Of the two, the latter we consider more interesting, for the decline of the dollar - against euros, gold, and financial assets generally - undermines Americans' wealth even as they see themselves living in the lap of prosperity. The decline of the dollar could also push forward the day on which the world's big holders of the greenback look at their piles and begin to worry that they have a trillion or two too many. At that point (which we have been attending for so long we often forget what we are waiting for) you should see some real excitement in the world's investment markets.
The most obvious consequences will be a further sell-off of the dollar, sparking an increase in U.S. dollar-yields. This, in turn, would disrupt millions of financial decisions, making lenders more wary and borrowers more prudent.
That there is still ample room for movement - towards wariness on the part of the former, and prudence on the part of the latter - is demonstrated in today's International Herald Tribune. Yes, dear reader, the mainstream press is finally catching on to the imperial trend we spotted years ago - towards widespread, commonly accepted fraud. Today it is 'fraud for housing.'
"Loans that require little or no documentation of income soared $276 billion, or 46 percent, of all subprime mortgages last year, from $30 billion in 2001," says IHT. Now, these 'liars' loans' are defaulting at eight times the rate of regular, fully documented prime mortgages.
According to the paper, many of the buyers didn't even know they were lying about their income; the mortgage brokers lied on their behalf, inflating income figures in order to get the loans through the approval process.
"I saw account executives openly engage in conduct such as altering borrower's W-2 forms or pay stubs, photocopying borrower signatures and copying them onto other, unsigned documents and similar conduct," said a witness.
But the FBI is not on the case. The G-men aren't interested in 'fraud for housing.' They've got bigger fish to fry - people who lie to get multiple mortgages with no intention of paying them back, known as 'fraud for profit.'
And don't expect the local DA or politicians to go after the small fish either. There's nothing in it for them - no glory…no votes…no path to higher office.
Instead, they will move to 'protect' the hapless victims of mortgage fraud - in many cases, the very same people who lied to get loans. Every era produces its own special variety of fraud; and every great, shining fraud is followed by paler imitators. Typically, borrowers get themselves into trouble; and then the politicians thunder about 'debt relief' or a 'moratorium' on foreclosures.
From Grant's Interest Rate Observer, we learn that in the midst of the Great Depression, many debt relief measures were passed. One of them was a clear interference with the right to contract, and was challenged in the U.S. Supreme Court. The Supremes affirmed the state's power to meddle, saying it was justified by the economic emergency. But Justice George Sutherland, who was writing for the dissent (but who might have been writing for the Daily Reckoning), expressed the view shared by all economists who aren't idiots - both of them.
"The present exigency is nothing new. From the beginning of our existence as a nation, periods of depression, of industrial failure, of financial distress, of unpaid and unpayable indebtedness, have alternated with years of plenty. The vital lesson that expenditure beyond income begets poverty, that public or private extravagance, financed by the promises to pay, either must end in complete or partial repudiation, or the promises be fulfilled by self-denial and painful effort, though constantly taught by bitter experience, seems never to be learned: and the attempt by legislative devices to shift the misfortune of the debtor to the shoulders of the creditor without coming into conflict with the contract impairment clause has been persistent and oft-repeated."
But in the contest between the sanctity of contracts and debt relief, the forces are badly mismatched. For every creditor trying to get his money back, there must be thousands of debtors armed with voter registration cards, determined to stop him.
Monday, June 16, 2008
THE LOWER DEPTHS
USA TODAY tells us that another historic event happened last week. For the first time in more than a quarter of a century, Americans are cutting back on their driving.
We don't know the cause of this big trend reversal. The pundits are blaming high gas prices. Apparently, prices at the pumps are also hitting records - up to $3.18 per gallon on average.
If drivers really are cutting back because of the price of gasoline, it suggests that the consumer is weakening. A poll of consumer confidence says that the poor consumer's spirits have fallen to an 8-month low. And the housing problem seems in no hurry to go away. "Gloom settles over housing market," announces a weekend headline.
It appears that the world is in the grip of two major and contradictory trends. At the top, money has never been easier to get…nor have rich people ever been more eager to get rid of it. Money changes hands so fast…and in such volume…the markets and bankers are having trouble keeping up with it. Institutional investors have so much money they don't know what to do with it.
Meanwhile, down in the Lower Depths…the poor lumpen can't even afford to drive to the store to rent a movie. They're not earning any more money…while their costs continue to rise. Every year, we get a notice that a college has raised its tuition. Our insurance and health care costs seem to go up annually. Every time we fill up our tank…or eat in a restaurant…we get a nasty shock. True, the cost of fuel and food is higher in Europe than in America, but the trends go in the same direction. Thanks to our Dear Readers we have enough income to keep up with these expenses; but we wonder how most people are able to do it. Maybe this latest news on U.S. driving habits tells us something…that they can't.
We don't know the cause of this big trend reversal. The pundits are blaming high gas prices. Apparently, prices at the pumps are also hitting records - up to $3.18 per gallon on average.
If drivers really are cutting back because of the price of gasoline, it suggests that the consumer is weakening. A poll of consumer confidence says that the poor consumer's spirits have fallen to an 8-month low. And the housing problem seems in no hurry to go away. "Gloom settles over housing market," announces a weekend headline.
It appears that the world is in the grip of two major and contradictory trends. At the top, money has never been easier to get…nor have rich people ever been more eager to get rid of it. Money changes hands so fast…and in such volume…the markets and bankers are having trouble keeping up with it. Institutional investors have so much money they don't know what to do with it.
Meanwhile, down in the Lower Depths…the poor lumpen can't even afford to drive to the store to rent a movie. They're not earning any more money…while their costs continue to rise. Every year, we get a notice that a college has raised its tuition. Our insurance and health care costs seem to go up annually. Every time we fill up our tank…or eat in a restaurant…we get a nasty shock. True, the cost of fuel and food is higher in Europe than in America, but the trends go in the same direction. Thanks to our Dear Readers we have enough income to keep up with these expenses; but we wonder how most people are able to do it. Maybe this latest news on U.S. driving habits tells us something…that they can't.
THE MILLION-EYED MARKET
Vanity is probably responsible for more crack-ups than any other character flaw.
The Greek tragedies almost always follow the same plot. Driven by some sort of vanity, a man challenges the gods. He is then humbled…usually in a gruesome or terrifying way. Prometheus, who stole fire from the gods to give it to human beings, was chained to Mount Olympus where eagles set to work plucking out his entrails. If that wasn't bad enough, the poor man miraculously recovered every night…so the birds could come back and do it again, over and over, for all eternity.
The mess in Iraq is also largely a result of vanity. The neocons had a plan for the world. No need to ask the world about it, though - they knew better.
Besides, no matter what the foreigners said, the neocons knew that deep down, they all longed to be just like Americans. All the United States had to do was to storm into Baghdad; the kids would line up to get candy…adults would line up to vote and get credit cards.
And now the U.S. army is chained down in Iraq…where terrorists and military contractors devour its innards.
Vanity gets investors into trouble too.
"There is record brokerage margin money out. There is record insider selling in the U.S. since 2000. There is record corporate buyout activity and mergers. Half of all corporate buyouts are for companies that are not profitable! Did you know that?" asks one commentator.
For confirmation, we turn to today's International Herald Tribune, where we get more details on the sale of Blackstone shares to the public. The article notes that the private equity firm's founders, Stephen Schwarzman and Peter Peterson, will walk away with $2.3 billion of the $4.7 billion IPO. Peterson is retiring. He earned $213 million last year. So, the $1.88 billion he will get from selling his stake in Blackstone will help supplement his Social Security payments. Even at $213 million in last year's pay envelope, he must have felt a little light in the wallet. The average pay of 25 top hedge fund managers was more than twice that much last year - $570 million.
But now Schwarzman and Peterson have hit pay dirt…along with the rest of the Blackstone team. The insiders are being taken out by the outsiders.
Let us pause a second to draw breath. We turn our heads upwards to marvel at the monumental vanity…the outrageous arrogance…of these poor outsiders…the retail investors who are buying Blackstone's shares.
You will recall, dear reader, that every investor needs a certain amount of arrogance. Mr. Market sets a price - taking into account all that is known about an asset. No one knows the future, of course, but Mr. Market has a million eyes…and he sees all that can be seen. He factors the future, as he sees it, as well as the past, into his price.
Then, along comes an investor from Salem or Seattle or Sun City who says to himself: "I think Mr. Market has miscalculated. This share is more valuable than he thinks. It's going up."
What audacity! What chutzpah! What arrogance! The investor is making a remarkable wager - that he can outsmart all the rest of the investing public all put together.
But now think about the poor lames who are buying Blackstone shares. Think of the Chinese government. When it comes to capitalism, these guys were born yesterday; they are still pink and soft. Out on the streets of Shanghai, Moms and Pops fresh off the farm line up to open brokerage accounts. And in the boardrooms of the Peoples' Bank of China, the baby hacks - still wet behind the ears - who guard the people's money have decided to buy Blackstone shares!
Of course, China is a special case. The billions the Chinese spend on Blackstone is chicken feed to them. They've got a trillion more where that came from. They can write it off as cheap tuition - part of the cost of learning how the market system works.
But other investors are merely playing make-believe in Disney World. Money from the IPO will not be used to expand the firm and make it more profitable. Instead, it will go directly into the pockets of the people who know it best. In fact, today's report tells us that the company is likely to show a loss for several years - because of the cost of the IPO itself. So, the investors who pick up Blackstone shares are betting not only that they can outsmart the entire market, but that they can outsmart Mr. Market's smartest lieutenants. Schwarzman and Peterson started the firm with $400,000. Twenty years and nearly 200 deals later, it is worth $32 billion. How can an ordinary retail investor hope to put one over on this dynamic duo?
Well…good luck to him.
The real problem is that most investors completely misunderstand what business Wall Street and the City here in London are in. A baker trades his bread for money; but what does a Wall Street financier trade? His expertise is at making money. If he sells you a share of a stock, he must believe that he can make more money selling it to you than holding onto it. His offer to sell must be weighed against the gravity of his professional ability. The heavier his expertise, the more the offer is suspect. In other words, the more able your financial advisor, the more cautious you should be when taking his advice.
Wall Street is fundamentally in the business of selling things it doesn't want to hold. Blackstone founders held onto their shares for many years, as the company rose to astounding heights. Now, they are selling. Draw your own conclusion, dear reader.
Our conclusion is that the financial industry makes money for itself by unloading investments to the retail public, after they've been stripped down as close to the bone as you'll see outside a video containing a certain "hotel heiress".
The assets are squeezed, picked over, packaged, marked up, advertised, promoted, and then unloaded at retail prices. Often, the best parts are held off the market for themselves, until the insiders choose a time, place and method of dumping them on the public for the maximum profit.
In other words, the financial industry doesn't create wealth; it redistributes it - from investors to itself. And now, in the midst of this Great Worldwide Bubble, business has never been better.
The Greek tragedies almost always follow the same plot. Driven by some sort of vanity, a man challenges the gods. He is then humbled…usually in a gruesome or terrifying way. Prometheus, who stole fire from the gods to give it to human beings, was chained to Mount Olympus where eagles set to work plucking out his entrails. If that wasn't bad enough, the poor man miraculously recovered every night…so the birds could come back and do it again, over and over, for all eternity.
The mess in Iraq is also largely a result of vanity. The neocons had a plan for the world. No need to ask the world about it, though - they knew better.
Besides, no matter what the foreigners said, the neocons knew that deep down, they all longed to be just like Americans. All the United States had to do was to storm into Baghdad; the kids would line up to get candy…adults would line up to vote and get credit cards.
And now the U.S. army is chained down in Iraq…where terrorists and military contractors devour its innards.
Vanity gets investors into trouble too.
"There is record brokerage margin money out. There is record insider selling in the U.S. since 2000. There is record corporate buyout activity and mergers. Half of all corporate buyouts are for companies that are not profitable! Did you know that?" asks one commentator.
For confirmation, we turn to today's International Herald Tribune, where we get more details on the sale of Blackstone shares to the public. The article notes that the private equity firm's founders, Stephen Schwarzman and Peter Peterson, will walk away with $2.3 billion of the $4.7 billion IPO. Peterson is retiring. He earned $213 million last year. So, the $1.88 billion he will get from selling his stake in Blackstone will help supplement his Social Security payments. Even at $213 million in last year's pay envelope, he must have felt a little light in the wallet. The average pay of 25 top hedge fund managers was more than twice that much last year - $570 million.
But now Schwarzman and Peterson have hit pay dirt…along with the rest of the Blackstone team. The insiders are being taken out by the outsiders.
Let us pause a second to draw breath. We turn our heads upwards to marvel at the monumental vanity…the outrageous arrogance…of these poor outsiders…the retail investors who are buying Blackstone's shares.
You will recall, dear reader, that every investor needs a certain amount of arrogance. Mr. Market sets a price - taking into account all that is known about an asset. No one knows the future, of course, but Mr. Market has a million eyes…and he sees all that can be seen. He factors the future, as he sees it, as well as the past, into his price.
Then, along comes an investor from Salem or Seattle or Sun City who says to himself: "I think Mr. Market has miscalculated. This share is more valuable than he thinks. It's going up."
What audacity! What chutzpah! What arrogance! The investor is making a remarkable wager - that he can outsmart all the rest of the investing public all put together.
But now think about the poor lames who are buying Blackstone shares. Think of the Chinese government. When it comes to capitalism, these guys were born yesterday; they are still pink and soft. Out on the streets of Shanghai, Moms and Pops fresh off the farm line up to open brokerage accounts. And in the boardrooms of the Peoples' Bank of China, the baby hacks - still wet behind the ears - who guard the people's money have decided to buy Blackstone shares!
Of course, China is a special case. The billions the Chinese spend on Blackstone is chicken feed to them. They've got a trillion more where that came from. They can write it off as cheap tuition - part of the cost of learning how the market system works.
But other investors are merely playing make-believe in Disney World. Money from the IPO will not be used to expand the firm and make it more profitable. Instead, it will go directly into the pockets of the people who know it best. In fact, today's report tells us that the company is likely to show a loss for several years - because of the cost of the IPO itself. So, the investors who pick up Blackstone shares are betting not only that they can outsmart the entire market, but that they can outsmart Mr. Market's smartest lieutenants. Schwarzman and Peterson started the firm with $400,000. Twenty years and nearly 200 deals later, it is worth $32 billion. How can an ordinary retail investor hope to put one over on this dynamic duo?
Well…good luck to him.
The real problem is that most investors completely misunderstand what business Wall Street and the City here in London are in. A baker trades his bread for money; but what does a Wall Street financier trade? His expertise is at making money. If he sells you a share of a stock, he must believe that he can make more money selling it to you than holding onto it. His offer to sell must be weighed against the gravity of his professional ability. The heavier his expertise, the more the offer is suspect. In other words, the more able your financial advisor, the more cautious you should be when taking his advice.
Wall Street is fundamentally in the business of selling things it doesn't want to hold. Blackstone founders held onto their shares for many years, as the company rose to astounding heights. Now, they are selling. Draw your own conclusion, dear reader.
Our conclusion is that the financial industry makes money for itself by unloading investments to the retail public, after they've been stripped down as close to the bone as you'll see outside a video containing a certain "hotel heiress".
