saveyourassetsfirst3 |
- The Mythical Land of Us
- China Cuts Required Reserves
- 6 Noteworthy Insider Buys And 3 Sells Last Week In Basic Materials And Energy Sectors
- Reckoning in Europe begins with intent
- 20 Years From Now: Gold @ $12,000 & Silver @ $1,000?
- JPMorgan: Cracks In The House Of Dimon Or Holes In The System?
- JPMorgan Chase: Too Big To Exist
- How To Profit From The Eurozone Crisis
- Gold bugs will be vindicated
- Gold Stocks As Yield Plays?
- FT's Gillian Tett Provides the Rationale for Gold Price Suppression
- Ex-Fed Governor Warsh confirms gold suppression
- Silver Update: Jamie's Cryin – 5.10.12
- T&S: The Big Market Picture
- JP Morgan: What It's All About
- BigDad06: Golden Nuggets
- Gold ‘Will Go To 3,000 Dollars Per Ounce’ - Rosenberg
- Making Silver Coins
- Four silver coins from William the Conquerors reign were discovered
- The Hungarian Connection
- Bill Black: New York Times Reporters Embrace the Berlin Consensus and Ignore Krugman and Economics
- By the Numbers for the Week Ending May 11
- Modern Miners Still Engaged in Risky Business
- Heidi Moore: JP Morgan's “Unicorn Hedge”
- Excellent paragraph in new Ted Butler article
- Of Drop Bears, Drinking Games and Australian Banks
| Posted: 12 May 2012 04:38 AM PDT If ever we needed proof of the saturation-level brainwashing to which the Western masses are now subjected (and to which they have succumbed), there is no clearer evidence than the U.S. Treasuries market. The U.S. economy has never been less-solvent in its entire history, meaning that U.S. Treasuries have never been less valuable. The new supply of U.S. Treasuries grossly exceeds any level of paper the U.S. has ever pumped into global markets before, meaning that Treasuries have never been less valuable. And yet we see (alleged) buyers being permanently willing to pay (by far) the highest prices in history for these mountainous stacks of paper. However, this is just the beginning of the absurdity here. We're told that the U.S. government can continue to obtain these record prices despite the fact that the two largest buyers of Treasuries over the past decade (China and Japan) have virtually stopped buying. Indeed, for more than a year China has been a net-seller of Treasuries. This collapse in demand also implies the lowest rather than the highest prices in history for U.S. Treasuries. Amazingly, we have now journeyed beyond absurdity. With U.S. Treasuries interest rates having literally dipped into negative numbers on several occasions already, absurdity becomes insanity: "buyers" supposedly paying for the privilege of lending money to the U.S. government. Under the best of circumstances this would be perverse and insane. Borrowers do not get to charge lenders interest when they borrow their money. Indeed, the simple fact that this point even needs to be made – to an adult audience – is proof of how this saturation propaganda has effectively rendered the majority brain-dead. Lenders do not pay interest to borrowers when they lend them money. This is a tautology of commerce which is true under the best of circumstances. However we are far from "the best of circumstances." The United States has never been less solvent, meaning its bonds have never been worth less (worthless?). And now we have the ultimate insanity. We have the Treasury Department announcing it is formally structuring its bond auctions to make it easier for "buyers" to pay negative interest rates (i.e. pay the U.S. government in order to be allowed to lend it their money). The King of Deadbeats, the most insolvent nation in all of history, has announced that it is now expecting lenders to line-up in order to be allowed to pay the U.S. government for the privilege of lending money to it. In short, the U.S. Treasuries market is already totally perverse. There is not even a hypothetical universe we could construct where this would be a rational, legitimate market. The only parallel I can think of is a fable I heard long ago about "The Mythical Land of Us".
The Land of Us was a rather dreary place. It was composed entirely of two groups: a small number of rich Hogs and a huge herd of poor Sheep. Inexplicably, it was the sheep themselves who always chose the Hogs to rule over them. The Land of Us became such a dreary place entirely because of its Golden Rule (one of the first laws created by the Hogs): "All of the Sacrifices will be bestowed upon the Sheep, and all of the Privileges will be imposed on the Hogs." The Sheep agreed that this seemed like a very equitable division. [Did I mention that the Sheep weren't very bright?] However, even the fat Hogs weren't smiling these days as The Land of Us had a very serious problem: it was deeply, deeply in debt – in fact hopelessly insolvent. Worse still, there were practically no revenues coming into the Hogs' coffers. The Sheep had nothing left to tax, while naturally the Hogs paid no taxes (as per the division between "Sacrifices" and "Privileges"). An emergency Council of the Hogs was convened to discuss this crisis. |
| Posted: 12 May 2012 03:46 AM PDT By Marc Chandler: The People's Bank of China reduced the amount of money banks must hold by about CNY350-CNY400 bln (~$60 bln). It is a 50 bp reduction in the required reserve ratio (RRR), effective May 18. It is the third cut in six months. The precise timing is always impossible to predict, but it was widely expected. In fact, two consideration was behind our warning that it was coming soon. First, China reported soft economic data 24 hours before the RRR cut was announced. The disappointing economic data included weaker than expected industrial production (slowed rather than increased) and fixed asset investment, which is an important engine of China's growth, which continued to slow and now is growing at its slowest pace in nearly a decade. The dramatic slowing of new yuan loans was also part of the data dump on Friday May 11. In March Chinese banks made CNY1.01 trillion of Complete Story » |
| 6 Noteworthy Insider Buys And 3 Sells Last Week In Basic Materials And Energy Sectors Posted: 12 May 2012 03:38 AM PDT By Ganaxi Small Cap Movers: We present here six noteworthy insider buys and three sells in the basic materials and energy sectors from Monday through Friday's (May 7th to 11th, 2012) over 1,850 separate SEC Form 4 (insider trading) filings, as part of our daily and weekly coverage of insider trades. The filings are noteworthy based on the dollar amount sold, the number of insiders buying or selling, and based on whether the overall buying or selling represents a strong pick-up based on historical buying and selling in the stock (for more info on how to interpret insider trades, please refer to the end of this article): Pioneer Natural Resources (PXD): PXD is engaged in the exploration and production oil and gas in the U.S. and South Africa. On Wednesday, Director Arthur Thomas filed SEC Form 4 indicating that he purchased 1,000 shares for $104,500, increasing his holdings to 20,956 shares in direct and indirect Complete Story » |
