEC officials during the probe. Last year, Mr. Fuld told lawmakers he had "absolutely no recollection whatsoever of hearing anything" about Repo 105 at the time of the transactions. Lehman's demise was caused by "uncontrollable market forces" and the U.S. government's unwillingness to rescue the firm, he said.

In other words, with everyone complicit on the crime, there is not one party that can be singled out without every party having to be sued. Ah the benefits of risk diversification: Wall Street realized all too well that a symbiotic approach to middle class parasitism is the best one, as it leaves it far less open to direct attack. Yes, any given bank may reap slightly less in benefits immediately, but over the long run everyone makes money and if there is some catastrophe the taxpaying peasant will have no choice but to bail everyone out. And should there be a legal case against one, in a reverse case of the Three Musketeers, it would have to be a case against all. 2008 confirmed the first. Dick Fuld is confirming the second. But don't forget - the SEC has no money and no computers. So it is isn't their fault they are corrupt and siding with the criminals on this one... and on every other one.

Expect Charles Ferguson's question of why nobody has ever gone to jail over the greatest financial crisis since the depression to remain unanswered in this lifetime.


Japan Nuclear Meltdown Would have Worldwide Implications

Posted: 12 Mar 2011 02:38 AM PST

The concerns continue to mount after Japan’s devastating earthquake and subsequent tsunami, which may further heighten recent anxiety in the financial markets. An explosion near the No. 1 reactor at the Fukushima Dai-Ichi nuclear power station has industry experts talking about the possibility of a meltdown. According to Bloomberg:


Japan's Chernobyl, Nuclear Power Plant Explodes, Meltdown in Progress

Posted: 12 Mar 2011 02:21 AM PST

A March 12 explosion at the earthquake-damaged Fukushima Daiichi nuclear power plant in Okuma, Japan, appears to have caused a reactor meltdown. The key piece of technology in a nuclear reactor is the control rods. Nuclear fuel generates neutrons; controlling the flow and production rate of these neutrons is what generates heat, and from the heat, electricity. Control rods absorb neutrons — the rods slide in and out of the fuel mass to regulate neutron emission, and with it, heat and electricity generation.


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