The assets are squeezed, picked over, packaged, marked up, advertised, promoted, and then unloaded at retail prices. Often, the best parts are held off the market for themselves, until the insiders choose a time, place and method of dumping them on the public for the maximum profit.
In other words, the financial industry doesn't create wealth; it redistributes it - from investors to itself. And now, in the midst of this Great Worldwide Bubble, business has never been better.
MARKET MADE SHOCK WAVE
Look up, dear reader. There, over The Daily Reckoning headquarters in London - in the building with the golden balls on the roof - is our Crash Alert flag…flying proudly.
Why bother? The stock market looks healthy. The problem in the housing market is "contained" in the subprime sector. And M3 is growing at 13% per annum - the fastest rate in 30 years. With all that new money coming into the system, how can prices do anything other than float higher?
But the risk of loss is always at its highest on the precise moment that most people judge it of least concern. Most likely, there will be no crash tomorrow…nor the day after. But there are some things you are better off preparing for, even though they may not happen for a while.
When money and credit are free and easy, people become free and easy with them. They begin spending more than they should…and investing recklessly. Eventually, there is a shock…a tipping point…a moment of desperate reality, in which people feel the ground give way beneath their feet. They look down and panic.
What kind of a shock? It could be almost anything. Sometimes it is a war…sometimes a bankruptcy…sometimes a market shock - such as a sudden increase in the price of oil…or the collapse of a stock market. Then investors, as if they shared a single mind, begin to worry not about the return ON their money; they are concerned about the return OF their money.
What could cause a shock today? Any number of things.
1) The Chinese stock market is getting hit hard. Its CSI 300 Index is down 17% in the last three weeks. Brokerage account openings have dropped by two-thirds. Could global hot money…and local cold cash…turn bearish on Chinese shares? Could Chinese officials say something particularly stupid? Could the market fall another 20%…50%? Could this trigger a worldwide equity sell-off? Yes to all those questions.
2) The dollar is in trouble. On Wednesday, it hit its lowest level against the pound (GBP) in 26-years. It is now near its lowest level ever against the euro (EUR). Trillions worth of dollars now sit in foreign vaults - while reserve managers openly talk of diversifying away from greenbacks. Foreigners don't have to abandon the dollar en masse to knock it down…all they have to do is to let up on their purchases of dollar-denominated assets - such as U.S. Treasuries. Could it happen? Could the shock cause a crash in major financial markets? Why…yes…again.
3) All paper currencies are dangerous. The dollar is not the only paper currency in the world whose supply is growing rapidly. Practically every central bank is printing up its own money in vast quantities - trying to keep up with the U.S. brand. This is why the world has so much "liquidity." It's why so many assets are rising in price so steeply. But could investors suddenly become fearful of so much monetary inflation? Could consumer prices shoot up…as asset prices already have? Could the world's people want to get rid of their paper currencies in favor of other stores of value - notably gold, as The Wall Street Journal warns in an article entitled "Money Meltdown"? And could this lead to a worldwide crash? Yes…yes…yes.
4) A Milan-based bank, Italease, has just seen its derivative portfolio blow up. So has Bear Stearns (NYSE:BSC). Large lenders are getting skittish of complex debt instruments…just as more deals than ever before come to market. So far this year $1 trillion in deals have been done in the North America - a rate of deal-making nearly 50% higher than the year before. What happens if the wheeler-dealers don't find the credit they're looking for? What would investors think if even one of these mega-deals blew up badly?
Reports Bloomberg: "The world's biggest bondholders have had their fill of leveraged buyouts…
"TIAA-CREF, which oversees $414 billion in retirement funds for teachers and college professors, is boycotting some debt offerings used to finance LBOs. Fidelity International, a unit of the world's largest mutual fund company, and Lehman Brothers Asset Management LLC, the money-management arm of the third- biggest bond underwriter, say they're avoiding debt from buyouts.
"You cannot do fundamental analysis and believe that those are creditworthy companies," says an analyst.
"More securities than ever have the lowest rankings, with CCC ratings assigned to 26.5 percent of the new debt, according to New York-based Fitch Ratings. That compares with 15 percent in 2006 for debt that Fitch says has a 'high default risk.'
"Traders demand 3 percentage points in extra interest to own U.S. junk bonds rather than government debt, compared with a record low of 2.41 percentage points on June 5, Merrill Lynch & Co. index data show. That's the fastest increase in spreads since April 2005, just before General Motors Corp. and Ford Motor Co. lost their investment-grade credit ratings."
Meanwhile, the Bank of England raised its key interest rate on Thursday by twenty-five basis points to 5.75 percent - another six-year high. This is the fifth time this year. The ECB's Trichet held steady this month but hints that rates will go up in the future. Elsewhere, banks are likely to hike rates too. And watch out if the Chinese decide to do some serious tightening.
Could there be even bigger blow ups waiting to happen? And could they cause a stampede for the exits? Anthony Bolton, Britain's most successful fund manager, worries about it. So does the Bank of International Settlements. And so do central bankers in Madrid, London and who knows where else. And if the pros stop lending so freely, mightn't it trigger a credit crunch…and a crash? Why, yes…now that you mention it.
5) The great millstone of housing debt continues to grind America's middle and lower classes.
The LA TIMES: "Slow job growth and declining home prices are causing financial problems for more Americans, who are falling behind on consumer debt, including home equity loans, at the highest rate since 2001, the American Bankers Assn. said Tuesday.
"Credit counselors said consumers were paying the price for reckless attitudes about debt fostered by years of easy credit, particularly in the mortgage market.
"'It's a monster we all created,' said Todd Emerson, president of Springboard, a nonprofit consumer credit management organization in Riverside."
Let's see, Chinese companies depend on consumer buying from America…which depends on U.S. consumer spending…which depends on consumer credit…which depends on mortgage lending…which depends on a secondary market in mortgage backed securities…which depends on rising housing prices! But housing prices aren't rising; they're falling.
Could housing prices go lower? Could lower housing prices cause consumers to stop spending so much? It seems so. The sale of light motor vehicles in the United States dropped 3.4% month-to-month in June to a seasonally adjusted rate of 15.6 million units, according to Northern Trust's Paul Kasriel. A number of retailers have lowered sales guidance as buyers tighten their belts.
Could an attack of consumer thrift one day swarm over financial markets like Japanese bombers over Pearl Harbor? Your guess is as good as ours, dear reader.
Will there be a crash on Wall Street today? Will the Chinese economic bubble find its pin? Probably not quite yet. But we will keep our eyes open anyway…and keep our ear to the ground for you, dear reader.
So the great debate continues… shall we carry on as we have been, waving our Crash Alert flag…or are we 'full of malarkey'?
Why bother? The stock market looks healthy. The problem in the housing market is "contained" in the subprime sector. And M3 is growing at 13% per annum - the fastest rate in 30 years. With all that new money coming into the system, how can prices do anything other than float higher?
But the risk of loss is always at its highest on the precise moment that most people judge it of least concern. Most likely, there will be no crash tomorrow…nor the day after. But there are some things you are better off preparing for, even though they may not happen for a while.
When money and credit are free and easy, people become free and easy with them. They begin spending more than they should…and investing recklessly. Eventually, there is a shock…a tipping point…a moment of desperate reality, in which people feel the ground give way beneath their feet. They look down and panic.
What kind of a shock? It could be almost anything. Sometimes it is a war…sometimes a bankruptcy…sometimes a market shock - such as a sudden increase in the price of oil…or the collapse of a stock market. Then investors, as if they shared a single mind, begin to worry not about the return ON their money; they are concerned about the return OF their money.
What could cause a shock today? Any number of things.
1) The Chinese stock market is getting hit hard. Its CSI 300 Index is down 17% in the last three weeks. Brokerage account openings have dropped by two-thirds. Could global hot money…and local cold cash…turn bearish on Chinese shares? Could Chinese officials say something particularly stupid? Could the market fall another 20%…50%? Could this trigger a worldwide equity sell-off? Yes to all those questions.
2) The dollar is in trouble. On Wednesday, it hit its lowest level against the pound (GBP) in 26-years. It is now near its lowest level ever against the euro (EUR). Trillions worth of dollars now sit in foreign vaults - while reserve managers openly talk of diversifying away from greenbacks. Foreigners don't have to abandon the dollar en masse to knock it down…all they have to do is to let up on their purchases of dollar-denominated assets - such as U.S. Treasuries. Could it happen? Could the shock cause a crash in major financial markets? Why…yes…again.
3) All paper currencies are dangerous. The dollar is not the only paper currency in the world whose supply is growing rapidly. Practically every central bank is printing up its own money in vast quantities - trying to keep up with the U.S. brand. This is why the world has so much "liquidity." It's why so many assets are rising in price so steeply. But could investors suddenly become fearful of so much monetary inflation? Could consumer prices shoot up…as asset prices already have? Could the world's people want to get rid of their paper currencies in favor of other stores of value - notably gold, as The Wall Street Journal warns in an article entitled "Money Meltdown"? And could this lead to a worldwide crash? Yes…yes…yes.
4) A Milan-based bank, Italease, has just seen its derivative portfolio blow up. So has Bear Stearns (NYSE:BSC). Large lenders are getting skittish of complex debt instruments…just as more deals than ever before come to market. So far this year $1 trillion in deals have been done in the North America - a rate of deal-making nearly 50% higher than the year before. What happens if the wheeler-dealers don't find the credit they're looking for? What would investors think if even one of these mega-deals blew up badly?
Reports Bloomberg: "The world's biggest bondholders have had their fill of leveraged buyouts…
"TIAA-CREF, which oversees $414 billion in retirement funds for teachers and college professors, is boycotting some debt offerings used to finance LBOs. Fidelity International, a unit of the world's largest mutual fund company, and Lehman Brothers Asset Management LLC, the money-management arm of the third- biggest bond underwriter, say they're avoiding debt from buyouts.
"You cannot do fundamental analysis and believe that those are creditworthy companies," says an analyst.
"More securities than ever have the lowest rankings, with CCC ratings assigned to 26.5 percent of the new debt, according to New York-based Fitch Ratings. That compares with 15 percent in 2006 for debt that Fitch says has a 'high default risk.'
"Traders demand 3 percentage points in extra interest to own U.S. junk bonds rather than government debt, compared with a record low of 2.41 percentage points on June 5, Merrill Lynch & Co. index data show. That's the fastest increase in spreads since April 2005, just before General Motors Corp. and Ford Motor Co. lost their investment-grade credit ratings."
Meanwhile, the Bank of England raised its key interest rate on Thursday by twenty-five basis points to 5.75 percent - another six-year high. This is the fifth time this year. The ECB's Trichet held steady this month but hints that rates will go up in the future. Elsewhere, banks are likely to hike rates too. And watch out if the Chinese decide to do some serious tightening.
Could there be even bigger blow ups waiting to happen? And could they cause a stampede for the exits? Anthony Bolton, Britain's most successful fund manager, worries about it. So does the Bank of International Settlements. And so do central bankers in Madrid, London and who knows where else. And if the pros stop lending so freely, mightn't it trigger a credit crunch…and a crash? Why, yes…now that you mention it.
5) The great millstone of housing debt continues to grind America's middle and lower classes.
The LA TIMES: "Slow job growth and declining home prices are causing financial problems for more Americans, who are falling behind on consumer debt, including home equity loans, at the highest rate since 2001, the American Bankers Assn. said Tuesday.
"Credit counselors said consumers were paying the price for reckless attitudes about debt fostered by years of easy credit, particularly in the mortgage market.
"'It's a monster we all created,' said Todd Emerson, president of Springboard, a nonprofit consumer credit management organization in Riverside."
Let's see, Chinese companies depend on consumer buying from America…which depends on U.S. consumer spending…which depends on consumer credit…which depends on mortgage lending…which depends on a secondary market in mortgage backed securities…which depends on rising housing prices! But housing prices aren't rising; they're falling.
Could housing prices go lower? Could lower housing prices cause consumers to stop spending so much? It seems so. The sale of light motor vehicles in the United States dropped 3.4% month-to-month in June to a seasonally adjusted rate of 15.6 million units, according to Northern Trust's Paul Kasriel. A number of retailers have lowered sales guidance as buyers tighten their belts.
Could an attack of consumer thrift one day swarm over financial markets like Japanese bombers over Pearl Harbor? Your guess is as good as ours, dear reader.
Will there be a crash on Wall Street today? Will the Chinese economic bubble find its pin? Probably not quite yet. But we will keep our eyes open anyway…and keep our ear to the ground for you, dear reader.
So the great debate continues… shall we carry on as we have been, waving our Crash Alert flag…or are we 'full of malarkey'?
MORTGAGE BACKED TEMPTATION
Is there anyone in Britain or America who still lives within his means? Does anyone know where their means are?
Only occasionally do they even bother to find out - like a middle aged man hunting around in closets for an old tuxedo. Then, when he puts on the pants, he realizes he has outgrown them…he spills over the top and nearly splits the seat.
Of course, you can't blame people for not living within their means - the whole idea is as quaint as thrift…as antique as spats. New credit card offers come everyday. And when you can buy a house for no-money-down on a teaser-rate ARM…you can afford much more house than you thought you could - as least for a while.
Most of the time, most people get by - just as most of the time, most people don't get themselves into serious trouble with the law. They know what they can get away with and what they can't. But occasionally, the old standards and guideposts get knocked down. Then, they run into trouble.
What gets them into trouble is the subject of today's reckoning.
Junk bonds, margin buying, program trading, portfolio insurance - each one eventually leads to trouble. People get excited about it…they think it is the answer to their prayers…they think it is going to make them rich. They do it. And then they over-do it.
The same is true for the innovation of easy mortgage credit. Now you can get a mortgage, apparently, over the Internet. Lender and borrower never meet. And then, of course, Wall Street created a whole industry - another new innovation - to take these mortgages and turn them into new and titillating products. Now, both the mortgages…and the securities derived from them are landing themselves in trouble.
Everyone knows that a man who wins the lottery is a threat to himself, his family and everyone around him. He runs wild, simply because he can get away with it. And yet everyone still hopes to win the lottery. That is why Christianity regards temptation as such a threat that we don't even bother asking God's help to resist it; we know that's impossible. Instead, we pray to "lead us not into temptation."
Here at The Daily Reckoning, we've had our fair share of temptation and enjoyed every minute of it. But what we've noticed is that temptation delayed is temptation denied. Things we would have found irresistible at 25 have only a passing attraction at 50. Fortunately, most people are spared too much temptation - at least, until they are old enough to resist it. Then, it isn't so tempting anymore.
But to a huge number of people in the last 10 years…the innovation of easy credit - especially easy mortgage credit was like catnip. Not only could they not resist it, they reveled in it. They rolled around in it. They salivated over it.
And now they are praying for help to…well…not to God, but to as near an imitation of Him as we have these days - the government.
According to a Bloomberg analysis of data from the National Conference of State Legislatures, legislators in some 30 states have introduced about 85 bills to protect mortgage borrowers from deceptive lending practices, foreclosure, or fraud. Now, from Illinois to Maine, lenders will be banned from tempting borrowers with enticing loans.
Yes…a ban on temptation. We are glad we are not young now.
Imagine if there were a ban on…but, there - we'll leave the rest to use your imagination, dear reader.