| Reckoning in Europe begins with intent Posted: 12 May 2012 03:02 AM PDT    Reckoning in Europe begins with intentPosted MAY 11 2012 by WILL BANCROFT We've talked about the Eurozone a lot these last few months. Investors have had to focus most clearly on Europe, it's been the acute infection in a larger open wound that is the banking system. Admittedly, all is far from rosy elsewhere. Elsewhere is just relatively less bad. Issue fatigue, nay crisis fatigue, has been creeping upon us all. This is only natural. However, after a potentially LTRO induced hiatus, and short-term political appeasement, the pressure is taking its toll in the Eurozone again. Two elections have recently been held, in France and Greece. In France, Sarkozy, who was politically joined at the hip with Angela Merkel, has been ousted. The conservative right, Sarkozy's previous intellectual constituency, fractured with a significant part of the further right leaning vote opting for Marine Le Pen and the Front National. Angry voters in EuropeFrance has now elected a socialist with a limited and inglorious political past. Francois Hollande won the French election on a ticket that said no to austerity and pain, and promised more borrowing and 'growth'. The Franco-German alliance at the heart of European politics looks to be replaced with future squabbles over differing economic ideologies. The election in Greece is more interesting in terms of politics deviating from the status quo. Since World War Two the conservative and socialist parties have held the mainstay of Greek politics; normally sharing around 70% of the vote. This Greek political mainstream was establishment, pro-EU, pro-single currency, in favour of bailouts and trying to work things through in accordance with the Merkozy inspired fiscal treaty, and most recently complicit with the European centre parachuting bureaucrats in to run Greek affairs. The long suffering Greeks have had enough and have voted in new directions. New parties such as the communists and radical left-wingers have experienced real success, whilst a new party from the far right, The Golden Dawn, achieved 7% of the ballot. The Golden Dawn, let by Nikolaos Michaloliakos, is described as 'genuinely Neo-Nazi'. If you look at their politics and practices this claim is difficult to refute. They embrace raised arm salutes and insist that members can trace their Greek citizenship back 7 generations. As Nigel Farage points out: "even Hitler only went back to your grandparents". The markets were bound to be disturbed by this, and have traded this week as such. Dominos falling in the European banking systemWe have also talked about Spain and her role in the unravelling of the euro. Spain experienced an even more spectacular property bubble than Ireland, and Spanish banks have been sweating under mountains of dodgy property loans that were made during the bubble. These loans, with inadequate provision set aside against them to cover potential defaults, are a ticking time-bomb waiting to affect the Spanish economy. Property debt in the Spanish banking system is now coming home to roost. Bankia, the country's 4th largest lender, was not able to manage its troubled loan book as a private company and fled into the arms of the Spanish government. The Spanish central bank reports a deal that will give the state a 45% indirect stake in Bankia in exchange for a previous loan of 4.5bn euros. Reuters reports that: "since the banking crisis began, Spain has bailed out seven smaller savings banks, but the Bankia rescue is by far the biggest and it comes after a string of other banking reform plans revealed over the past week". And, it looks like Spain is set to continue down this path. "We will deepen the process of cleaning up the banks" advised Prime Minister Mariano Rajoy. The bailout precedent has been continued. A major banking domino falls in Spain, and whatever the full extent of Bankia's problematic property loans are, the state will have to continue its support. If this Spanish policy response remains consistent then in the next few years the government apparently stands ready to take on what analyst believe is up to 100m of bad property loans. Yet again the good times in banking were enjoyed by few, and now the losses and consequences are shouldered across tax payers generally. More debt will move from private balance sheets to the public balance sheet; an equity market problem moves on to add to a government bond market problem. Investors will require greater interest payments to hold Bonos and Obligaciones del Estado. Without a continued ECB bid, or LTRO financed private bid, in these debt markets the bond vigilantes can finally have their way. And, if easing and printing are continued as the mode du jour then yet more good money is being sent after bad. Debt is being reckoned with in Europe; look out below. This is where assets that are nobody else's liability earn their reputation and keep as part of a balanced portfolio. Gold is the king of these 'real assets'. It cannot be frozen, repudiated or defaulted on. We may be bored of the 'end of the bull market' debate about gold, and thegold price might have disappointed investors these last 7 months, but hang onto old Yella'. This might just be the "end of the beginning" of the Eurozone crisis.
Invest in gold and protect yourself from panics and debt crises. Buy gold bullion in minutes… -OR- SIGN UP NOW to receive your FREE* oz of silver Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date. TAGS: Central Banks, Eurozone crisis, Gold bullion, Gold Investment CATEGORIES: Original commentary About the Author Will BancroftAside from being COO, Will also contributes to The Real Asset Company's Research Desk. His passion for financial markets and investment led him to develop a keen interest in monetary economics, gold and silver. Will's views are sought by and appear on sites such as Seeking Alpha, Market Oracle, Stockopedia, Resource Investor, and Commodity Online. Will holds a BSc Econ Politics from Cardiff University.
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| 20 Years From Now: Gold @ $12,000 & Silver @ $1,000? Posted: 12 May 2012 02:58 AM PDT Should both Gold & Silver Bulls & Bears take a long winter sleep?
When we look at Silver prices from 1985 to today (Green line in the chart below) and compare the evolution to the one from 1967 to 1974 (black line in the chart below), we can see a very similar pattern. If price would continue to track this pattern, it could mean that silver has just entered a 20 years lasting winter sleep. In the meantime, it would trade between $20 and $50, before taking off again in 2032… From then on, it could gain over 2,000% to reach nearly $1,000.
A similar pattern can be observed in the price of Gold, although the time scale is slightly different.
Why the hell would Gold drop towards $1,000 per ounce by 2015, while all the fundamentals are pointing to a "screaming buy"? Well, if Martin Armstrong is correct and we would get a Sovereign Debt "Big Bang" sometime late 2015, then that could be the reason for Gold's drop (please have a look at the following slide which he presented in 1998 & click HERE for the complete presentation). All of Martin Armstrong predictions in 1998 came true, so the chances are high that the last one will too.
Jim Rogers was recently quoted saying: "It's extremely unusual for any asset in history to move higher for 11 straight years. That's why I expect the recent correction in gold to continue." He's not selling any of his gold. And he's not shorting it, either. Back in 2008 when Gold was trading around $900 (after having traded above $1,000 for the first time in history), he said in an interview with the Chinapost he would buy Gold if it were to drop towards $750. Eventually, it bottomed 10% lower around $680, before nearly trippling over the next 3 years. Assume Rogers is right, and Gold drops towards $1,100 (the point where he would add to his positions), and history repeats (meaning Gold bottoms about 10% lower), that would put Gold at $1,000 an ounce, which is also the price target of the second chart above. Now why should Gold & Silver take a break?
Now let's have a look at the markets. I have written extensively about how the HUI index has been under performing Gold, just like in 2008. The pattern is still holding so far, which does not look good at all:
However, sentiment in Gold Stocks is VERY depressed at the moment, as only 10% of the Gold stocks have a BUY signal on the Poing & Figure chart, as shown in the following chart ($BPGDM). On top of that, the HUI index has now hit the 50% Fibonacci Retracement level from the bottom in 2008 to the top in 2011:
Gold stocks are trading at historical low valuations compared to Gold, so this combined with the extremely depressed sentiment could mean that Gold Stocks are at or near a bottom, although the similarities with the 2008 crash are still striking and therefore worrisome. I haven't bought Gold stocks since I sold them in 2011, right before Silver hit nearly $50 per ounce, but am now back in the market. I have decided to only accept new subscribers until June 30th. From then on my services will be open to existing subscribers ONLY. To secure your membership now, visit www.profitimes.com and subscribe now!