Although the government is stepping in now - the damage in the housing market has been done. And really - no smart investor is going to count on the government to protect their portfolio…that's something that we suggest you do yourself. Find out how you can protect your assets - and make some extra cash while you are at it - from the second wave of housing hurt, here:
Only occasionally do they even bother to find out - like a middle aged man hunting around in closets for an old tuxedo. Then, when he puts on the pants, he realizes he has outgrown them…he spills over the top and nearly splits the seat.
Of course, you can't blame people for not living within their means - the whole idea is as quaint as thrift…as antique as spats. New credit card offers come everyday. And when you can buy a house for no-money-down on a teaser-rate ARM…you can afford much more house than you thought you could - as least for a while.
Most of the time, most people get by - just as most of the time, most people don't get themselves into serious trouble with the law. They know what they can get away with and what they can't. But occasionally, the old standards and guideposts get knocked down. Then, they run into trouble.
What gets them into trouble is the subject of today's reckoning.
Junk bonds, margin buying, program trading, portfolio insurance - each one eventually leads to trouble. People get excited about it…they think it is the answer to their prayers…they think it is going to make them rich. They do it. And then they over-do it.
The same is true for the innovation of easy mortgage credit. Now you can get a mortgage, apparently, over the Internet. Lender and borrower never meet. And then, of course, Wall Street created a whole industry - another new innovation - to take these mortgages and turn them into new and titillating products. Now, both the mortgages…and the securities derived from them are landing themselves in trouble.
Everyone knows that a man who wins the lottery is a threat to himself, his family and everyone around him. He runs wild, simply because he can get away with it. And yet everyone still hopes to win the lottery. That is why Christianity regards temptation as such a threat that we don't even bother asking God's help to resist it; we know that's impossible. Instead, we pray to "lead us not into temptation."
Here at The Daily Reckoning, we've had our fair share of temptation and enjoyed every minute of it. But what we've noticed is that temptation delayed is temptation denied. Things we would have found irresistible at 25 have only a passing attraction at 50. Fortunately, most people are spared too much temptation - at least, until they are old enough to resist it. Then, it isn't so tempting anymore.
But to a huge number of people in the last 10 years…the innovation of easy credit - especially easy mortgage credit was like catnip. Not only could they not resist it, they reveled in it. They rolled around in it. They salivated over it.
And now they are praying for help to…well…not to God, but to as near an imitation of Him as we have these days - the government.
According to a Bloomberg analysis of data from the National Conference of State Legislatures, legislators in some 30 states have introduced about 85 bills to protect mortgage borrowers from deceptive lending practices, foreclosure, or fraud. Now, from Illinois to Maine, lenders will be banned from tempting borrowers with enticing loans.
Yes…a ban on temptation. We are glad we are not young now.
Imagine if there were a ban on…but, there - we'll leave the rest to use your imagination, dear reader.
Although the government is stepping in now - the damage in the housing market has been done. And really - no smart investor is going to count on the government to protect their portfolio…that's something that we suggest you do yourself. Find out how you can protect your assets - and make some extra cash while you are at it - from the second wave of housing hurt, here:
REQUIEM FOR AN ECONOMIST
Kurt Richebächer died two weeks ago at his home in Cannes, France, at 88 years old. R.I.P.
One of our greatest complaints is the way the modern world pays homage to its dead. When a good man finally has the mud tossed on his face, he is almost instantly forgotten; so little notice is taken, it hardly seems worth dying. Meanwhile, those who are widely mourned and greatly regretted usually don’t deserve it. When Paris Hilton dies, for example, America will probably declare three days of national mourning and hang black crepe on the capitol.
Kurt Richebächer met his end with hardly an “ave” from anyone but friends and family. We pause to remember him here for both sentimental reasons and practical ones. On the sentimental side, we remember him as an old friend and fellow idealist. On the practical side he, and practically he alone, understood the worldwide economic boom for what it really is – a sham.
Kurt Richebächer was born at the wrong time, in the wrong place. He came into this life in the middle of WWI, on the losing side. He was a young man when another losing war got underway. He was one of the generation who were plucked up by the Wehrmacht in ‘39…and lucky to still be alive by ‘45. Kurt was lucky, in a way. He suffered a disabling accident while still in training. He spent the entire war in various military hospitals, unable to walk; the rest of his life he walked only with a cane. Doctors didn’t know exactly what was wrong with him; at one point German military officials threatened to prosecute him for malingering. Had Kurt’s father, a Nazi party member, not intervened, he might have been shot. Instead, in his hospital bed, he began to read economics.
The classical economics texts Kurt read made sense to him. They described not merely the world as it was, but the world as it ought to be. They emphasized discipline, hard work, and capital formation as the essential elements of wealth creation. And they warned against excess credit and inflation as if they were loose women and demon rum; both were sure to lead to ruin.
The war over, Germany threw off the bad advice of its American overseers. The deutschemark was made a rock-hard currency. Germans clove to the old economics. The country prospered. And Kurt Richebächer rose to be chief economist for Dresdner Bank.
But then, in the 1970s, classical economics – known as the Austrian School today – was going out of style, even in Germany. Economists – those in the United States and Britain – found they could upgrade their trade. Instead of merely reminding people of the old, un-yielding truths they began offering new tricks and innovations. They promised not merely to explain how the world works, but to make it work better…by taking the devil out of it and making it a more agreeable place. Using their new tools, econometrics and statistical analysis, they believed they could manage an economy, so as to achieve full employment and steady growth forever.
Kurt saw the new trends in his profession as dangerous; he regarded their proponents as quacks.
”You anglo-saxons…” he said to us once… “you just have no concept of financial discipline. Just look what you are doing – at every level. In Europe, we have high levels of state debt, but at the individual and business level, our balance sheets are pretty strong. But in almost every English-speaking country, people borrow for everything.
“All this emphasis on statistics and calculations…,” he went on, rapping his silver-handled cane on the table for emphasis, “without a proper theory, it is all nonsense. And your economists seem to have no theory at all…they just think they can manipulate the system in order to get whatever outcome they want. They think economic growth comes from consumer spending and that they can control consumer spending by adjusting lending rates. It is unbelievable that anyone takes this seriously. It is capital formation that really matters. A rich society is one with a great stock of capital…one that builds capital and puts it to work to create more capital. A rich society is not one where people consume. Just the opposite. It is not what is consumed that creates wealth; it is what is NOT consumed. Yet, all the Anglo-Saxons focus on motivating consumers to consume. And now they are consuming more than they make. I tell you, in 70 years of studying economics, I have never seen such nonsense.
“I have always thought it was the duty of each generation to leave the next one a little better off. That means, each generation has to consume less than it produces. It has to leave a little something extra. The problem, you see, is not an economic one…what we are doing to our children with this use of credit and debt is deeply immoral. It is wrong. It is wrong to burden the future with our mistakes, our conceits, our ambitions. This is what we are doing, and it is shameful.”
Kurt warned against the bubble in tech stocks in the late ’90s. Then, he warned against the great bubble in housing. In September 2001, he wrote: “The new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fueled the stock market bubble.”
In one of his final letters, he concluded, “The recklessness of both borrowers and lenders has vastly exceeded our imagination.”
He went on to predict “that the housing bubble – together with the bond and stock bubbles – will invariably implode in the foreseeable future, plunging the U.S. economy into a protracted, deep recession.”
Paul Volker once remarked that the challenge of modern central bankers “is to prove Kurt Richebächer wrong.” Instead, they are proving him right.
One of our greatest complaints is the way the modern world pays homage to its dead. When a good man finally has the mud tossed on his face, he is almost instantly forgotten; so little notice is taken, it hardly seems worth dying. Meanwhile, those who are widely mourned and greatly regretted usually don’t deserve it. When Paris Hilton dies, for example, America will probably declare three days of national mourning and hang black crepe on the capitol.
Kurt Richebächer met his end with hardly an “ave” from anyone but friends and family. We pause to remember him here for both sentimental reasons and practical ones. On the sentimental side, we remember him as an old friend and fellow idealist. On the practical side he, and practically he alone, understood the worldwide economic boom for what it really is – a sham.
Kurt Richebächer was born at the wrong time, in the wrong place. He came into this life in the middle of WWI, on the losing side. He was a young man when another losing war got underway. He was one of the generation who were plucked up by the Wehrmacht in ‘39…and lucky to still be alive by ‘45. Kurt was lucky, in a way. He suffered a disabling accident while still in training. He spent the entire war in various military hospitals, unable to walk; the rest of his life he walked only with a cane. Doctors didn’t know exactly what was wrong with him; at one point German military officials threatened to prosecute him for malingering. Had Kurt’s father, a Nazi party member, not intervened, he might have been shot. Instead, in his hospital bed, he began to read economics.
The classical economics texts Kurt read made sense to him. They described not merely the world as it was, but the world as it ought to be. They emphasized discipline, hard work, and capital formation as the essential elements of wealth creation. And they warned against excess credit and inflation as if they were loose women and demon rum; both were sure to lead to ruin.
The war over, Germany threw off the bad advice of its American overseers. The deutschemark was made a rock-hard currency. Germans clove to the old economics. The country prospered. And Kurt Richebächer rose to be chief economist for Dresdner Bank.
But then, in the 1970s, classical economics – known as the Austrian School today – was going out of style, even in Germany. Economists – those in the United States and Britain – found they could upgrade their trade. Instead of merely reminding people of the old, un-yielding truths they began offering new tricks and innovations. They promised not merely to explain how the world works, but to make it work better…by taking the devil out of it and making it a more agreeable place. Using their new tools, econometrics and statistical analysis, they believed they could manage an economy, so as to achieve full employment and steady growth forever.
Kurt saw the new trends in his profession as dangerous; he regarded their proponents as quacks.
”You anglo-saxons…” he said to us once… “you just have no concept of financial discipline. Just look what you are doing – at every level. In Europe, we have high levels of state debt, but at the individual and business level, our balance sheets are pretty strong. But in almost every English-speaking country, people borrow for everything.
“All this emphasis on statistics and calculations…,” he went on, rapping his silver-handled cane on the table for emphasis, “without a proper theory, it is all nonsense. And your economists seem to have no theory at all…they just think they can manipulate the system in order to get whatever outcome they want. They think economic growth comes from consumer spending and that they can control consumer spending by adjusting lending rates. It is unbelievable that anyone takes this seriously. It is capital formation that really matters. A rich society is one with a great stock of capital…one that builds capital and puts it to work to create more capital. A rich society is not one where people consume. Just the opposite. It is not what is consumed that creates wealth; it is what is NOT consumed. Yet, all the Anglo-Saxons focus on motivating consumers to consume. And now they are consuming more than they make. I tell you, in 70 years of studying economics, I have never seen such nonsense.
“I have always thought it was the duty of each generation to leave the next one a little better off. That means, each generation has to consume less than it produces. It has to leave a little something extra. The problem, you see, is not an economic one…what we are doing to our children with this use of credit and debt is deeply immoral. It is wrong. It is wrong to burden the future with our mistakes, our conceits, our ambitions. This is what we are doing, and it is shameful.”
Kurt warned against the bubble in tech stocks in the late ’90s. Then, he warned against the great bubble in housing. In September 2001, he wrote: “The new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fueled the stock market bubble.”
In one of his final letters, he concluded, “The recklessness of both borrowers and lenders has vastly exceeded our imagination.”
He went on to predict “that the housing bubble – together with the bond and stock bubbles – will invariably implode in the foreseeable future, plunging the U.S. economy into a protracted, deep recession.”
Paul Volker once remarked that the challenge of modern central bankers “is to prove Kurt Richebächer wrong.” Instead, they are proving him right.
Saturday, June 14, 2008
Honest Money: Gold & Silver Coin
Top to Bottom
The United States used to be the largest creditor nation. Now we are the largest debtor nation. One bread winner used to earn enough to support the entire family. This is no longer the case for most American households. It now takes two. Why?
The savings of the American people is at all time lows, less than one half of one percent. Debt levels are at historic highs. Our government is running deficits of unprecedented proportions. What has happened in the past few decades to cause such drastic changes in our standard of living and way of life?
Something is going on, and whatever it is, it isn’t good. The goal of this work is to ferret out what is wrong with our monetary system, and to offer a possible solution before it is too late. Not so much for ourselves, as for our children, and their children to come. Time is of the essence.
Appearances
Money is not easily understood, at least not in the way it has been presented by the international bankers and the establishment. But why would anyone make it appear different than it is?
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” [2]
The question is – by whom and towards what end? Cui Bono?
The Issue
Many issues need to be corrected in any society: past, present, and to come – including our own. Poverty, homelessness, and lack of affordable medical care are some of the more obvious problems. There are others as well.
Our aging infrastructure needs to be rebuilt. The viability of a transportation system dependent on fossil fuel must be addressed. A comprehensive energy program should be developed and put in place.
Highway bridges are in a state of disrepair. Care for the elderly is in a state of denial. Our educational system requires constant attention to remain up-to-date across a broad range of issues, from buildings and supplies, to teachers and the curriculum, and everything in between.
All these problems have one thing in common – money. Not one of them can be corrected without money. This is why the money power is the greatest power that man has, even greater than the military power.
Without money, a military presence is impossible. It requires huge sums to pay for a standing army in full array. Since ancient times it has been known that “endless money forms the sinews of war.” [3] The merchants of death know this all too well. War is business to those who profit thereby.
None of the above problems can be fixed until the money problem is fixed. Gold and silver can restore the loss of purchasing power that results from paper money.
Without paper money it is much more difficult to rage war in the imperialistic manner it is today. A monetary system of gold and silver coin would hold the purse strings tight, reining in the dogs of war, and the inflation paper money breeds. Only an honest currency can cure the ills of a cancerous debt based system.
The Need to Know
This is why it is so important to understand money, and the money power, as they are the keys to the proper functioning of society.
Spiritual, emotional, and other non-physical ideals are of great importance as well, but the present work concerns itself with the economy of man: his need to exchange with one another for life’s basic necessities: food, water, shelter, and their like.
“Money is the most important subject intellectual persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and its defects remedied very soon.” [4]
It is difficult to get excited over monetary theory. The reasons are many. We are all so busy trying to put food on the table, who has time to study money? But that’s the rub. It is exactly because we do not understand money that we have to work as subjects of feudalism 21st century-style – at the behest of the new world order.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” [5]
Money has been made a difficult subject to understand, and this is not by accident, but by design. Those who control the money power do not want the common man to understand it, lest they forsake their power.
“The few who understand the system, will either be so interested in its profits, or so dependent on its favors, that there will be no opposition from that class. The great body of people, mentally incapable of comprehending the tremendous advantages, will bear its burden without complaint.” [6]
If we understood the way money works, we would not accept paper money. We would realize why the Constitution provides for gold and silver coin, while bills of credit, are disallowed. The Founding Fathers knew full well that paper money is an evil contrivance that swindles the common man.
“Whoever controls the volume of money in any country is absolute master of all industry and commerce.” [7]
The Constitution
According to the Constitution our money is gold and silver coin, not Federal Reserve Notes of debt-obligation. Silver is the standard by which the dollar is defined – the unit of account of the United States.
• Article I, Section 8, Clause 5: The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures. [8]
• Article I, Section 10, Clause 1: No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt. [9]
As the Constitution states, Congress is empowered to coin money out of gold and silver, not to emit bills of credit. Nothing can be more simply said, yet that is not the form of money we have today. Why?
Instead of gold and silver coin, we have dollar bills – bills of credit that the Constitution disallows, paper fiat money.
The dollar of the Constitution is a weight of silver: the then current circulating silver dollar. The dollar bill or Federal Reserve Note is not the silver dollar of the Constitution or the Coinage Act of 1792. One is an honest weight of silver – the other a mere piece of paper.
Perhaps there is something being hidden from our sight, so we do not understand this thing called money, and thus accept the unacceptable in its place – paper money.
“All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.” [10]
The goal of this work is to shed some light on the ignorance that John Adams mentions, an act of omission by the majority, and commission by a select few, one that has been designed to hide the truth – not to reveal it. It is easy to stumble by that which has been hidden out of sight.
In the Beginning
For most of the first century of its existence, the United States adhered to the monetary system of the Constitution: gold and silver coins. No bills of credit were allowed.
The Constitution expressly forbids such paper money. As the Supreme Court has said:“The prohibition in the constitution to make anything but gold or silver coin a tender in payment of debts is express and universal. The framers of the Constitution regarded it as an evil to be repelled without modification; they have, therefore, left nothing to be inferred or deduced from construction on this subject.” [11]
The words “emit bills of credit” were hotly debated during the constitutional convention. Not only had the issue been discussed, it had been voted on to disallow them – in clear and precise terms.
“Mr. Ellsworth thought this a favorable moment to shut and bar the door against paper money. The mischief of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Government, more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.” [12]
“Mr. Read thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.” [13]
“Mr. Langdon had rather reject the whole plan than retain the three words (and emit bills).” [14]
“Mr. Sherman thought this a favorable crisis for crushing paper money. If the consent of the Legislature could authorize emissions of it, the friends of paper money, would make every exertion to get into the Legislature in order to license it.” [15]
According to the Constitution, the Supreme Court, and notes from the constitutional convention, a monetary system that allowed bills of credit to circulate as the currency was not only unconstitutional, but an evil blight to be wiped out, once and for all. Yet today we have it in spades. Why? The purpose of this book is to answer this and other similar questions.
Why has our money been allowed to devolve from gold and silver coin, to the present paper fiat money known as Federal Reserve Notes?
Why have Federal Reserve Notes lost 95% of their purchasing power since the Fed was created in 1913?
Why are we not taught in school the importance of purchasing power?
Why are we not taught in school the definition of a dollar according to the Coinage Act of 1792?
Why does Congress act as if it is completely unaware of what the Constitution states is money?
How can the greatest nation on earth accept the debasement and destruction of its own currency?
Black & White
Our monetary system has stepped over the edge – into the abyss. With the unlawful suspension of gold as money, the last vestige of an honest monetary system disappeared. In its place paper money is allowed to circulate as the currency de jour – in complete opposition to the Constitution.
“We are in danger of being overwhelmed with irredeemable paper, mere paper, representing neither gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.” [16]
All through our history, there has been a fight between those who desire paper money, and those who want gold and silver coin, as money, as mandated by the Constitution.
It has always been the banking establishment, and those closely associated with it, that fought for paper money. This is because the bankers want to control the issue of money, and hence reap the profits such monopolization breeds.
If the bankers can simply create money out of nothing, it is easier for them to control the entire monetary system. If, on the other hand, money is gold and silver coin, then it is much harder, perhaps impossible, for the bankers to control money.
“Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with a flick of a pen they will create enough to buy it back.” [17]
Watching the Watchers
Gold and silver do not lend themselves to the control of man – paper money does. Paper is easily had. Gold and silver must be removed from the bowels of the earth by hard and dangerous work. It cannot simply be spoken into existence – by fiat.
Today’s paper money system is the elite collectivist’s dream come true, the perfect wealth transference mechanism, not only here in the United States, but across the entire world. Such a system is a vile and wicked thing – an abomination that walks the earth in darkness, casting shadows far and wide.
In the words of Alan Greenspan, whom some consider the overlord of paper money:
“Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.” [18]
The beginning of our new nation was witness to money of gold and silver coin. Slowly, however, things changed. Gold certificates were first authorized by Congress in the Currency Act of March 3, 1863, but were not issued until 1865.[19]
Silver certificates were created by the Coinage Act if 1878.[20] Both were backed by gold and silver coins held on deposit as reserves. A holder of these certificates could redeem them at any time for gold or silver coins.
Then paper bank notes were issued, but they were only partially backed by gold and silver reserves, which generally amounted to 40%, and steadily declined there from. Finally, our monetary system devolved into the dysfunctional mess of paper fiat money we have today, backed by nothing.
The United States used to be the largest creditor nation. Now we are the largest debtor nation. One bread winner used to earn enough to support the entire family. This is no longer the case for most American households. It now takes two. Why?
The savings of the American people is at all time lows, less than one half of one percent. Debt levels are at historic highs. Our government is running deficits of unprecedented proportions. What has happened in the past few decades to cause such drastic changes in our standard of living and way of life?
Something is going on, and whatever it is, it isn’t good. The goal of this work is to ferret out what is wrong with our monetary system, and to offer a possible solution before it is too late. Not so much for ourselves, as for our children, and their children to come. Time is of the essence.
Appearances
Money is not easily understood, at least not in the way it has been presented by the international bankers and the establishment. But why would anyone make it appear different than it is?
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” [2]
The question is – by whom and towards what end? Cui Bono?
The Issue
Many issues need to be corrected in any society: past, present, and to come – including our own. Poverty, homelessness, and lack of affordable medical care are some of the more obvious problems. There are others as well.
Our aging infrastructure needs to be rebuilt. The viability of a transportation system dependent on fossil fuel must be addressed. A comprehensive energy program should be developed and put in place.
Highway bridges are in a state of disrepair. Care for the elderly is in a state of denial. Our educational system requires constant attention to remain up-to-date across a broad range of issues, from buildings and supplies, to teachers and the curriculum, and everything in between.
All these problems have one thing in common – money. Not one of them can be corrected without money. This is why the money power is the greatest power that man has, even greater than the military power.
Without money, a military presence is impossible. It requires huge sums to pay for a standing army in full array. Since ancient times it has been known that “endless money forms the sinews of war.” [3] The merchants of death know this all too well. War is business to those who profit thereby.
None of the above problems can be fixed until the money problem is fixed. Gold and silver can restore the loss of purchasing power that results from paper money.
Without paper money it is much more difficult to rage war in the imperialistic manner it is today. A monetary system of gold and silver coin would hold the purse strings tight, reining in the dogs of war, and the inflation paper money breeds. Only an honest currency can cure the ills of a cancerous debt based system.
The Need to Know
This is why it is so important to understand money, and the money power, as they are the keys to the proper functioning of society.
Spiritual, emotional, and other non-physical ideals are of great importance as well, but the present work concerns itself with the economy of man: his need to exchange with one another for life’s basic necessities: food, water, shelter, and their like.
“Money is the most important subject intellectual persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and its defects remedied very soon.” [4]
It is difficult to get excited over monetary theory. The reasons are many. We are all so busy trying to put food on the table, who has time to study money? But that’s the rub. It is exactly because we do not understand money that we have to work as subjects of feudalism 21st century-style – at the behest of the new world order.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” [5]
Money has been made a difficult subject to understand, and this is not by accident, but by design. Those who control the money power do not want the common man to understand it, lest they forsake their power.
“The few who understand the system, will either be so interested in its profits, or so dependent on its favors, that there will be no opposition from that class. The great body of people, mentally incapable of comprehending the tremendous advantages, will bear its burden without complaint.” [6]
If we understood the way money works, we would not accept paper money. We would realize why the Constitution provides for gold and silver coin, while bills of credit, are disallowed. The Founding Fathers knew full well that paper money is an evil contrivance that swindles the common man.
“Whoever controls the volume of money in any country is absolute master of all industry and commerce.” [7]
The Constitution
According to the Constitution our money is gold and silver coin, not Federal Reserve Notes of debt-obligation. Silver is the standard by which the dollar is defined – the unit of account of the United States.
• Article I, Section 8, Clause 5: The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures. [8]
• Article I, Section 10, Clause 1: No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt. [9]
As the Constitution states, Congress is empowered to coin money out of gold and silver, not to emit bills of credit. Nothing can be more simply said, yet that is not the form of money we have today. Why?
Instead of gold and silver coin, we have dollar bills – bills of credit that the Constitution disallows, paper fiat money.
The dollar of the Constitution is a weight of silver: the then current circulating silver dollar. The dollar bill or Federal Reserve Note is not the silver dollar of the Constitution or the Coinage Act of 1792. One is an honest weight of silver – the other a mere piece of paper.
Perhaps there is something being hidden from our sight, so we do not understand this thing called money, and thus accept the unacceptable in its place – paper money.
“All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.” [10]
The goal of this work is to shed some light on the ignorance that John Adams mentions, an act of omission by the majority, and commission by a select few, one that has been designed to hide the truth – not to reveal it. It is easy to stumble by that which has been hidden out of sight.
In the Beginning
For most of the first century of its existence, the United States adhered to the monetary system of the Constitution: gold and silver coins. No bills of credit were allowed.
The Constitution expressly forbids such paper money. As the Supreme Court has said:“The prohibition in the constitution to make anything but gold or silver coin a tender in payment of debts is express and universal. The framers of the Constitution regarded it as an evil to be repelled without modification; they have, therefore, left nothing to be inferred or deduced from construction on this subject.” [11]
The words “emit bills of credit” were hotly debated during the constitutional convention. Not only had the issue been discussed, it had been voted on to disallow them – in clear and precise terms.
“Mr. Ellsworth thought this a favorable moment to shut and bar the door against paper money. The mischief of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Government, more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.” [12]
“Mr. Read thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.” [13]
“Mr. Langdon had rather reject the whole plan than retain the three words (and emit bills).” [14]
“Mr. Sherman thought this a favorable crisis for crushing paper money. If the consent of the Legislature could authorize emissions of it, the friends of paper money, would make every exertion to get into the Legislature in order to license it.” [15]
According to the Constitution, the Supreme Court, and notes from the constitutional convention, a monetary system that allowed bills of credit to circulate as the currency was not only unconstitutional, but an evil blight to be wiped out, once and for all. Yet today we have it in spades. Why? The purpose of this book is to answer this and other similar questions.
Why has our money been allowed to devolve from gold and silver coin, to the present paper fiat money known as Federal Reserve Notes?
Why have Federal Reserve Notes lost 95% of their purchasing power since the Fed was created in 1913?
Why are we not taught in school the importance of purchasing power?
Why are we not taught in school the definition of a dollar according to the Coinage Act of 1792?
Why does Congress act as if it is completely unaware of what the Constitution states is money?
How can the greatest nation on earth accept the debasement and destruction of its own currency?
Black & White
Our monetary system has stepped over the edge – into the abyss. With the unlawful suspension of gold as money, the last vestige of an honest monetary system disappeared. In its place paper money is allowed to circulate as the currency de jour – in complete opposition to the Constitution.
“We are in danger of being overwhelmed with irredeemable paper, mere paper, representing neither gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.” [16]
All through our history, there has been a fight between those who desire paper money, and those who want gold and silver coin, as money, as mandated by the Constitution.
It has always been the banking establishment, and those closely associated with it, that fought for paper money. This is because the bankers want to control the issue of money, and hence reap the profits such monopolization breeds.
If the bankers can simply create money out of nothing, it is easier for them to control the entire monetary system. If, on the other hand, money is gold and silver coin, then it is much harder, perhaps impossible, for the bankers to control money.
“Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with a flick of a pen they will create enough to buy it back.” [17]
Watching the Watchers
Gold and silver do not lend themselves to the control of man – paper money does. Paper is easily had. Gold and silver must be removed from the bowels of the earth by hard and dangerous work. It cannot simply be spoken into existence – by fiat.
Today’s paper money system is the elite collectivist’s dream come true, the perfect wealth transference mechanism, not only here in the United States, but across the entire world. Such a system is a vile and wicked thing – an abomination that walks the earth in darkness, casting shadows far and wide.
In the words of Alan Greenspan, whom some consider the overlord of paper money:
“Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.” [18]
The beginning of our new nation was witness to money of gold and silver coin. Slowly, however, things changed. Gold certificates were first authorized by Congress in the Currency Act of March 3, 1863, but were not issued until 1865.[19]
Silver certificates were created by the Coinage Act if 1878.[20] Both were backed by gold and silver coins held on deposit as reserves. A holder of these certificates could redeem them at any time for gold or silver coins.
Then paper bank notes were issued, but they were only partially backed by gold and silver reserves, which generally amounted to 40%, and steadily declined there from. Finally, our monetary system devolved into the dysfunctional mess of paper fiat money we have today, backed by nothing.
Monthly Market Trends
To make money in the stock market it is important to follow the trend. I believe it is best to begin with the big picture in mind and then work our way down to weekly and then daily views of the charts. You will notice that the chart and the value of the indicators change as we move from a monthly to a weekly and then a daily chart. This is a normal part of the technical analysis.
Let's start with the long term view of the S&P 500. The Relative Strength Index (RSI) seems to be a good indicator of the cyclical bull and bear markets. In addition, the 78-week Exponential Moving Average (EMA) acts as support in a bull market and resistance in a bear market.
In January we fell into a bear market as the RSI dropped below 50. The index fell through the rising trend line and the 78-week exponential moving average and MACD crossed below zero. This is consistent with the fundamentals of a weakening economy, and a recession. It is best to remain nimble during times like this.
The first support level looks to be just above the 1200 level. We are testing the 78 exponential moving average, which is a normal occurrence. If this resistance level holds, then it is a sign the market will fall further and you could go short.
Let's start with the long term view of the S&P 500. The Relative Strength Index (RSI) seems to be a good indicator of the cyclical bull and bear markets. In addition, the 78-week Exponential Moving Average (EMA) acts as support in a bull market and resistance in a bear market.
In January we fell into a bear market as the RSI dropped below 50. The index fell through the rising trend line and the 78-week exponential moving average and MACD crossed below zero. This is consistent with the fundamentals of a weakening economy, and a recession. It is best to remain nimble during times like this.
The first support level looks to be just above the 1200 level. We are testing the 78 exponential moving average, which is a normal occurrence. If this resistance level holds, then it is a sign the market will fall further and you could go short.
Merk Market Outlook
The recent rise in inflation has not yet been properly captured by the variety of inflation indexes used by the market to assess the pricing environment. The publication of the April Consumer Price Index elicited howls of derision from the market due to the very dubious -2.0% decline in the price of gasoline suggested by the report. At the time, our reaction was that it did not pass the “laugh test” and that once the seasonal adjustments made by the Bureau of Labor Statistics are “adjusted” we are quite confident that the actual increase in headline prices will be accurately accounted for and the increase in core prices that most individuals have observed will also work their way into the data.
All of this has not been lost on the Federal Reserve, which has over the past number of weeks has moved to begin rhetorically addressing the upside risks to inflation and was one of the paramount concerns that drove Fed Chair Ben Bernanke to verbally intervene in the currency markets on June 3. The hawkish contingent at the Fed led by Dallas Fed President Richard Fisher and Richmond Fed President Jeffrey Lacker have been quite forthright in their criticism of the accommodative policy out of the Fed, with Mr. Lacker making an unusually strong critique of the unorthodox temporary auction facility put forward by Mr. Bernanke. Moreover, Mr. Lacker’s pointed jab at the Fed for moving out of the monetary realm into the fiscal realm occupied by the US Congress, provides a real glimpse into not only the moral hazards created by the bailout of Bear Stearns, but the real dangers created by the very accommodative policy that has characterized Fed policy for much of the past several years.