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| JPMorgan: Cracks In The House Of Dimon Or Holes In The System? Posted: 12 May 2012 02:54 AM PDT By Jason Merriam: JPMorgan (JPM) really threw a monkey wrench into the capital markets Thursday afternoon with the shocking revelation of a $2 billion dollar trading loss racked up within six weeks. Worse, there is a potential for an additional $1 billion in trading losses. I've been a long-time admirer of Jamie Dimon, Morgan's bold CEO. It was he, if you recall, who basically did the Fed and Treasury a favor by taking over the now defunct WaMu. While some would argue that he got a sweetheart deal, Dimon was the only banker in town (at that time) with any cash. Yet, then Treasury Secretary Hank Paulson and Fed chief Bernanke had a gun to Dimon's head ... and at a time when JPM was trying to digest a belly-full of Bear Stearns. But, some four years later and it was hoped that "too big to fail" attitudes would have settled down a Complete Story » |
| JPMorgan Chase: Too Big To Exist Posted: 12 May 2012 02:01 AM PDT By Thomas J. Feeney: The news of the week was that JPMorgan Chase (JPM), held in esteem by many as the pre-eminent mega-bank, had sorely miscalculated and lost a couple of billion dollars or so on what was characterized as a "hedge." These guys were reputed to be the best and the brightest. If this was a hedge, where are the offsetting profits? This debacle was not the work of a single rogue trader. Allegedly, the decisions were made in the Chief Investment Office. Late in the day Friday, Fitch downgraded its ratings on the bank's long-term debt and indicated that all the bank's debt was on credit watch negative. The ratings agency indicated that the magnitude of the loss implies a lack of liquidity. Fitch also stated that the complexity of the bank's operations makes it difficult to assess risk exposure. Onerous as a multi-billion dollar loss might be to the House of Complete Story » |
| How To Profit From The Eurozone Crisis Posted: 12 May 2012 01:43 AM PDT The Eurozone sovereign debt crisis is still unresolved and is making investors feel queasy since it is depressing markets on both sides of the Atlantic ocean. Where there's a problem often there's an opportunity; here's how you could take advantage of the EU crisis to reap some profits. Short the Euro The first idea that comes to mind is shorting the Euro. In the past year, since may 2011, the euro has lost 10% of its value against the dollar and, if Greece will abandon the European currency, it may drop even further. To short the Euro you could buy the ProShares UltraShort Euro ETF (EUO) or the Market Vectors Double Short Euro ETN (DRR). These are 2x leveraged so beware that your profits may accumulate faster but so may your losses. (click to enlarge) Buy Gold Gold has always been considered a safe harbor in troubled financial times, so Complete Story » |
| Posted: 12 May 2012 01:00 AM PDT In recent weeks, while the eurozone has suffered escalating levels of systemic stress in government bond markets and its banking system, the gold price has fallen under $1,600. One would have thought ... |
| Posted: 12 May 2012 12:50 AM PDT  By Roger Nusbaum: The other day I stumbled across an article about the dividend yields for four gold mining stocks including Anglo Gold Ashanti (AU). Before the SPDR Gold Trust (GLD) came along we used AU for our gold exposure. It did okay, and then starting in late 2005 it started skyrocketing; we sold it in February 2006 and swapped it share for share into GLD, which we've held ever since (we did sell a chunk of GLD last August). (click to enlarge) Historically there have been times where the metal outperforms the miners and vice versa. There were rotations between the metal and the miners for this particular trade and every so often you would hear or read someone explaining how this worked. The sale of AU came after a period of miner outperformance and the swap at the time seemed obvious, but there was no real expectation of being able to Complete Story » |
| FT's Gillian Tett Provides the Rationale for Gold Price Suppression Posted: 12 May 2012 12:35 AM PDT Yesterday in Gold and SilverAs you already know from yesterday's comments in 'The Wrap'...the gold price came under selling pressure at 9:00 a.m. Hong Kong time on their Friday morning...with the low tick of the day [around $1,573 spot] coming at 8:30 a.m. in London. From that low, the subsequent rally made it up to the high of the day [$1,591.90 spot]...which came around 10:45 a.m. in New York. And, like Thursday, it got sold off into the close electronic trading from there. Gold finished the Friday trading session at $1,580.40 spot...down $13.00 from Thursday's close. Net volume was around 117,000 contracts.
Silver also got sold off in Far East trading starting at the same time. But silver's low [around $28.40 spot] came exactly thirty minutes after gold's...at precisely 9:00 a.m. in London. The silver price recovered a bit from there, but then got sold off once Comex trading began...and by 9:30 a.m. in New York, it was almost back at its London low. But from there it moved sharply higher...with the high of the day [$29.23 spot] coming around 11:00 a.m. Eastern time. From that point, the silver price got sold off just over a percent going into the 5:15 p.m. close. The silver price closed the day at $28.89 spot...down 15 cents from Thursday. Net volume was around 33,000 contracts.
The dollar bounced around between 80.10 and 80.30 for most of the trading day on Friday...closing almost on it high at 80.26...but only up about 6 basis points from Thursday's close.
The gold stocks gapped down over a percent at the open...but then managed to make it back into positive territory for about thirty minutes around gold's high. However, once the gold price rolled over, the equities followed...and the HUI finished the Friday trading session down 1.69%.
The silver stocks didn't do much better...and Nick Laird's Silver Sentiment Index closed down 1.38%
(Click on image to enlarge) The CME's Daily Delivery Report showed that 65 gold and 7 silver contracts were posted for delivery on Tuesday. Not much to see here. There were no reported changes in either GLD or SLV...and the U.S. Mint sold another 75,000 silver eagles. Switzerland's Zürcher Kantonalbank updated their gold and silver ETF totals at the end of the Wednesday trading day on May 8th. Their gold ETF took in 42,497 troy ounces...and their silver ETF added 574,823 troy ounces. It was extremely busy over at the Comex-approved depositories on Thursday. They reported receiving 1,207,452 troy ounces of silver...and shipped another 1,097,050 ounce of the stuff out the door. The link to that action is here. Well, yesterday's Commitment of Traders Report [for positions held at the close of Comex trading on Tuesday, May 8th] was beyond even my expectations...which were considerable. And, as fantastic as these numbers were, I should point out right up front that the new lows in all precious metals that were set on Wednesday...and again yesterday morning in London...means that they are even more fantastic now. In silver, the Commercial net short position declined by a whopping 5,844 contracts. The Commercial net short position is now down to 17,900 contracts, or 89.5 million ounces. The biggest changes in the Non-Commercial and Nonreportable categories were the huge increases in their respective short positions. Between both categories, they increased their net short positions by 4,844 contracts. As Ted Butler mentioned several times during the reporting week, it was obvious that JPMorgan et al were setting prices lower in such a way as to entice the traders in these other two categories to go massively short...and they succeeded. Many multi-year records were broken in this COT report...and I know that Ted Butler will have much to say in his weekly commentary later today. One record that fell in this COT report was the net long position of the small traders in silver...the Nonreportable category. It hit a record low on Tuesday...and is lower still, since the cut-off. It was just as impressive, if not more so, in the COT for gold. The Commercial net short position in gold dropped by 26,548 contracts, or 2.65 million ounces. The Commercial net short position is now down to 15.1 million ounces...a level not seen in a bit over three years. In the other two categories of the COT...the Non-Commercial and the Nonreportable...traders dumped long positions and piled onto the short side. During the reporting week, these two categories dumped 7,136 long contracts and went short 19,412 contracts. If you add those last two numbers up, the total comes to the drop in the Commercial net short position...26,548 contracts. Don't forgot that there has to be a long for every short...and there's your proof. In some ways, this COT report is better than the one that we had at the prior low of late December of last year...and with the improvements from Wednesday and Friday thrown in, we're most likely at new records in all categories in all four precious metals. Today's first chart is courtesy of Washington state reader S.A. It's the "Annual Consumer Inflation" graph from John Williams over at shadowstats.com...and needs no further embellishment from me.