The most obvious result of the Fed monetary policy has been the recent run up in headline inflation. Our forecast for the upcoming core inflation aggregates imply that the consumer price index and the Fed’s preferred inflation gauge, the personal consumer expenditure deflator, will continue to trend towards the upside and reside in terrain above the implied target range of the central bank.
All of this has not been lost on the Federal Reserve, which has over the past number of weeks has moved to begin rhetorically addressing the upside risks to inflation and was one of the paramount concerns that drove Fed Chair Ben Bernanke to verbally intervene in the currency markets on June 3. The hawkish contingent at the Fed led by Dallas Fed President Richard Fisher and Richmond Fed President Jeffrey Lacker have been quite forthright in their criticism of the accommodative policy out of the Fed, with Mr. Lacker making an unusually strong critique of the unorthodox temporary auction facility put forward by Mr. Bernanke. Moreover, Mr. Lacker’s pointed jab at the Fed for moving out of the monetary realm into the fiscal realm occupied by the US Congress, provides a real glimpse into not only the moral hazards created by the bailout of Bear Stearns, but the real dangers created by the very accommodative policy that has characterized Fed policy for much of the past several years.
The most obvious result of the Fed monetary policy has been the recent run up in headline inflation. Our forecast for the upcoming core inflation aggregates imply that the consumer price index and the Fed’s preferred inflation gauge, the personal consumer expenditure deflator, will continue to trend towards the upside and reside in terrain above the implied target range of the central bank.
Pressure Points in the Bank Bust
Standard & Poor announced in late May it has cut or might cut debt ratings on $34 billion of securities tied to Alt-A mortgages, whose type issued in 2007 have a default rate to 6.64% for 90 days late as of end April. Massive S&P downgrades might soon force Wall Street firms to move up to $5000 billion of assets from off-balance sheet locations back onto their books. The bank sector has so far seen very little in bank failures, compared to past cycles.
The Texas Ratio is calculated by dividing non-performing loans at a bank, including those 90 days delinquent, by their tangible equity capital plus money set aside for future loan losses. Using this ratio, IndyMac Bancorp, Sterling Financial, Corus Bankshares, Imperial Capital Bancorp, and GMAC Bank are all on the verge of busts. Look for these banks to possibly lead the list of failures, each with unique vulnerabilities.
Many of the regional and other private banks scattered across the United States are in deep trouble. The Federal Deposit Insurance Corp (FDIC) has declared 76 banks as official ‘Troubled’ in a rise from the 50 declared with similar status at the end of year 2006. Joining the breakdown of the big banking stock index BKX breakdown in progress is the breakdown of the regional bank stock index RKH. It has fallen below the pennant pause pattern. The word CONTAGION comes to mind, the nightmare for USFed officials. The worst lies directly ahead for banks and stated losses. All propaganda will be unmasked very soon. Panic might set in within a few months time.
The Texas Ratio is calculated by dividing non-performing loans at a bank, including those 90 days delinquent, by their tangible equity capital plus money set aside for future loan losses. Using this ratio, IndyMac Bancorp, Sterling Financial, Corus Bankshares, Imperial Capital Bancorp, and GMAC Bank are all on the verge of busts. Look for these banks to possibly lead the list of failures, each with unique vulnerabilities.
Many of the regional and other private banks scattered across the United States are in deep trouble. The Federal Deposit Insurance Corp (FDIC) has declared 76 banks as official ‘Troubled’ in a rise from the 50 declared with similar status at the end of year 2006. Joining the breakdown of the big banking stock index BKX breakdown in progress is the breakdown of the regional bank stock index RKH. It has fallen below the pennant pause pattern. The word CONTAGION comes to mind, the nightmare for USFed officials. The worst lies directly ahead for banks and stated losses. All propaganda will be unmasked very soon. Panic might set in within a few months time.
Friday, June 13, 2008
IT’S NOT A DOLLAR CRISIS:
The title is a bow to Peter Schiff for his admirable article It’s Not an Oil Crisis: It’s a Dollar Crisis.
Thirty-five years ago gold, symbol of permanence, was chased out from the Monetary Garden of Eden, replaced by the floating irredeemable dollar as the pillar of the international monetary system. That’s right: a floating pillar. The gold demonetization exercise was a farce. It was designed as a fig leaf to cover up the ugly default of the U.S. government on its gold-redeemable sight obligations to foreigners. The word ‘default’ itself was put under taboo even though it punctured big holes in the balance sheet of every central bank of the world, as its dollar-denominated assets sank in value in terms of anything but the dollar itself. These banks were not even allowed to say ‘ouch’ as they were looking at the damage to their balance sheets caused by the default. They just had to swallow the loss, obediently and dutifully join the singing of the Hallelujah Chorus of sycophants in Washington praising the irredeemable dollar and the Nirvana of synthetic credit.
For a time it looked like a clever coup as America has benefited at the expense of the rest of the world. It could now buy all the goods and services it wanted from foreign countries in exchange for “little scraps of paper on which some ink has been sprinkled”. More importantly, America could establish military bases and start wars on foreign soil paying for them with dollars created out of thin air. Foreigners had to put up and shut up. What used to be “deficits without tears” before, has now become “deficits with laughter”.
Few people realized at the time that America, far from giving itself a gift at the expense of foreigners, has fatally shot itself in the foot. At first the wound from this self-inflicted gunshot did not hurt and was quite invisible. Festering and pain came later. The long time-lag makes the causal relationship between the two events fade. Yet the connection exists creating ever more mischief, misdiagnosis, monetary quackery and, ultimately, the greatest credit collapse in history.
America had to foster an anti-gold psychosis in the world to cover up default. Milton Friedman was the high priest of the new paradigm with his monetarism, preaching the unmatched virtues of the floating dollar. It was supposed to eliminate the American current account deficit. It never did. Instead, it killed the healthy American trade surplus, as American industry was pushed into an endless decline by the self-mutilation of the dollar.
The worst part of the anti-gold psychosis was its effect on the banking system. American banks were deprived of a chance to hedge their assets, all of it held in the form of irredeemable debt (irredeemable in the sense that at maturity it was payable in irredeemable currency) by holding monetary metals, gold and silver, as a reserve. Those foreign banks that did were made the laughing stock of the banking industry. ‘Progressive’ banks were free to heap debt upon debt in the asset column of the balance sheet without any regard to reserve ratios, in a mad chase of illusory paper profits. If the balance sheet was not big enough, why, they could simply go ‘off balance sheet’ to add more debt. Foreign banks chimed in: “Me too, me too!” It was truly an incredible sight watching the Union Bank of Switzerland, a solid and liquid bank before 1973, throwing all caution to the winds in its zeal to embrace hare-brained securitization schemes, and to put a lot of bad debt made in USA on its balance sheet.
We were also treated to another incredible sight: the Bank for International Settlements (BIS), the only sane central bank left after the gold-demonetization farce, committing hara-kiri. Since its establishment the BIS carried its books in Swiss gold francs. The implication was clear: the BIS wanted to stay above the hurly-burly of competitive currency devaluations which humiliated even the lofty Swiss franc in 1936. The BIS continued to carry its books in Swiss gold francs, never mind the vicious anti-gold agitation that started in 1973. Ultimately it threw away all good banking sense and caved in. On March 10, 2003, BIS abandoned the Swiss gold franc and embraced the SDR (Special Drawing Rights) as its unit of account. The SDR has the dubious distinction among fiat currencies that it does not even have an obligor. It is an out-and-out make-believe currency. It does not arise as an obligation. It arises as a free gift, manna from heaven, brought by Santa Claus alias IMF. (This Santa has just announced that, in a move of belt-tightening, he was selling gold to cover the cost of mending his bag). In want of a definition of an accounting unit no bank is subject to any meaningful accounting rules any more. The last central bank with the ability to step into the breach, offering sound credit in case of a world-wide credit collapse, has disappeared from the scene.
Because of the anti-gold psychosis the dollar went into a downward spiral, never to come out of it. The question arises whether gold is just an embellishment, a barbarous relic, a superstitious talisman, or whether gold is a real mooring without which the banking systems cannot safely manage risks in the long run.
To answer this question we must understand the first principles of hedging. Gold and silver, as monetary metals, are the two most important hedges banks can have to offset risks to the asset column of their balance sheets. You cannot hedge these risks through owning more debt ― the liability of someone else. A hedge that is subject to exactly the same risks would not diminish but magnify risks. It is a “Texas hedge”. (The reference is to the rancher who, when it was pointed out to him that his long contracts on live cattle can in no way hedge his herd on the ranch, proudly answered: “me hedge is a Texas hedge”.)
For a true hedge, you need and ultimate asset that is not the liability of anyone. Such an asset is furnished by the monetary metals. It is foolish to suggest that gold and silver have lost their value as hedges since their prices fluctuate. The fluctuation of their price does not prove that the value of gold and silver fluctuates. On the contrary, it is the value of the dollar that does fluctuate in which gold and silver prices are quoted.
Because of this fluctuation it is inherently treacherous to trade gold and silver on the variation of price. Proper hedging replaces price risk with basis risk which is less erratic and more predictable. The basis is the difference between the nearest futures price and the cash price of the monetary metal, gold or silver. There is a long-term trend for the basis to fall, and ultimately to go negative. Traditionally the basis has been positive. The condition that holds when the futures price exceeds the cash price is called contango. Permanent contango is a characteristic of the monetary metals indicating large above-ground stores relative to the annual output of the mines. But fiat currencies keep losing value through monetary debasement. It makes the basis of gold and silver fall, and contango disappear. The opposite condition, obtaining when the futures price goes to a discount against the cash price, is called backwardation. It is equivalent to a negative basis. It is an indication of the fact that the monetary metals are going into hiding.
The international monetary system is inevitably drifting towards the black hole of backwardation, and will ultimately succumb to its pull. Governments and central banks tell you that they are combating inflation. They do in the forlorn hope that they can escape the pull of the backwardation of monetary metals. But they cannot, because that pull is the global manifestation of countless individuals’ seeking shelter against deliberate monetary debasement in the ownership of monetary metals.
The point is that the only way to measure the more or less slow deterioration in the collective value of irredeemable currencies is the gold and silver basis. It is precisely the change in the basis that provides clues for hedging against the risk of monetary debasement. The outstanding fact is that the basis can be traded with greatly reduced risk, as compared with trading the price.
It should be clear that some banks in the world are doing just that. They are trading the gold and silver basis (as opposed to trading the gold and silver price) continuously. This means that they are buying hedged metal when the basis is high, and selling it when the basis is low. This enables them to earn a steady income on their gold and silver reserves in gold and silver. The proof that they indeed engage in this activity is furnished by the inordinate size of the short interest in the gold and silver futures market. It is altogether erroneous to attribute this short interest to the activities Jurassic Park creatures, and to that of the bogeyman of ‘naked’ silver commercials. The inordinate size of short interest in gold and silver is just the visible side of the hedges of bullion banks and others, the invisible side of which is their metallic reserves.
Gold Standard University Live is the only organization that advocates paying attention to features such as silver and gold contango, backwardation, basis, and short squeeze. The vocabulary of analysts and other observers of the passing scene doesn’t even include these market terms. They follow statistics of production and off-take, the commitments of traders in the futures market, and are trying to divine coming moves in the gold and silver price through supply and demand equilibrium analysis. Theirs is a wrong-headed approach. Supply and demand equilibrium analysis is inapplicable to the monetary metals, both the supply of and the demand for which tend to be unlimited. That’s just what makes gold and silver a monetary metal. Nevertheless, the threat of a short squeeze or, if the worse comes to the worst, that of a corner, is very real. Corner in precious metals also goes by the other name hyperinflation. Reams and reams of supply/demand statistics and all the COT reports in the world will not predict when it will hit. Only the basis will. It provides an early-warning system indicating, with the precision of a seismograph, the escalating shortages in silver and gold. And only Gold Standard University Live is willing, “without fear or favor”, to publish the results of research which tell you how to read basis signals.
In summary, the present crisis is far from over. Far from being an oil crisis, it is not even a dollar crisis. It is a gold crisis. It is preying on American and other banks, punishing them for their failure to hedge paper assets with gold. The U.S. government is trying to bail out large multinational banks by stuffing them with more paper assets to bursting. In a recent move the Federal Reserve has made history when it swapped U.S. Treasury bonds for the so-called asset-backed securities held by brain-dead banks for which the market refuses to put in a bid. The trick won’t work. And it is doubtful that the only meaningful bail-out that would work, namely, opening the U.S. Mint to gold and silver as advocated by presidential candidate Dr. Ron Paul, is in the cards. To be sure, opening the Mint to the monetary metals should work. It would make U.S. Treasury gold available to American banks, to save them from insolvency. What they need is not augmentation of capital in the form of more paper credits. What they need is metallic hedges to prop up the value of paper assets. Opening the Mint would mobilize the world’s metallic reserves, presently in hiding, and put them back into the public domain to assume their traditional role as the foundation of the world’s credit system.
Thirty-five years ago gold, symbol of permanence, was chased out from the Monetary Garden of Eden, replaced by the floating irredeemable dollar as the pillar of the international monetary system. That’s right: a floating pillar. The gold demonetization exercise was a farce. It was designed as a fig leaf to cover up the ugly default of the U.S. government on its gold-redeemable sight obligations to foreigners. The word ‘default’ itself was put under taboo even though it punctured big holes in the balance sheet of every central bank of the world, as its dollar-denominated assets sank in value in terms of anything but the dollar itself. These banks were not even allowed to say ‘ouch’ as they were looking at the damage to their balance sheets caused by the default. They just had to swallow the loss, obediently and dutifully join the singing of the Hallelujah Chorus of sycophants in Washington praising the irredeemable dollar and the Nirvana of synthetic credit.
For a time it looked like a clever coup as America has benefited at the expense of the rest of the world. It could now buy all the goods and services it wanted from foreign countries in exchange for “little scraps of paper on which some ink has been sprinkled”. More importantly, America could establish military bases and start wars on foreign soil paying for them with dollars created out of thin air. Foreigners had to put up and shut up. What used to be “deficits without tears” before, has now become “deficits with laughter”.
Few people realized at the time that America, far from giving itself a gift at the expense of foreigners, has fatally shot itself in the foot. At first the wound from this self-inflicted gunshot did not hurt and was quite invisible. Festering and pain came later. The long time-lag makes the causal relationship between the two events fade. Yet the connection exists creating ever more mischief, misdiagnosis, monetary quackery and, ultimately, the greatest credit collapse in history.
America had to foster an anti-gold psychosis in the world to cover up default. Milton Friedman was the high priest of the new paradigm with his monetarism, preaching the unmatched virtues of the floating dollar. It was supposed to eliminate the American current account deficit. It never did. Instead, it killed the healthy American trade surplus, as American industry was pushed into an endless decline by the self-mutilation of the dollar.