The next chart courtesy of Nick Laird shows the "Total Weight vs. Total Value" of all the transparent precious metal holdings in the world.
Nick also pointed out the following..."Just updating my ETFs holdings...and UBS declared that they sold 347,850 oz ($5.5 billion worth) of gold out of three different Gold ETFs this week - 23% of their total gold holdings, so it's a huge change." Yes, it is...and here's the "UBS Gold ETF Ounces" chart that Nick sent me.
(Click on image to enlarge) I have the usual number of stories for a weekend...and I hope you have the time to glance through all of them. The internal structure of the precious metals market from a Commitment of Traders perspective is the most bullish I can remember in years Gold -- what correction? Gold 'Will Go To 3,000 Dollars Per Ounce' - David Rosenberg. If It's Made of Metal, Thieves Aren't Picky. A Blockbuster COT Report. Critical ReadsWhat Jamie Dimon Doesn't Know Is Plain ScaryCould Jamie Dimon really be as clueless as he sounded on the phone yesterday? Last month, after Bloomberg News broke the story that JPMorgan Chase & Co.'s chief investment office had, in essence, become a ticking time bomb, Dimon, the bank's chief executive officer, called the press coverage "a complete tempest in a teapot." That explanation no longer works. Yesterday, Dimon changed tacks. Losses on the investment office's "synthetic credit portfolio" had reached $2 billion so far this quarter, though he refused to give any meaningful details on how that had happened. Presumably, these are derivatives of some sort, but even that basic fact was too much for the bank to specify. What Dimon lacked in information, he more than made up for in assigning blame -- to himself and JPMorgan employees. Bloomberg columnist Jonathan Weil tees up Jamie Dimon and drives him down the fairway in this op-ed piece posted on their website early yesterday morning. It's certainly a must read...and I thank Phil Barlett for sending it. The link is here. Jamie's Cryin: Dimon, J.P. Morgan Chase Lose $2 Billion: Matt TaibbiA quick note on the disastrous news emanating from J.P. Morgan Chase, whose unflappable (well, unflappable until yesterday) CEO Jamie Dimon yesterday disclosed that the bank suffered $2 billion in trading losses this quarter. I'm still not entirely clear on what the trades by Bruno Iksil, the so-called "London Whale," were exactly. According to the excellent Felix Salmon at Reuters, Iksil had taken a massive long position on corporate CDS, and when word of this leaked out, the market turned on him and beat his brains out. From Salmon's piece: "Whenever a trader has a large and known position, the market is almost certain to move violently against that trader — and that seems to be exactly what happened here. On the conference call, when asked what he should have been watching more closely, Dimon said "trading losses — and newspapers". It wasn't a joke. Once your positions become public knowledge, the market will smell blood." Matt Taibbi over at Rolling Stone magazine posted this piece on their website about two hours after the Bloomberg piece above. It's also worth reading...and I thank Roy Stephens for bringing it to my attention. The link is here. Chilton: JPMorgan's Loss Signals It's Time for Regulators to Put the Hammer DownLeave it to Wall Street to remind us all how vulnerable our economy remains, and how important it is that we implement financial reform as soon as possible. Yesterday, JPMorgan Chase reported mammoth losses—over $2 billion—a significant amount of which appear to be related to failed speculative bets on credit default swaps. While that won't trigger a repeat of 2008, it certainly highlights what we already know, painfully well: reckless speculation and poor risk management by large, interconnected financial institutions can spark financial calamities. These circumstances take on a fantasy-world quality in that many of us continue to believe the bankers are so scary smart about our markets and economy. What it really demonstrates is what chumps we sometimes have become. Bart Chilton has always struck me as one of those "all hat and no cattle" kind of guys. Since they can't/won't do anything about JPMorgan's obscene short position in silver, you have to wonder what makes you think that the CME will allow the CFTC to put JPMorgan Chase in its place now. This op-ed piece by Chilton was posted over at the cnbc.com website late Friday morning...and I thank West Virginia reader Elliot Simon for sharing it with us. The link is here. Guest Post: How Long Before Massive Government Debt Buildup Triggers Another Financial Shock?Sometimes a picture is worth a thousand words. A recent post on the popular ZeroHedge financial blog compared the annualized growth in federal debt to the annualized growth in GDP in Q1 2012. ZeroHedge reported that while U.S. government debt rose by $359.1 billion in Q1 2012, the U.S. GDP grew only $142.4 billion. Durden noted that, "It now takes $2.52 in new federal debt to buy $1 worth of economic growth." The surprising observation prompted us to examine the relationship between growth in debt and growth in GDP from 1975 through 2012. What we found is both astonishing and frightening. Each $1 increase in GDP has been accompanied by, on average, a $2.50 increase in debt. Before the recession, an increase in debt generally generated a greater increase in GDP, but now it takes an enormous increase in debt to eke out a small increase in GDP. At some point, the amount of debt required to generate even modest GDP growth will suffocate the economy and trigger another financial shock. This short piece posted over at zerohedge.com is worth the trip for the chart alone. I thank Roy Stephens for digging it up on our behalf. The link is here. James Turk: Central Bankers Are Intellectually BankruptCongressman Ron Paul says that "central bankers are intellectually bankrupt". This is actually the title of an excellent op-ed article he wrote last week for London's Financial Times in which he clearly explains that controlling interest rates is a form of price fixing. We know from monetary history that price fixing has always been harmful to economic activity. Yet "control of the world's economy has been placed in the hands of a banking cartel" even "while socialism and centralised economic planning have largely been rejected by free-market economists". It is an excellent article, and I highly recommend it. But I do want to comment on one point. This short piece by James was posted on his fgmr.com website earlier this morning in Europe...and the link is here. Fitch: REOs Now Reach One-Third of All U.S. CMBS DelinquenciesU.S. Commercial Mortgage-Backed Securities [CMBS] delinquencies rose for the second straight month while the volume of real estate-owned [REO] assets continued to climb, according to the latest index results from Fitch Ratings. Late-pays rose 10 basis points in April to 8.53% from 8.43% in March. This was largely expected with five-year loans originated in 2007 now starting to come due. Another notable trend is the increased amount of REO assets, which are making up a larger share of the index. REO assets climbed again and now represent one-third of all delinquencies, reaching $11.1 billion in scheduled loan balance in April. This story was posted on the finance.yahoo.com website yesterday...and I thank reader Ryan McQuire for sending it along. The link is here. Postal Service Reports Quarterly Loss of $3.2. BillionThe United States Postal Service on Thursday reported a quarterly loss of $3.2 billion and blamed Congress for blocking the agency's cost-cutting efforts to offset declining mail volume and mounting costs for future retiree health benefits. From January to March, losses were $1 billion more than during the same period last year. The Postal Service said that without legislative action, it would be forced to default on more than $11 billion in health prepayments due to the Treasury this fall. This very short AP story showed up in The New York Times yesterday...and you've already read half of it. I thank Phil Barlett for sending it our way...and the link is here. Bankia Bailout: Spain Struggles to Control Escalating Bank CrisisThis week's move by Spain to nationalize the country's fourth-largest bank almost overnight is just the latest in a financial sector crisis that has been growing since the Spanish real estate bubble burst. It is likely to increase calls for Madrid to accept financial aid from its European partners. It wasn't so long ago that the Spanish banking system was the subject of glowing praise. As financial institutions in Germany and many other European Union countries began to falter because they had badly gambled on high-risk US mortgage securities, the situation remained remarkably quiet in the southwestern part of the continent. The reason was that Spanish banking regulators had largely restricted the country's banks from engaging in the risky business. In the meantime, Spain's banks are now amongst the greatest problem children in the euro zone. Developments on Wednesday night underscored just how dire the situation has become. The Spanish government announced that Bankia, the country's fourth-largest financial institution, would be largely nationalized. The announcement, made with little notice, suggests a hectic situation. The cabinet of Prime Minister Mariano Rajoy had actually been planning to announce a new bailout program on Friday. This story was posted over at the German website spiegel.de yesterday...and is another offering from Roy Stephens. The link is here.& |
| Ex-Fed Governor Warsh confirms gold suppression Posted: 11 May 2012 11:44 PM PDT
from gata.org: Dear Friend of GATA and Gold: When, in September 2009, as he denied GATA's request for access to the Federal Reserve's records involving gold, did Fed Governor Kevin M. Warsh really mean to acknowledge that the Fed has gold swap arrangements with foreign banks that must remain secret? Did Warsh, who left the Fed this year, not understand that, in acknowledging these gold swap arrangements, he was confirming the U.S. government's long-running gold price suppression scheme? Warsh's letter from 2009 denying access to the Fed's gold records is here: http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf We always had thought that Warsh's admission was inadvertent. But in an essay published this month in The Wall Street Journal, Warsh compounded that admission. He wrote that "policy makers are finding it tempting to pursue 'financial repression' — suppressing market prices that they don't like." He added, "Efforts to manage and manipulate asset prices are not new." Indeed: GATA has documented U.S. government efforts to manipulate the gold price going back more than 50 years: http://www.gata.org/taxonomy/term/21 Keep on reading @ gata.org |
| Silver Update: Jamie's Cryin – 5.10.12 Posted: 11 May 2012 11:25 PM PDT |
| T&S: The Big Market Picture Posted: 11 May 2012 11:24 PM PDT Let's look at a big cross section of the Stock markets, the chart of Gold, silver, the Eoro, The USDX, the Aussie Dollar, The Swiss Franc, and GBP to get a perspective on where we are likely heading and hopefully we will get a grasp of how long and rotracted the new moves will be into our future. This all will give us a better perspective and idea on how to prepare better than the non-infomed. from mrthriveandsurvive: ~TVR |
| JP Morgan: What It's All About Posted: 11 May 2012 11:12 PM PDT It's not about the federal reserve. It's not about silver. It's not about more losses ahead. It's about what the headline says it is. from daytradeshow: ~TVR |
| Posted: 11 May 2012 11:01 PM PDT |
| Gold ‘Will Go To 3,000 Dollars Per Ounce’ - Rosenberg Posted: 11 May 2012 05:01 PM PDT gold.ie |
| Posted: 11 May 2012 04:30 PM PDT |
| Four silver coins from William the Conquerors reign were discovered Posted: 11 May 2012 04:30 PM PDT |
| Posted: 11 May 2012 04:00 PM PDT Gold University |
| Bill Black: New York Times Reporters Embrace the Berlin Consensus and Ignore Krugman and Economics Posted: 11 May 2012 03:10 PM PDT Yves here. Black does yeoman's work in describing the bias in the New York Times' Eurocrisis reporting. By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives. The New York Times' coverage of the euro zone crisis continues to exhibit two related flaws. First, it is overwhelmingly written from the German perspective – the Berlin Consensus that is driving the crisis. Second, it continues to ignore economics. Paul Krugman, the NYT's Nobel Laureate in economics, has been explaining the economics of the crisis for years in his weekly NYT column. We know that Berlin either doesn't read or comprehend what Krugman has been trying to explain, but it is remarkable that so many of the NYT reporters covering the euro zone crisis share their failure to read or comprehend. A recent example of this pattern is the May 8, 2012 article "German Patience with Greece on the Euro Wears Thin." The introductory paragraph establishes that the frame for the article is Berlin's destructive and warped view of the euro zone crisis.
We should begin with the title of the article. Germany has insisted that Greece follow austerity policies (the Berlin Consensus) that were certain to force Greece into depression. The Berlin Consensus has forced Greece into a depression. The German reaction to the economic catastrophe that it has forced on the Greek people is to be enraged that the Greek people in the recent election rebelled against their leaders who had given in to the German demands that the Greeks be forced into a depression. Greek patience with Germany's destructive policies, its assaults on Greek sovereignty, and its constant, vitriolic insults of the Greek people has more than worn "thin." The Greeks are responding to the failed Berlin Consensus in a manner similar to Latin America's revolt against the Washington Consensus. The Greek reaction, therefore, was not "almost unthinkable" – it was the typical response of a nation whose leaders caved in to a neoliberal assault on their economy and sovereignty. The NYT reporters get their analytics wrong because they studiously ignore the Greek perspective and refuse to even entertain the question of why anyone would expect a nation to accept being forced by a hostile foreign power into a great depression. As I have argued, the "Occupy" movement in the U.S. should stand in awe of Germany's reoccupation of Greece. The Greeks have a bitter history of Greek quislings aiding Germany's World War II occupation, so their rage at their recent leaders' surrender to German demands is understandably intense. The Greek reaction would be understandable if the NYT reporters bothered to consider the Greek perspective. Unfortunately, the reporters' adoption of the German perspective leads them to emulate Berlin's refusal to consider the Greek perspective. Instead, the reporters' adopt the German framing of the issue. That framing is that the Greeks are inexplicably "refusing to abide by the terms of the country's international loan agreement." The idea that the Greek people should continue to take the Berlin elevator that has plunged their nation into a great depression because their disgraced leaders were coerced into agreeing to a deal that is destroying their nation is insane. Democracy is all about throwing out leaders who have disgraced themselves, crushed the nation's economy, and cravenly taken orders from a hostile foreign power. The Greeks have done just that. Why would anyone expect the Greeks to continue to follow a suicidal economic policy imposed by Germany? Berlin and the NYT reporters share the bizarre belief that if your coerced leaders sign a suicide pact you have a duty to commit suicide because – a deal is a deal. The reporters fail to ask why the Greeks object to the deal and why the consequences of the deal would be suicidal for Greece. Instead, they simply assume that Greece should continue a deal.