The worst part of the anti-gold psychosis was its effect on the banking system. American banks were deprived of a chance to hedge their assets, all of it held in the form of irredeemable debt (irredeemable in the sense that at maturity it was payable in irredeemable currency) by holding monetary metals, gold and silver, as a reserve. Those foreign banks that did were made the laughing stock of the banking industry. ‘Progressive’ banks were free to heap debt upon debt in the asset column of the balance sheet without any regard to reserve ratios, in a mad chase of illusory paper profits. If the balance sheet was not big enough, why, they could simply go ‘off balance sheet’ to add more debt. Foreign banks chimed in: “Me too, me too!” It was truly an incredible sight watching the Union Bank of Switzerland, a solid and liquid bank before 1973, throwing all caution to the winds in its zeal to embrace hare-brained securitization schemes, and to put a lot of bad debt made in USA on its balance sheet.
We were also treated to another incredible sight: the Bank for International Settlements (BIS), the only sane central bank left after the gold-demonetization farce, committing hara-kiri. Since its establishment the BIS carried its books in Swiss gold francs. The implication was clear: the BIS wanted to stay above the hurly-burly of competitive currency devaluations which humiliated even the lofty Swiss franc in 1936. The BIS continued to carry its books in Swiss gold francs, never mind the vicious anti-gold agitation that started in 1973. Ultimately it threw away all good banking sense and caved in. On March 10, 2003, BIS abandoned the Swiss gold franc and embraced the SDR (Special Drawing Rights) as its unit of account. The SDR has the dubious distinction among fiat currencies that it does not even have an obligor. It is an out-and-out make-believe currency. It does not arise as an obligation. It arises as a free gift, manna from heaven, brought by Santa Claus alias IMF. (This Santa has just announced that, in a move of belt-tightening, he was selling gold to cover the cost of mending his bag). In want of a definition of an accounting unit no bank is subject to any meaningful accounting rules any more. The last central bank with the ability to step into the breach, offering sound credit in case of a world-wide credit collapse, has disappeared from the scene.
Because of the anti-gold psychosis the dollar went into a downward spiral, never to come out of it. The question arises whether gold is just an embellishment, a barbarous relic, a superstitious talisman, or whether gold is a real mooring without which the banking systems cannot safely manage risks in the long run.
To answer this question we must understand the first principles of hedging. Gold and silver, as monetary metals, are the two most important hedges banks can have to offset risks to the asset column of their balance sheets. You cannot hedge these risks through owning more debt ― the liability of someone else. A hedge that is subject to exactly the same risks would not diminish but magnify risks. It is a “Texas hedge”. (The reference is to the rancher who, when it was pointed out to him that his long contracts on live cattle can in no way hedge his herd on the ranch, proudly answered: “me hedge is a Texas hedge”.)
For a true hedge, you need and ultimate asset that is not the liability of anyone. Such an asset is furnished by the monetary metals. It is foolish to suggest that gold and silver have lost their value as hedges since their prices fluctuate. The fluctuation of their price does not prove that the value of gold and silver fluctuates. On the contrary, it is the value of the dollar that does fluctuate in which gold and silver prices are quoted.
Because of this fluctuation it is inherently treacherous to trade gold and silver on the variation of price. Proper hedging replaces price risk with basis risk which is less erratic and more predictable. The basis is the difference between the nearest futures price and the cash price of the monetary metal, gold or silver. There is a long-term trend for the basis to fall, and ultimately to go negative. Traditionally the basis has been positive. The condition that holds when the futures price exceeds the cash price is called contango. Permanent contango is a characteristic of the monetary metals indicating large above-ground stores relative to the annual output of the mines. But fiat currencies keep losing value through monetary debasement. It makes the basis of gold and silver fall, and contango disappear. The opposite condition, obtaining when the futures price goes to a discount against the cash price, is called backwardation. It is equivalent to a negative basis. It is an indication of the fact that the monetary metals are going into hiding.
The international monetary system is inevitably drifting towards the black hole of backwardation, and will ultimately succumb to its pull. Governments and central banks tell you that they are combating inflation. They do in the forlorn hope that they can escape the pull of the backwardation of monetary metals. But they cannot, because that pull is the global manifestation of countless individuals’ seeking shelter against deliberate monetary debasement in the ownership of monetary metals.
The point is that the only way to measure the more or less slow deterioration in the collective value of irredeemable currencies is the gold and silver basis. It is precisely the change in the basis that provides clues for hedging against the risk of monetary debasement. The outstanding fact is that the basis can be traded with greatly reduced risk, as compared with trading the price.
It should be clear that some banks in the world are doing just that. They are trading the gold and silver basis (as opposed to trading the gold and silver price) continuously. This means that they are buying hedged metal when the basis is high, and selling it when the basis is low. This enables them to earn a steady income on their gold and silver reserves in gold and silver. The proof that they indeed engage in this activity is furnished by the inordinate size of the short interest in the gold and silver futures market. It is altogether erroneous to attribute this short interest to the activities Jurassic Park creatures, and to that of the bogeyman of ‘naked’ silver commercials. The inordinate size of short interest in gold and silver is just the visible side of the hedges of bullion banks and others, the invisible side of which is their metallic reserves.
Gold Standard University Live is the only organization that advocates paying attention to features such as silver and gold contango, backwardation, basis, and short squeeze. The vocabulary of analysts and other observers of the passing scene doesn’t even include these market terms. They follow statistics of production and off-take, the commitments of traders in the futures market, and are trying to divine coming moves in the gold and silver price through supply and demand equilibrium analysis. Theirs is a wrong-headed approach. Supply and demand equilibrium analysis is inapplicable to the monetary metals, both the supply of and the demand for which tend to be unlimited. That’s just what makes gold and silver a monetary metal. Nevertheless, the threat of a short squeeze or, if the worse comes to the worst, that of a corner, is very real. Corner in precious metals also goes by the other name hyperinflation. Reams and reams of supply/demand statistics and all the COT reports in the world will not predict when it will hit. Only the basis will. It provides an early-warning system indicating, with the precision of a seismograph, the escalating shortages in silver and gold. And only Gold Standard University Live is willing, “without fear or favor”, to publish the results of research which tell you how to read basis signals.
In summary, the present crisis is far from over. Far from being an oil crisis, it is not even a dollar crisis. It is a gold crisis. It is preying on American and other banks, punishing them for their failure to hedge paper assets with gold. The U.S. government is trying to bail out large multinational banks by stuffing them with more paper assets to bursting. In a recent move the Federal Reserve has made history when it swapped U.S. Treasury bonds for the so-called asset-backed securities held by brain-dead banks for which the market refuses to put in a bid. The trick won’t work. And it is doubtful that the only meaningful bail-out that would work, namely, opening the U.S. Mint to gold and silver as advocated by presidential candidate Dr. Ron Paul, is in the cards. To be sure, opening the Mint to the monetary metals should work. It would make U.S. Treasury gold available to American banks, to save them from insolvency. What they need is not augmentation of capital in the form of more paper credits. What they need is metallic hedges to prop up the value of paper assets. Opening the Mint would mobilize the world’s metallic reserves, presently in hiding, and put them back into the public domain to assume their traditional role as the foundation of the world’s credit system.
PRECIOUS SIGNS
It is impossible to extrapolate anything from a single data point, however careful observation usually pays dividends especially when looking for certain clues that financial markets may signal. Today, Thursday June 5, 2008 I noticed that gold was down on the day and yet gold stocks were up. Silver actually had a rather positive day overall and many silver equities were up two to three percent on the day. Normally, when gold is off even slightly and gold stocks show mild strength it is a result of short covering. In fact this is most likely the cause of today’s price action.
Many in the precious metals investment arena have bemoaned the fact that the metals have performed better than the mining stocks and far better than the junior mining companies.
In the May edition of The Morgan Report I wrote: “Earning season is here and many of the producers have reported very good margins, far superior to what they reported last year during the first quarter. The market is taking a big yawn at this excellent news and we need to comment. It is only a matter of time before Wall Street wakes up to the fact the many of the leading gold and silver companies (like those we feature each month in the top asset allocation model) are making profits. Earnings drive stock prices eventually, so the point is simply that these earnings will not be ignored forever.
For example, Silver Wheaton Corp. (TSX, NYSE:SLW) announced record net earnings of US$27.9 million (US$0.13 per share) and operating cash flows of US$33.1 million (US$0.15 per share) for the first quarter of 2008. Newmont and others had excellent earnings. As I stated in August of 2007 when the credit crisis surfaced in the financial markets, some companies have hit their (intermediate) bottom and now is the time to buy. At the time I honestly thought that some of the better juniors had probably hit bottom as well. During this month’s review it appears that mainly the top tier companies bottomed in August. It is very difficult to find any junior resource stock that is not close to or below the August 2007 low.
Last month we focused on the probability of the current corrective phase in the precious metals. Some are still of the opinion that the correction is almost over and we can expect to see silver and gold move toward their recent highs in short order. We do not see that taking place and expect at least a three to six month corrective phase to develop. This is the time to build or accumulate stocks you favor.
One of the clearest signs that the bottom is complete will be the precious metal mining equities refusing to move down further in spite of the fact the metals themselves may continue to find lower prices. In other words, I fully expect to see the mining stocks form a bottom before the metals themselves. If we are wrong and this sell-off is short-lived, we will send an alert to our readers. The problem will be filtering out a quick move to the upside that might last for a very brief time. We will employ the rules and discipline that have served us so well in the market so far.”
So, today could be the day and then again it may not be. The point however, is to use the traditional summer weakness in the precious metals complex to your best advantage because the months and years ahead are going to prove to be a time when great fortunes are won and lost based upon investing in what the market values and what is does not value.
We are still climbing the wall of worry and many that have put their investment toe in the water of precious metals found the temperature uninviting and have left the pool. There is plenty of “reasons” to get out because many of the most notable in the industry are calling this a commodity bubble.
To my analysis it is not a bubble but verification that most investors are still skeptical of gold and silver. Still worried about the overall financial landscape but do not have any real conviction to their investment strategy. They simply want to play it “safe” and therefore stick with the general stock market and avoid the commodity sector. This will change, and I expect far more interest in the gold market once the metal of kings moves over the $1000 USD level.
As an interesting aside I will also go out on a limb and forecast that more gold will be purchased between $1000 and $1500 than was purchased between $500 and $1000. Investors do not buy low and sell high, most wait until things are well underway and then gain the confidence to invest accordingly.
Want verification? Simply look at the tech wreck or technology bubble, most jumped on the Nasdaq after it hit 8000 on the way up. As far as I am concerned it will be similar for the precious metals, most investors will find gold and silver irresistible during the optimism phase, and during the final euphoric phase (mania) most everyone will be screaming it is different this time.
Many in the precious metals investment arena have bemoaned the fact that the metals have performed better than the mining stocks and far better than the junior mining companies.
In the May edition of The Morgan Report I wrote: “Earning season is here and many of the producers have reported very good margins, far superior to what they reported last year during the first quarter. The market is taking a big yawn at this excellent news and we need to comment. It is only a matter of time before Wall Street wakes up to the fact the many of the leading gold and silver companies (like those we feature each month in the top asset allocation model) are making profits. Earnings drive stock prices eventually, so the point is simply that these earnings will not be ignored forever.
For example, Silver Wheaton Corp. (TSX, NYSE:SLW) announced record net earnings of US$27.9 million (US$0.13 per share) and operating cash flows of US$33.1 million (US$0.15 per share) for the first quarter of 2008. Newmont and others had excellent earnings. As I stated in August of 2007 when the credit crisis surfaced in the financial markets, some companies have hit their (intermediate) bottom and now is the time to buy. At the time I honestly thought that some of the better juniors had probably hit bottom as well. During this month’s review it appears that mainly the top tier companies bottomed in August. It is very difficult to find any junior resource stock that is not close to or below the August 2007 low.
Last month we focused on the probability of the current corrective phase in the precious metals. Some are still of the opinion that the correction is almost over and we can expect to see silver and gold move toward their recent highs in short order. We do not see that taking place and expect at least a three to six month corrective phase to develop. This is the time to build or accumulate stocks you favor.
One of the clearest signs that the bottom is complete will be the precious metal mining equities refusing to move down further in spite of the fact the metals themselves may continue to find lower prices. In other words, I fully expect to see the mining stocks form a bottom before the metals themselves. If we are wrong and this sell-off is short-lived, we will send an alert to our readers. The problem will be filtering out a quick move to the upside that might last for a very brief time. We will employ the rules and discipline that have served us so well in the market so far.”
So, today could be the day and then again it may not be. The point however, is to use the traditional summer weakness in the precious metals complex to your best advantage because the months and years ahead are going to prove to be a time when great fortunes are won and lost based upon investing in what the market values and what is does not value.
We are still climbing the wall of worry and many that have put their investment toe in the water of precious metals found the temperature uninviting and have left the pool. There is plenty of “reasons” to get out because many of the most notable in the industry are calling this a commodity bubble.
To my analysis it is not a bubble but verification that most investors are still skeptical of gold and silver. Still worried about the overall financial landscape but do not have any real conviction to their investment strategy. They simply want to play it “safe” and therefore stick with the general stock market and avoid the commodity sector. This will change, and I expect far more interest in the gold market once the metal of kings moves over the $1000 USD level.
As an interesting aside I will also go out on a limb and forecast that more gold will be purchased between $1000 and $1500 than was purchased between $500 and $1000. Investors do not buy low and sell high, most wait until things are well underway and then gain the confidence to invest accordingly.
Want verification? Simply look at the tech wreck or technology bubble, most jumped on the Nasdaq after it hit 8000 on the way up. As far as I am concerned it will be similar for the precious metals, most investors will find gold and silver irresistible during the optimism phase, and during the final euphoric phase (mania) most everyone will be screaming it is different this time.
Triggering Global Revolution
T“he theory of Communism,” wrote Karl Marx and Friedrich Engels, “may be summed in one sentence: Abolish all private property.” When the Communists took over Russia in 1917 they attempted to practice Marx and Engel’s “theory.” By the spring of 1918 the Russian economy had reached a state of collapse and civil war broke out. Vladimir Lenin later admitted his mistake. He didn’t know how to build a Communist economy, so the Soviet regime retreated into “state capitalism.” The theory of Communism, plain and simple, signified economic collapse.
In 1987, when I was in graduate school, a remarkable discussion occurred during a seminar on political economy. A fellow graduate student, attracted to socialist ideas, suggested an experiment. “Let us attempt to run the world’s economy without money, without a medium of exchange.” Nobody raised an objection, so I said the following: “If you attempted to run today’s world without money, billions of innocent people would starve to death.” The graduate student looked at me coldly and said, “So what?”
Those who seek the destruction of capitalism have typically favored policies leading to despotism, starvation and mass killing. The socialist revolutionary announces his benevolent intentions to everyone. He intends to build a better society, based on unselfish cooperation. He denounces the greed of the capitalists. His real agenda, let us be clear, is self-aggrandizement predicated on envy.
The envious Lenin once suggested that the surest way to destroy the capitalist system was to debauch the currency. About this idea, Lord Keynes wrote: “Lenin is certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
The state capitalism embraced by Vladimir Lenin and carried forward today under Prime Minister Vladimir Putin, has immunized itself against the machinations of financiers and the collapse of the dollar. Russia is preparing for an economic storm. Capitalism contains, within itself, the germs of its own destruction. The dollar has become a paper currency and the collapse of the dollar is therefore inevitable. This collapse may not happen today or tomorrow; but one day, it will happen. The fever of financial crisis has already raised our collective temperature. Real estate values are falling. The stock market cannot remain high. There is a banking crisis, a credit crunch, an energy crunch and more. An economic unraveling has begun. Once this process becomes full blown the unity of the Western world will be undermined. The free world will become unstable. Demagogues will rise to power. Violent political passions will be engendered. Russia will be powerful again.