Note the lack of any embarrassing questions by the reporters to Hefeker, who they describe as an expert in the euro. His premise is that if the Greeks refuse to continue to follow a suicidal austerity program mandated by Berlin, if instead they take "the path" of rejecting austerity "it would be hard to justify keeping them in [the euro]." We are back at one of the most disturbing aspects of the Berlin Consensus – the dogma that "there is no alternative" (TINA). Austerity during a recession, much less the great depression levels of unemployment Greece is suffering, deepens the depression and tears the nation apart. Berlin insists that its suicidal policies are the only alternative. Krugman (and many others, including UMKC economists) have been explaining for years why that view is economically illiterate. The Berlin Consensus has forced the euro zone into recession and thrown the periphery into depression level unemployment. If the reporters had listened to economists they would have responded to Hefeker's query by reformulating his question. His question invites a follow-up by the reporters: "How do you deal with a country that says we don't want to keep any of the commitments we have made?" If the "commitments" are suicidal, then the way you deal with Greece's refusal to commit suicide is to praise it and end the German diktats that have devastated Europe. If Chancellor Merkel gave into foreign coercion and signed an agreement that was suicidal for Germany and the German people threw her out of office through a democratic vote and repudiated the agreement, who believes that Hefeker would urge Germans to commit suicide on the grounds that a deal is deal? The reporters then note the German praise for Spain's conservative government because of "the government's efforts to cut deficits in spite of a contracting economy." Germany praises the quislings who give in to its coercion and cause their national economy to collapse into great depression levels of unemployment. Germany praises suicidal quislings, but it is venomous in its hate for the Greeks because they have thrown the quislings out of office.
I agree that Greece is a special case and that it has greater internal problems of its own making than other nations of the periphery. What isn't special about Greece, however, is the insanity of Berlin's demands for austerity in the midst of a recession or depression. Austerity has produced a crisis throughout the euro zone and it has caused a great depression in many nations of the periphery. Most euro zone nations have made false statements about the true state of the economy and budget deficit projections. The central reason the projections proved false is that Berlin insists that austerity will produce recovery, but it actually produces economic losses or even catastrophe. Berlin wants euro zone nations to create their budget deficit estimates on the assumption that austerity will spur economic growth. Using Berlin's preferred means of projecting budgets deficits has caused virtually every euro zone nation to greatly underestimate the actual budget deficit. When a nation such as Greece is forced into a great depression its tax revenues fall sharply and the need for public expenditures, e.g., for unemployment payments, grows. The result is that nations do not control their budget deficit. If they adopt austerity they may make the budget deficit even larger. If they raise taxes they reduce private sector demand and if they cut government programs they reduce public sector demand – both of which make the recession worse. My colleague Stephanie Kelton has been very strong in trying to get this basic fact across to the public and policy makers – nations do not control their budget deficits. Austerity does not lead to balancing the budget – it leads to recession and depression. If you hate budget deficits, you should realize that it is recessions that primarily drive budget deficits and that adopting austerity during a recession or the recovery from a recession is what leads to deeper recessions and severe depressions. The reporters miss all of this (as does Berlin). The reporters then move to options, but the genius of TINA is that there are no options.
"Unpalatable" to who – and how did the purported unattractiveness of policy options come to be a "fact"? The reporters present these two paragraphs as facts – not Berlin's dogma that is economically illiterate and has been falsified by the facts. If Germany stopped demanding austerity the euro zone would not be in recession and the periphery would not be continuing to descend into depression. If the euro zone followed policies to expand employment through increased public sector demand the results would be extraordinarily "palatable." The German Consensus is catastrophically "unpalatable" – which is why it has consistently led to voter rejection of the quislings who have been coerced into giving in to Berlin's austerity diktats. It is unacceptable for reporters from the nation's top paper to present statements like this as facts. The reporters' statements about the alternatives are not simply contestable; they are contrary to observed reality and economics. It is deeply disturbing that the reporters covering the euro crisis have adopted the Berlin Consensus and become devotees of cult of austerity, but the newspaper has a duty to prevent them from presenting their dogma as fact. If the NYT reporters read Krugman (or most any sentient macroeconomist) they will learn that austerity is not the only alternative – it is the worst alternative of those under consideration. If Germany and the European Central Bank (ECB) were to increase public spending Germany and the entire euro zone, indeed, the entire world would be better off. Pushing the euro zone into recession and the periphery into great depressions is terrible for every euro zone nation and imperils the global economic recovery. The NYT reporters do note the alternative that Greece could withdraw from the suicide pact that Berlin insisted they sign and default on its debts. The article implies that the IMF taught Argentina a lesson when it refused to continue to adhere to the suicide pact the IMF had coerced disgraced Argentine leaders to accept. The implication is that the Argentine option is unpalatable because the IMF cut off of funding results in a disaster in Germany. The facts, however, are inconvenient. First, it was Argentina that told the IMF to go jump into their choice of the Atlantic or Pacific Ocean. Second, Argentina's rejection of the austerity suicide pact worked brilliantly for Argentina and its people – and Argentina's government has never been cited as an exemplar of good government. It would be relevant to know why Argentina fell into a depression so severe that the IMF intervened and prescribed its universal snake oil – austerity. Argentina eventually rejected the IMF suicide pact and defaulted on its debt. Argentina was the purported star performer demonstrating the wisdom of the Washington Consensus. Timothy Geithner, in his IMF incarnation (where he was also a policy failure), approved a report entitled "Lessons from the Crisis in Argentina" dated October 8, 1993:
Argentina followed the IMF's Washington Consensus game plan, which plunged it into depression. The IMF told Argentina that a partial bailout and austerity was the answer to depression and the Argentine leaders were desperate enough to agree. I set out below the IMF's description of what it sought to impose on Argentina. If you know enough to realize its similarity to the troika's (EU, ECB, and IMF) demands on Greece you may wonder why the troika would repeat the IMF's failed policies from a decade ago in Argentina. (Hint: recurrent failure is the IMF's specialty. Failure, therefore, has never led the IMF to change its insistence one size fits all financial suicide pact. Actually, I am being too kind to the IMF. Geithner concluded that the IMF had made mistakes in dealing with Argentina – it had not been draconian enough in insisting on austerity, reduced national debt-to-GDP ratios, and reduced working class wages. As I said in my first column on this subject, citizens that have experienced the tender mercies of the Washington and Berlin Consensus develop a passionate hate of those policies.) "The program sought to bolster the prospects for economic growth through gradual fiscal consolidation—an increase in the public sector primary surplus to 1½ percent of GDP from about ½ percent of GDP in 2000— with an overall deficit of about 3 percent of GDP—and various structural measures. The consolidation plan was formulated against the backdrop of a new fiscal pact with the provinces and envisaged improvements in tax enforcement. On the structural side, the program aimed at promoting private investment and competition in domestic markets through (inter alia) elimination of tax disincentives, continued implementation of already approved labor market reforms, and deregulation of key sectors…." The alert reader will not be surprised that austerity did not produce an economic recovery in Argentina.
As always, austerity failed to deliver its promised economic benefits and produced a political backlash among the citizenry that realized that austerity was a suicide pact imposed by a hostile neo-colonial power. Geithner predicted that Argentina's default and anti-austerity response would make it extraordinarily difficult for Argentina to recover.
The IMF was writing about an Argentina in a severe recession, but Geithner's report stressed that the IMF's primary concern was the need to re-establish: "the pre-eminence of contracts, property rights and economic security…." "Reforms of the labor market" is code for cutting working class wages. The IMF answer to severe unemployment is to add to it by firing public workers. The needs of the Argentine people were not even tertiary to the IMF. The IMF, Washington, D.C., and Berlin are always amazed that the citizens of the nations they assault figure out that their welfare is irrelevant and become enraged at those that inflict the suicide pact. Actually, the Geithner report did reach one sound conclusion. Unfortunately, Berlin has ignored it.