The president of the Federal Reserve Bank of Philadelphia, Charles Plosser, has warned that attempts to stabilize the banking system are distorting markets and preventing asset price corrections. Worse yet, financial stabilization policies “subsidize risk-taking” by leading financial institutions.” Such policies, says Plosser, risk systemic instability through the promotion of moral hazard.
The whole financial system has become an exercise in moral hazard: massive indebtedness, consumption on credit, out-of-control social entitlement programs, protections for investors, corporate bailouts and the greatest moral hazard of all – our fiat currency. But who will admit this final, devastating truth? “In dictatorships,” says Natan Sharansky, “you need courage to fight evil; in the free world, you need courage to see the evil.”
We cling to comfort, refusing to see the problem. Are Lehman Brothers, Merrill Lynch and Morgan Stanley sitting at the bottom of a credit crater? Have they “overused” hybrid securities? What is low quality capital, anyway? Shut your eyes and plug your ears. There is “nothing to fear but fear itself.” It’s no big deal if real estate values are falling faster than they did during the Great Depression.
In 1987, when I was in graduate school, a remarkable discussion occurred during a seminar on political economy. A fellow graduate student, attracted to socialist ideas, suggested an experiment. “Let us attempt to run the world’s economy without money, without a medium of exchange.” Nobody raised an objection, so I said the following: “If you attempted to run today’s world without money, billions of innocent people would starve to death.” The graduate student looked at me coldly and said, “So what?”
Those who seek the destruction of capitalism have typically favored policies leading to despotism, starvation and mass killing. The socialist revolutionary announces his benevolent intentions to everyone. He intends to build a better society, based on unselfish cooperation. He denounces the greed of the capitalists. His real agenda, let us be clear, is self-aggrandizement predicated on envy.
The envious Lenin once suggested that the surest way to destroy the capitalist system was to debauch the currency. About this idea, Lord Keynes wrote: “Lenin is certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
The state capitalism embraced by Vladimir Lenin and carried forward today under Prime Minister Vladimir Putin, has immunized itself against the machinations of financiers and the collapse of the dollar. Russia is preparing for an economic storm. Capitalism contains, within itself, the germs of its own destruction. The dollar has become a paper currency and the collapse of the dollar is therefore inevitable. This collapse may not happen today or tomorrow; but one day, it will happen. The fever of financial crisis has already raised our collective temperature. Real estate values are falling. The stock market cannot remain high. There is a banking crisis, a credit crunch, an energy crunch and more. An economic unraveling has begun. Once this process becomes full blown the unity of the Western world will be undermined. The free world will become unstable. Demagogues will rise to power. Violent political passions will be engendered. Russia will be powerful again.
The president of the Federal Reserve Bank of Philadelphia, Charles Plosser, has warned that attempts to stabilize the banking system are distorting markets and preventing asset price corrections. Worse yet, financial stabilization policies “subsidize risk-taking” by leading financial institutions.” Such policies, says Plosser, risk systemic instability through the promotion of moral hazard.
The whole financial system has become an exercise in moral hazard: massive indebtedness, consumption on credit, out-of-control social entitlement programs, protections for investors, corporate bailouts and the greatest moral hazard of all – our fiat currency. But who will admit this final, devastating truth? “In dictatorships,” says Natan Sharansky, “you need courage to fight evil; in the free world, you need courage to see the evil.”
We cling to comfort, refusing to see the problem. Are Lehman Brothers, Merrill Lynch and Morgan Stanley sitting at the bottom of a credit crater? Have they “overused” hybrid securities? What is low quality capital, anyway? Shut your eyes and plug your ears. There is “nothing to fear but fear itself.” It’s no big deal if real estate values are falling faster than they did during the Great Depression.
Banks want secrecy
Banks have a vested interest in keeping the swaps market opaque, because as dealers, the banks have a high volume of transactions, giving them an edge over other buyers and sellers. Since customers don't necessarily know where the market is, you can charge them much wider profit margins.
Banks try to balance the protection they've sold with credit-default swaps they purchase from others, either on the same companies or indexes. They can also create synthetic CDOs, which are packages of credit-default swaps the banks sell to investors to get themselves protection.
The idea for the banks is to make a profit on each trade and avoid taking on the swap's risk. As one CDO dealer puts it, “Dealers are just like bookies. Bookies don't want to bet on games. Bookies just want to balance their books. That's why they're called bookies.”
Now as the economy contracts and bankruptcies spread across the United States and beyond, there's a high probability that many who bought swap protection will wind up in court trying to get their payouts. If things are collapsing left and right, people will use any trick they can.
Last year, the Chicago Mercantile Exchange set up a federally regulated, exchange-based market to trade CDSs. So far, it hasn't worked. It's been boycotted by banks, which prefer to continue their trading privately.
Banks try to balance the protection they've sold with credit-default swaps they purchase from others, either on the same companies or indexes. They can also create synthetic CDOs, which are packages of credit-default swaps the banks sell to investors to get themselves protection.
The idea for the banks is to make a profit on each trade and avoid taking on the swap's risk. As one CDO dealer puts it, “Dealers are just like bookies. Bookies don't want to bet on games. Bookies just want to balance their books. That's why they're called bookies.”
Now as the economy contracts and bankruptcies spread across the United States and beyond, there's a high probability that many who bought swap protection will wind up in court trying to get their payouts. If things are collapsing left and right, people will use any trick they can.
Last year, the Chicago Mercantile Exchange set up a federally regulated, exchange-based market to trade CDSs. So far, it hasn't worked. It's been boycotted by banks, which prefer to continue their trading privately.
Basle BIS worried
The Basle Bank for International Settlements, the supervisory organization of the world’s major central banks is alarmed at the dangers. The Joint Forum of the Basel Committee on Banking Supervision, an international group of banking, insurance and securities regulators, wrote in April that the trillions of dollars in swaps traded by hedge funds pose a threat to financial markets around the world.
``It is difficult to develop a clear picture of which institutions are the ultimate holders of some of the credit risk transferred,'' the report said. ``It can be difficult even to quantify the amount of risk that has been transferred.''
Counterparty risk can become complicated in a hurry. In a typical CDS deal, a hedge fund will sell protection to a bank, which will then resell the same protection to another bank, and such dealing will continue, sometimes in a circle. That has created a huge concentration of risk. As one leading derivatives trader expressed the process, “The risk keeps spinning around and around in this daisy chain like a vortex. There are only six to 10 dealers who sit in the middle of all this. I don't think the regulators have the information that they need to work that out.''
Traders, and even the banks that serve as dealers, don't always know exactly what is covered by a credit-default-swap contract. There are numerous types of CDSs, some far more complex than others. More than half of all CDSs cover indexes of companies and debt securities, such as asset-backed securities, the Basel committee says. The rest include coverage of a single company's debt or collateralized debt obligations...
Banks usually send hedge funds, insurance companies and other institutional investors e-mails throughout the day with bid and offer prices, as there is no regulated exchange to pricess the market or to insure against loss. To find the price of a swap on Ford Motor Co. debt, for example, even sophisticated investors might have to search through all of their daily e-mails.
``It is difficult to develop a clear picture of which institutions are the ultimate holders of some of the credit risk transferred,'' the report said. ``It can be difficult even to quantify the amount of risk that has been transferred.''
Counterparty risk can become complicated in a hurry. In a typical CDS deal, a hedge fund will sell protection to a bank, which will then resell the same protection to another bank, and such dealing will continue, sometimes in a circle. That has created a huge concentration of risk. As one leading derivatives trader expressed the process, “The risk keeps spinning around and around in this daisy chain like a vortex. There are only six to 10 dealers who sit in the middle of all this. I don't think the regulators have the information that they need to work that out.''
Traders, and even the banks that serve as dealers, don't always know exactly what is covered by a credit-default-swap contract. There are numerous types of CDSs, some far more complex than others. More than half of all CDSs cover indexes of companies and debt securities, such as asset-backed securities, the Basel committee says. The rest include coverage of a single company's debt or collateralized debt obligations...
Banks usually send hedge funds, insurance companies and other institutional investors e-mails throughout the day with bid and offer prices, as there is no regulated exchange to pricess the market or to insure against loss. To find the price of a swap on Ford Motor Co. debt, for example, even sophisticated investors might have to search through all of their daily e-mails.
No regulation
A chain reaction of failures in the CDS market could trigger the next global financial crisis. The market is entirely unregulated, and there are no public records showing whether sellers have the assets to pay out if a bond defaults. This so-called counterparty risk is a ticking time bomb. The US Federal Reserve under the ultra-permissive chairman, Alan Greenspan and the US Government’s financial regulators allowed the CDS market to develop entirely without any supervision. Greenspan repeatedly testified to skeptical Congressmen that banks are better risk regulators than government bureaucrats.
The Fed bailout of Bear Stearns on March 17 was motivated, in part, by a desire to keep the unknown risks of that bank’s Credit Default Swaps from setting off a global chain reaction that might have brought the financial system down. The Fed's fear was that because they didn't adequately monitor counterparty risk in credit-default swaps, they had no idea what might happen. Thank Alan Greenspan for that.
Those counterparties include JPMorgan Chase, the largest seller and buyer of CDSs.
The Fed only has supervision to regulated bank CDS exposures, but not that of investment banks or hedge funds, both of which are significant CDS issuers. Hedge funds, for instance, are estimated to have written 31% in CDS protection.
The credit-default-swap market has been mainly untested until now. The default rate in January 2002, when the swap market was valued at $1.5 trillion, was 10.7 percent, according to Moody's Investors Service. But Fitch Ratings reported in July 2007 that 40 percent of CDS protection sold worldwide was on companies or securities that are rated below investment grade, up from 8 percent in 2002.
A surge in corporate defaults will now leave swap buyers trying to collect hundreds of billions of dollars from their counterparties. This will to complicate the financial crisis, triggering numerous disputes and lawsuits, as buyers battle sellers over the technical definition of default - - this requires proving which bond or loan holders weren't paid -- and the amount of payments due. Some fear that could in turn freeze up the financial system.
Experts inside the CDS market believe now that the crisis will likely start with hedge funds that will be unable to pay banks for contracts tied to at least $150 billion in defaults. Banks will try to pre-empt this default disaster by demanding hedge funds put up more collateral for potential losses. That will not work as many of the funds won't have the cash to meet the banks' demands for more collateral.
Sellers of protection aren't required by law to set aside reserves in the CDS market. While banks ask protection sellers to put up some money when making the trade, there are no industry standards. It would be the equivalent of a licensed insurance company selling insurance protection against hurricane damage with no reserves against potential claims.
The Fed bailout of Bear Stearns on March 17 was motivated, in part, by a desire to keep the unknown risks of that bank’s Credit Default Swaps from setting off a global chain reaction that might have brought the financial system down. The Fed's fear was that because they didn't adequately monitor counterparty risk in credit-default swaps, they had no idea what might happen. Thank Alan Greenspan for that.
Those counterparties include JPMorgan Chase, the largest seller and buyer of CDSs.
The Fed only has supervision to regulated bank CDS exposures, but not that of investment banks or hedge funds, both of which are significant CDS issuers. Hedge funds, for instance, are estimated to have written 31% in CDS protection.
The credit-default-swap market has been mainly untested until now. The default rate in January 2002, when the swap market was valued at $1.5 trillion, was 10.7 percent, according to Moody's Investors Service. But Fitch Ratings reported in July 2007 that 40 percent of CDS protection sold worldwide was on companies or securities that are rated below investment grade, up from 8 percent in 2002.
A surge in corporate defaults will now leave swap buyers trying to collect hundreds of billions of dollars from their counterparties. This will to complicate the financial crisis, triggering numerous disputes and lawsuits, as buyers battle sellers over the technical definition of default - - this requires proving which bond or loan holders weren't paid -- and the amount of payments due. Some fear that could in turn freeze up the financial system.
Experts inside the CDS market believe now that the crisis will likely start with hedge funds that will be unable to pay banks for contracts tied to at least $150 billion in defaults. Banks will try to pre-empt this default disaster by demanding hedge funds put up more collateral for potential losses. That will not work as many of the funds won't have the cash to meet the banks' demands for more collateral.
Sellers of protection aren't required by law to set aside reserves in the CDS market. While banks ask protection sellers to put up some money when making the trade, there are no industry standards. It would be the equivalent of a licensed insurance company selling insurance protection against hurricane damage with no reserves against potential claims.
CREDIT DEFAULT SWAPS THE NEXT CRISIS
While attention has been focussed on the relatively tiny US „sub-prime“ home mortgage default crisis as the center of the current financial and credit crisis impacting the Anglo-Saxon banking world, a far larger problem is now coming into focus. Sub-prime or high-risk Collateralized Mortgage Obligations, CMOs as they are called, are only the tip of a colossal iceberg of dodgy credits which are beginning to go sour. The next crisis is already beginning in the $62 TRILLION market for Credit Default Swaps. You never heard of them? It’s time to take a look, then.
The next phase of the unravelling crisis in the US-centered “revolution in finance” is emerging in the market for arcane instruments known as Credit Default Swaps or CDS. Wall Street bankers always have to have a short name for these things.
As I pointed out in detail in my earlier exclusive series, the Financial Tsunami, Parts I-V, the Credit Default Swap was invented a few years ago by a young Cambridge University mathematics graduate, Blythe Masters, hired by J.P. Morgan Chase Bank in New York. The then-fresh university graduate convinced her bosses at Morgan Chase to develop a revolutionary new risk product, the CDS as it soon became known.
A Credit Default Swap is a credit derivative or agreement between two counterparties, in which one makes periodic payments to the other and gets promise of a payoff if a third party defaults. The first party gets credit protection, a kind of insurance, and is called the "buyer." The second party gives credit protection and is called the "seller". The third party, the one that might go bankrupt or default, is known as the "reference entity." CDS’s became staggeringly popular as credit risks exploded during the last seven years in the United States. Banks argued that with CDS they could spread risk around the globe.
Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge, or insure against a default on a debt. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can also be used for speculative purposes.
Warren Buffett once described derivatives bought speculatively as "financial weapons of mass destruction." In his Berkshire Hathaway annual report to shareholders he said "Unless derivatives contracts are collateralized or guaranteed, their ultimate value depends on the creditworthiness of the counterparties. In the meantime, though, before a contract is settled, the counterparties record profits and losses -often huge in amount- in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)." A typical CDO is for five years term.
Like many exotic financial products which are extremely complex and profitable in times of easy credit, when markets reverse, as has been the case since August 2007, in addition to spreading risk, credit derivatives, in this case, also amplify risk considerably.
Now the other shoe is about to drop in the $62 trillion CDS market due to rising junk bond defaults by US corporations as the recession deepens. That market has long been a disaster in the making. An estimated $1,2 trillion could be at risk of the nominal $62 trillion in CDOs outstanding, making it far larger than the sub-prime market.
The next phase of the unravelling crisis in the US-centered “revolution in finance” is emerging in the market for arcane instruments known as Credit Default Swaps or CDS. Wall Street bankers always have to have a short name for these things.