Berlin has mastered the art of forcing the periphery to twist slowly in the wind while being subjected to constant insults. Everyone suffers from Berlin's passive aggressive assault on the periphery. Berlin, however, finds it politically and personally desirable to put a boot on the throat of the nations of the periphery and squeeze until quislings emerge to do Berlin's bidding. The 1993 Geithner report about Argentina reached another interesting conclusion that the IMF and Berlin failed to follow when dealing with the current crisis.
Greece's "debt dynamics are clearly unsustainable" but the devotees of the cult of austerity are late to see this fact because they believe that austerity spurs economic growth. If austerity spurs economic growth then debt dynamics are rarely unsustainable. As the nation reduces spending the economy expands, which increases tax revenues, which allows the nation to achieve a budgetary surplus. Similarly, the IMF and Berlin assume that if a nation cuts working class wages during a recession it will increase exports and run a trade surplus that will provide funds it can use to pay down its sovereign debt. The IMF and Berlin do not understand that sharply reducing working class wages during a recession can cause already inadequate private sector demand to fall and deepen the recession. The result of believing in what Krugman aptly labels the "Confidence Fairy" is that it leads you to believe financial fairy tales in which austerity allows nations to recover from even severe debt crises – even when (like Argentina and the euro zone) they lack a true sovereign currency. This causes Berlin and the IMF to continuously fail to realize that debt has become unsustainable in nations that lack a sovereign currency. The Geithner report admits aspects of this problem.
Sadly, it is impossible for the IMF or Berlin to undertake "a careful and critical assessment" of a core dogma. That is the nature of dogma. The result is recurrent error. The IMF was relying on austerity to summon the "confidence fairy" and produce a miraculous Argentine recovery. David Rosnick and Mark Weisbrot of the Center for Economic and Policy Research (CEPR) authored an excellent report on Argentina (Political Forecasting? The IMF's Flawed Growth Projections for Argentina and Venezuela) in April 2007.
Even the IMF's internal review found that the IMF took actions that could succeed only if confidence played a magic role. The confidence fairy, of course, never appeared.
Once Argentina defaulted, the IMF expressed its desire to see the nation "suffer."
So what happened to Argentina after it defaulted, the IMF withdrew all aid, and Argentina adopted policies that Geithner claimed made its recovery extraordinarily unlikely? For the reasons I have explained, the IMF consistently overestimated how well the Argentine economy would perform under its Washington Consensus policies. "In Argentina, the IMF overestimated GDP growth for 2000, 2001, and 2002 by 2.3, 8.1, and 13.5 percentage points respectively." Once Argentina decided to default on its debt and break with the suicide pact demanded by the IMF, the IMF's economic projection errors continued – but reversed their direction. The direction of International Monetary Fund (IMF) forecasting errors was reversed after Argentina rejected the IMF suicide pact.
Argentina's recovery, which Geithner had dismissed as next to impossible given its break with the policies mandated by the IMF suicide pact, proved extraordinary.
To sum it up, Argentina's experience demonstrates one of the most palatable alternatives to Berlin's insistence that the periphery accept a suicide pact of austerity-driven severe depression. The NYT reporters wrote about Argentina in a manner that deliberately gave the opposite impression. The reporters end their article by channeling Berlin at is most arrogant.
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| By the Numbers for the Week Ending May 11 Posted: 11 May 2012 03:07 PM PDT This week's closing table. If the image is too small click on it for a larger version. That is all for now, but there is more to come. |
| Modern Miners Still Engaged in Risky Business Posted: 11 May 2012 12:21 PM PDT Mining is a risky and expensive business, as Michael Maloney has often said. The difficulty and high start-up costs of extracting precious metals contribute to supply pressure that has factored into rising prices. With gold and silver prices artificially suppressed, once the "easy pickin's" were extracted from a mine, it often was not profitable enough to remain in operation. The expense and risk of developing new finds was prohibitive. But the gold and silver bull markets of the past couple of decades have paved the way for larger profits, and miners are once again feeling "gold fever." Even in environmentally vigilant and regulation-burdened California, a new wave of modern prospectors has returned to the gold fields. |
| Heidi Moore: JP Morgan's “Unicorn Hedge” Posted: 11 May 2012 11:56 AM PDT From Whale Tails to Unicorn Fairytales, this week has ended with a bigger splash then anyone could have expected. The London Whale has officially capsized JP Morgan's balance sheet with a reportedly 2 billion dollar trading loss. from capitalaccount: Jamie Dimon, the firm's CEO, admitted "egregious mistakes" were made and that he and his colleagues were "stupid." Fair enough, but why were these mistakes made, and was this trade a legitimate hedge as Jamie Dimon claims, or more of a "unicorn hedge" as our guest Heidi N. Moore called it? Why was this trade put on through the company's CIO, and why was it done so on a portfolio level? That's an awfully broad way to hedge risk on the titanic. What happens with this ship finally tries to make it back to port? JP Morgan now has tremendous exposure on its balance sheet that, if it were to try and unwind, may not find too many friendly buyers. Also, what does this recent hole on the side of Jamie's ship say about risk management on wall street? JP Morgan and it's captain Jamie Dimon have been the darlings of wall street. His firm weathered the financial crisis in 2008 without so much as a hiccup, using it as an opportunity to buy up rival Bear Sterns for pennies on the dollar. But will this latest torpedo to JP Morgan's balance sheet provide further ammunition to those calling for stricter and tighter regulations of wall street firms that make risky bets with depositors' money? Is this the time for the public to pay closer attention than ever before to legislative efforts like those surrounding the Volcker Rule or are too big to fail banks going to continue to make proprietary bets with our money until all of us go broke? We speak with members of Occupy Wall Street, including Alexis Goldstein and Brett Goldberg during the second half of our show. Besides their fantastic work on the Volcker Rule, they have been active in trying to help put some teeth into President Barack Obama's "mortgage financial fraud task force." We speak to them about their efforts in this regard as well. ~TVR |
| Excellent paragraph in new Ted Butler article Posted: 11 May 2012 11:25 AM PDT The latest article by Ted Butler (Knowing the Game) rehashes the bankster manipulation and the non response by useless agencies that many here are tired of hearing about, but it also includes the paragraph below. This paragraph sums up my viewpoint very well: Quote: What can we do about this as investors, market participants and citizens? I can only speak for myself, but I am not selling silver here or lower. I don't know how low we may go from here and there is nothing I can do to prevent a decline, so I'm not going to obsess over it. As new funds become available, I'll buy more silver. I'm in it for the long run or until I see signs that silver is free of manipulation and exhibiting signs of overvaluation. That's very far from the case presently. The COT structure was bullish before this last sell-off and is even more bullish now. Try to remember that the collusive COMEX commercials are buying, illegally in my opinion, but buying nevertheless. No one, not even a crook, buys anything that he doesn't expect to rise in price. Certainly at past extremes of commercial buying, it invariably turned out to be a good time to buy. The key test will be if JPMorgan sells short additional contracts on the next meaningful silver rally. Although that rally may not feel close at hand, I can assure you that we will get it eventually and the answer to what JPMorgan will do. When the rally does come it should prove to be explosive if JPMorgan decides to quit manipulating the price. |
| Of Drop Bears, Drinking Games and Australian Banks Posted: 11 May 2012 10:00 AM PDT This week, three seemingly unrelated stories hit the news.
Have you connected the dots? [Hint: The hidden link is gravity.] First to the bear, which also featured in Monday's Daily Reckoning. It was tranquilised and fell out of a tree after being judged too close to a student housing complex:  Your editor's short lived career as a trapeze artist was equally elegant, but never received much attention from the global media. In fact, the bear has its own Facebook page and we don't. Now on to the new drinking game being played in New Zealand. It's called 'Possum' and involves getting very drunk while sitting in a tree. You only stop drinking when you hit the ground. We're not sure how to win the game. Or why the tree is necessary in the activity. But consider it a metaphor for leverage - the use of debt to make things more exciting. We submit to you that Australia's banks are the next thing to fall out of their tree. At least, the next thing to fall out of a tree that is in your vicinity. The banks are both cornered, like the bear was, and drunk, like the students at Dunedin Park. Watch out below. Why do we say that? Well, just like the black bear in Colorado, Australian banks strayed into places they shouldn't have been. And then got drunk on their exploits like the students up the trees. Maiden explains: 'Foreign loans taken out by Australian banks to fund their own lending accounted for 82 per cent of Australia's $521 billion net foreign debt load at the end of 2006.' In other words, banks borrowed from far away places at low interest rates to lend locally at high rates. And on a large scale. But one of the joys of banking is that debt has to be rolled over. Banks borrow for short periods of time and lend for long periods of time. That creates what's called a maturity mismatch. And taking on the risk of a maturity mismatch is part of the reason banks make a profit. It's a bet they will be able to find financing at agreeable rates. But what's important here is that banks have to be able to refinance themselves regularly after committing to long term loans. If they can't source new cash at cheap rates, they become less profitable. If they can't source enough cash, they do a Lehman Brothers. Which causes the global economy to do a global financial crisis. Which causes governments to bail out the banks. Which causes governments to default. Greece is at the default point in that cycle. Spain just decided to bail out a bank, and has plenty more to go. The US and UK are in between the two, having bailed out banks but not yet entered a sovereign debt crisis. Australia is at the beginning of the cycle - where the banks are about to get into trouble. That's because the overseas sources of funds that allowed them to grow their lending in the early 2000s are in turmoil. Never mind why for now, we're focusing on what might be lurking in the trees above your head, not on the other side of the world. So those sources of funding aren't there anymore, creating a difficult situation for Australian banks. You've seen the symptoms plastered all over the media with newspaper editors demanding that the big four banks lower their interest rates in lockstep with the central bank. That's something the banks were happy to play along with while their important sources of funding (from overseas) were low anyway. They created an illusion that banks follow the RBA because they profited from that illusion. Now that the relationship with overseas lenders is no more, and banks are having to finance themselves in the face of tougher funding conditions, it's time to make their customers pay up. The issue isn't that bank funding has become more expensive. It's that it is normalising. Banks are now funding themselves locally more, and that means the interest rates that they borrow at and the rates they charge at are much closer together. There is less profit. But this change can't be allowed to happen because of what it would do to an economy used to cheap credit imported from overseas by the banks. An economy used to rising house prices and lots of spending. An economy with a housing bubble and massive amounts of private debt. We'll put this simply because the world of banking is a little odd. Think of it like this. The banks used to import money from overseas, where it was cheap. Then prices there rose, causing banks to look locally for funding. But they are now fighting over a much smaller pool. That means less and more expensive funding, which gets passed on to you. And that's where we are now. In a world where deposits, hybrid debt issuance and superannuation are the new, more expensive, sources of funding for banks. If the mention of Super made you choke on an orange pip too, get this from Maiden: '... deposit funding would also require a restructuring of the $1.3 billion superannuation pool, to divert money from it to the banks.' Do you smell a back door bank bailout in the making? Dan Denning made the case that there are big changes in store for Australia's retirement system in his newsletter Australian Wealth Gameplan. We reckon the powers that be are pondering the idea that governments should require an allocation of your Super to cash at a bank. To get a window into the mind of those calling the shots, why not take a 30-day trial of AWG? One last story to round off the metaphors and analogies for today's Daily Reckoning. Your editor lost his keys in the middle of the rather large Fawkner Park a few months ago. On the way home, the world seemed wonderful after a miraculous discovery of the keys in the dark. Then we got the fright of our life as a possum, not the drunk human kind, fell out of a tree right next to us. That's how quickly things can change. One moment everything is wonderful, you've narrowly evaded a global financial crisis because of your supposedly strong balance sheet. You're on top of the world, convinced of your own ability. And then - bam - out of nowhere a possum gives you a heart attack. This is perhaps the most important lesson the armchair investor can learn. Things can happen very quickly - even if you expect them. By the way, our three news stories have another similarity - they all end badly. Possum players in New Zealand were required to clean up after themselves by the University of Otago's so called 'Campus Watch'. And the same black bear who took the world by storm was taken out by two cars on a highway recently, two miles away from the university where it was tranquilised...after being relocated 50 miles away. So our question to you is, what are you doing again that you were doing in 2007? And does it involve the banks? RIP Black Bear. Until next week, Nickolai Hubble. ALSO THIS WEEK in The Daily Reckoning Australia... When Financial Markets Decouple From Reality The cosy relationship between central banks and governments is responsible for this. The financial has become political. And currently, the political is a complete mess in Europe. Central banks used to just be responsible for the stability of the currency, but now they're responsible for the entire financial system. And because the financial crisis has torpedoed government finances and the economy, the entire system of free enterprise in the Western world has finally been supplanted by central planning. How The US Military Is Sucking The Empire Dry A common view of what is going on - in order to be commonly shared - has to be stripped so bare of nuance and paradox that it ceases to be an idea at all. It is just a feeling. And sometimes, it becomes a grotesque, simpleminded fantasy that it is actually the opposite of the original thought or desire behind it. It becomes a zombie thought...actually harmful to the group that holds it. Low Interest Rates Are A Dangerous Addiction! Low interest rates have become a panacea for economic problems. In part, this reflects the limited flexibility of governments to run budget deficits. This is driven by increasing scrutiny of public finances and the lack of willingness of investors to finance such deficits, as highlighted by the ongoing European debt crisis. But like all addictions, low interest rates are dangerous. They may be also ineffective in addressing the real economic issues. Could The Revival of U.S. Manufacturing Mean China Has Lost its Edge? Even though labour costs have surged, one could argue they have not kept pace with the cost of living. "Food prices in China are ridiculous," Scott says. "It's a hell of a lot cheaper to live in the United States than it is in China if you equalize people's incomes. As a percentage of someone's income, the chunk for food is a huge line item there. Land prices have been skyrocketing everywhere. Apartment prices are through the roof. It is cheaper to live in the U.S." Remarkable, isn't it? How Bailouts Encourage Bad Behavior As we have observed time-after-time since the 2008 crisis, there is no economic downtick that is not simultaneously a call to action - a call to government action. Regrettably, most of these government actions address symptoms rather than the disease itself. They "cure" gangrenous limbs with Lidocaine rather than amputations. As a result, a smattering of politically connected banks and corporations feel better, but the overall economy remains deathly ill. Similar Posts:
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