As I pointed out in detail in my earlier exclusive series, the Financial Tsunami, Parts I-V, the Credit Default Swap was invented a few years ago by a young Cambridge University mathematics graduate, Blythe Masters, hired by J.P. Morgan Chase Bank in New York. The then-fresh university graduate convinced her bosses at Morgan Chase to develop a revolutionary new risk product, the CDS as it soon became known.
A Credit Default Swap is a credit derivative or agreement between two counterparties, in which one makes periodic payments to the other and gets promise of a payoff if a third party defaults. The first party gets credit protection, a kind of insurance, and is called the "buyer." The second party gives credit protection and is called the "seller". The third party, the one that might go bankrupt or default, is known as the "reference entity." CDS’s became staggeringly popular as credit risks exploded during the last seven years in the United States. Banks argued that with CDS they could spread risk around the globe.
Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge, or insure against a default on a debt. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can also be used for speculative purposes.
Warren Buffett once described derivatives bought speculatively as "financial weapons of mass destruction." In his Berkshire Hathaway annual report to shareholders he said "Unless derivatives contracts are collateralized or guaranteed, their ultimate value depends on the creditworthiness of the counterparties. In the meantime, though, before a contract is settled, the counterparties record profits and losses -often huge in amount- in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)." A typical CDO is for five years term.
Like many exotic financial products which are extremely complex and profitable in times of easy credit, when markets reverse, as has been the case since August 2007, in addition to spreading risk, credit derivatives, in this case, also amplify risk considerably.
Now the other shoe is about to drop in the $62 trillion CDS market due to rising junk bond defaults by US corporations as the recession deepens. That market has long been a disaster in the making. An estimated $1,2 trillion could be at risk of the nominal $62 trillion in CDOs outstanding, making it far larger than the sub-prime market.
TH*NK*NG (RUNNING MATES)
I’ve been thinking about running mates. Actually I’ve been thinking about Campaign 2008, strategies, Vice Presidents, Lieutenant Governors, and “term” life insurance. The election/ selection process for Campaign 2008 is entering the next phase before the national party nominating conventions are held later this summer and the really hard-core campaigning begins in earnest before the November elections. We the People… pretty much know who will head the two major party tickets at this point, but who will run as the candidates for the Veep position is still a huge unknown.
You see the position of the Vice President is hardly the deciding factor in why voters cast their ballots for this nation’s chief executive. Still… the position is very important in that this is the individual who is literally a “heartbeat” away from the Oval Office in the event that the President (for whatever reason) cannot complete their term of office. Despite all of the lobbying and arm twisting from special interests and party poobahs, the final decision rests with the person at the top of the ticket. This is as it should be. It must be noted that initially in our history, the Veep was the person who came in second.
Strategies and political maneuvering do enter into the choice for positive (and negative) reasons. It should be important that the choice is an individual (who if the unTH*NKable occurs) can effectively function as the nation’s chief executive. That has not always been true. Vice Presidential running mates are sometimes selected to achieve geographical, philosophical, and political balance. This is done to garner “wider” appeal for the ticket with the general electorate, to placate special interests within the party, and even to stroke the ego/ personalities of the candidate running for President. The Veep choices maybe be made to complement the strengths of the lead candidate, or they may even be made to focus the jokes and the criticism away from the Chief executive once they are elected. We’ve seen all of this.
In my adult lifetime, there have been Vice Presidents who were eminently qualified, while there have been others who have proven to be “real pieces of work.” Really strong candidates/ personalities for the Oval Office (who felt confident of their election because of the “legacies” of their immediate predecessors) tended to pick running mates who left the voting public asking: “WHY?” When Nixon selected Agnew in 1968, the headlines ran: “What is a Spiro Agnew?” This choice proved very strategic because in the aftermath of Watergate, Nixon was secure in his tenure as the President ONLY as long as Agnew remained as the Vice President. All bets were off once Spiro was ousted, Nixon was forced to resign, and the replacement Veep Jerry Ford ultimately assumed the Presidency. Some twenty years later the electorate saw headlines: “What is a Dan Quayle?” Quayle took the brunt of the jokes and frivolous criticism. Papa Bush finished his first administration, but the team was not re-elected for a second term.
Presumed democratic candidate Barack Obama is now under a great deal of pressure to choose Mrs. Clinton as his running mate. There are strong historical precedents for this; and, in essence, this “kind of” follows in the founding fathers’ original method whereby the “second” vote-getter receives the nod. I don’t see this happening as the pre-convention campaign was too bitterly fought between the two. Despite all of the major in-party arm twisting; concerns of a troika (three horse driven vehicle) with an Obama, Clinton, AND Clinton co-presidency should more than sway Obama away from that choice.
In Illinois, we have seen similar “political” posturing in the selection of our Lieutenant Governor. There are common threads with some different twists. Corrine Wood proved to a “term” life insurance policy for former Governor Ryan. She was eminently qualified to be Lieutenant Governor and to replace the Governor - having a long history of Illinois elected office. She was a hard nosed politico who had stepped on a lot of toes over the years and made a lot of foes in the process. Despite the corruption and scandals surrounding George Ryan, the legislature left him to finish his term - in-part to preclude making Wood the Illinois Governor. George Ryan was tried, convicted, and sentenced to the slammer; AFTER he left office. Corrine Wood was denied the governorship in the process.
We in Illinois are now again enduring letting the clock run out for a highly controversial (and very negatively perceived) Governor. Rod Blagojevic can actually be said to make George Ryan look like an effective chief executive who does proud for the citizens of Illinois! His understudy, the Lieutenant Governor Pat Quinn, had an almost “Dan Quayle laughableness” to him when he came into his office. Yet in his six years tenure; he has literally remade his image and the do-nothing perception of the Office of Lieutenant Governor. I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.
You see the position of the Vice President is hardly the deciding factor in why voters cast their ballots for this nation’s chief executive. Still… the position is very important in that this is the individual who is literally a “heartbeat” away from the Oval Office in the event that the President (for whatever reason) cannot complete their term of office. Despite all of the lobbying and arm twisting from special interests and party poobahs, the final decision rests with the person at the top of the ticket. This is as it should be. It must be noted that initially in our history, the Veep was the person who came in second.
Strategies and political maneuvering do enter into the choice for positive (and negative) reasons. It should be important that the choice is an individual (who if the unTH*NKable occurs) can effectively function as the nation’s chief executive. That has not always been true. Vice Presidential running mates are sometimes selected to achieve geographical, philosophical, and political balance. This is done to garner “wider” appeal for the ticket with the general electorate, to placate special interests within the party, and even to stroke the ego/ personalities of the candidate running for President. The Veep choices maybe be made to complement the strengths of the lead candidate, or they may even be made to focus the jokes and the criticism away from the Chief executive once they are elected. We’ve seen all of this.
In my adult lifetime, there have been Vice Presidents who were eminently qualified, while there have been others who have proven to be “real pieces of work.” Really strong candidates/ personalities for the Oval Office (who felt confident of their election because of the “legacies” of their immediate predecessors) tended to pick running mates who left the voting public asking: “WHY?” When Nixon selected Agnew in 1968, the headlines ran: “What is a Spiro Agnew?” This choice proved very strategic because in the aftermath of Watergate, Nixon was secure in his tenure as the President ONLY as long as Agnew remained as the Vice President. All bets were off once Spiro was ousted, Nixon was forced to resign, and the replacement Veep Jerry Ford ultimately assumed the Presidency. Some twenty years later the electorate saw headlines: “What is a Dan Quayle?” Quayle took the brunt of the jokes and frivolous criticism. Papa Bush finished his first administration, but the team was not re-elected for a second term.
Presumed democratic candidate Barack Obama is now under a great deal of pressure to choose Mrs. Clinton as his running mate. There are strong historical precedents for this; and, in essence, this “kind of” follows in the founding fathers’ original method whereby the “second” vote-getter receives the nod. I don’t see this happening as the pre-convention campaign was too bitterly fought between the two. Despite all of the major in-party arm twisting; concerns of a troika (three horse driven vehicle) with an Obama, Clinton, AND Clinton co-presidency should more than sway Obama away from that choice.
In Illinois, we have seen similar “political” posturing in the selection of our Lieutenant Governor. There are common threads with some different twists. Corrine Wood proved to a “term” life insurance policy for former Governor Ryan. She was eminently qualified to be Lieutenant Governor and to replace the Governor - having a long history of Illinois elected office. She was a hard nosed politico who had stepped on a lot of toes over the years and made a lot of foes in the process. Despite the corruption and scandals surrounding George Ryan, the legislature left him to finish his term - in-part to preclude making Wood the Illinois Governor. George Ryan was tried, convicted, and sentenced to the slammer; AFTER he left office. Corrine Wood was denied the governorship in the process.
We in Illinois are now again enduring letting the clock run out for a highly controversial (and very negatively perceived) Governor. Rod Blagojevic can actually be said to make George Ryan look like an effective chief executive who does proud for the citizens of Illinois! His understudy, the Lieutenant Governor Pat Quinn, had an almost “Dan Quayle laughableness” to him when he came into his office. Yet in his six years tenure; he has literally remade his image and the do-nothing perception of the Office of Lieutenant Governor. I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.
The Markets
Last week’s roller coaster cum bloodbath on Wall Street gives us a beautiful case study in the art of macrotrading and the importance of economic factors shaping market trends. The case study started last Wednesday with Fed Chairman Ben Bernanke’s professint not only rising concern with inflation but also a desire to shore up the dollar. Of course, it has been Bernanke debasing ye olde greenback through his over-aggressive rate cutting. With Bernanke now drawing a line in the shifting sands of fortunes of the dollar – a marked policy shift for the Fed -- the markets reacted just like the macrotrading text book indicates:
In particular, the dollar strengthened on the prospects of higher U.S. interest rates. This, in turn, sent oil and commodities prices, which are priced in dollars, down the chute. The U.S. stock market then rallied on the prospect that the oil bubble might be now burst, and the contractionary effects of high oil prices would be moderated.
Ah, but what a difference a day or two – and one horrific economic report – make. On Thursday, the ECB President warned of a possible rate hike. This gave a boost to the euro at the dollar’s expense. Then, on Friday, the jobs report came in with recession written all over it – with the unemployment rate jumping to 5.5% from 5%. With this single report slaying expectations of a Fed rate hike coming soon to fight inflation, the dollar fall was accentuated. Oil prices, in turn, spiked not only on the weak dollar news but also some saber-rattling by Israel over Iran’s nuclear program. The end result was a Friday bearish trifecta of 3% drops for the Dow, S&P, and Nazz.
So here’s where we stand. In the ongoing battle between our three possible economic scenarios – U.S. recession drags world down, global decoupling, and stagflation -- the clear winner last week for the second week in a row was stagflation. As I have previously lamented, this is the worst possible scenario for bulls because it is impossible to cure with discretionary policy fixes. Rate cuts exacerbate inflation and rate hikes exacerbate recession.
In fact, it is becoming increasingly obvious that Bernanke is being backed into a stagflationary corner. Last week’s desperate save the greenback gambit perfectly illustrates this point. No doubt, Greenspan’s favorite fall guy, AKA Helicopter Ben, was likely quite positive that his support for the dollar would make all things rights. Pity the fool – except when we are his victims.
As for next week, if you are really superstitious, then you don’t want to be long on Friday the 13th ahead of the CPI report. It is the most likely market mover next week in terms of economic reports and the risks to the downside outweigh those to the upside.
My market trend bottom line is this : My “sell in May and go away” warning in this newsletter on May 23rd remains in effect. This is not a market I want to be long
In particular, the dollar strengthened on the prospects of higher U.S. interest rates. This, in turn, sent oil and commodities prices, which are priced in dollars, down the chute. The U.S. stock market then rallied on the prospect that the oil bubble might be now burst, and the contractionary effects of high oil prices would be moderated.
Ah, but what a difference a day or two – and one horrific economic report – make. On Thursday, the ECB President warned of a possible rate hike. This gave a boost to the euro at the dollar’s expense. Then, on Friday, the jobs report came in with recession written all over it – with the unemployment rate jumping to 5.5% from 5%. With this single report slaying expectations of a Fed rate hike coming soon to fight inflation, the dollar fall was accentuated. Oil prices, in turn, spiked not only on the weak dollar news but also some saber-rattling by Israel over Iran’s nuclear program. The end result was a Friday bearish trifecta of 3% drops for the Dow, S&P, and Nazz.
So here’s where we stand. In the ongoing battle between our three possible economic scenarios – U.S. recession drags world down, global decoupling, and stagflation -- the clear winner last week for the second week in a row was stagflation. As I have previously lamented, this is the worst possible scenario for bulls because it is impossible to cure with discretionary policy fixes. Rate cuts exacerbate inflation and rate hikes exacerbate recession.
In fact, it is becoming increasingly obvious that Bernanke is being backed into a stagflationary corner. Last week’s desperate save the greenback gambit perfectly illustrates this point. No doubt, Greenspan’s favorite fall guy, AKA Helicopter Ben, was likely quite positive that his support for the dollar would make all things rights. Pity the fool – except when we are his victims.
As for next week, if you are really superstitious, then you don’t want to be long on Friday the 13th ahead of the CPI report. It is the most likely market mover next week in terms of economic reports and the risks to the downside outweigh those to the upside.
My market trend bottom line is this : My “sell in May and go away” warning in this newsletter on May 23rd remains in effect. This is not a market I want to be long
General Comments
key reversal down day on Thursday, followed by a wide range bar down day on Friday for the US Dollar sent the Dollar Index tumbling from a peak of 73.37 on Thursday’s high to a reading of 72.38 at Friday’s close, with the Swiss Franc and Euro leading the advance. For precious metals, weak economic data including surging unemployment was bullish grist for the mill, helping the metals complex end the week on a strong note and reversing some of the prior weeks losses. For Gold, the week produced a gain of $15.45 to end at $901.35, up 1.74% from last weeks close of $885.90, and reversing about 40% of the prior weeks $38.30 decline. For Platinum, prices surged by $67 dollars per ounce on the week for a gain of 3.34%, with prices closing at $2070.00, up from $2003.00 the prior week. During the prior week, Platinum declined by 7.26% or $157 dollars per ounce, so this week’s recovery rally retraced 42.6% of the prior weeks down move. Silver also gained ground during the week just past, advancing from a close of $16.84 last Friday to a close of $17.48 this Friday and ending with a gain of $.64/zo or 3.80%. For Silver, this weeks gain retraced 48.85% of last weeks 7% decline.
With the Dollar very weak and precious metals very strong, it was no surprise to see mining stocks in recovery mode. For the XAU Gold Stock Index, the week generated a gain of 2.26 index points or 1.24%, with the index ending at 183.70, up from 181.44. For the XAU, strong gains on Thursday and Friday erased earlier pronounced intra-week losses, with the XAU gaining 5.26% from the Thursday low of 174.52, to the Friday close of 183.70, an advance of 9.18 index points in just two days. Other mining stock barometers also finished with gains, with the GDX ETF advancing by 1.45% on the week, with the HUI Amex Gold Bugs Index advancing by 2.31%. For the Small Cap Miners, which usually lag the action in the large caps by a day or two, the turn in large cap stocks provided only a modest boost to the weekly result. In the case of the FSO Junior Mining Index, the index managed to finish the week with a gain, ending higher by 1.41 index points at a close of 235.41, up .6% from last weeks close of 234.00. For the FSO Junior Mining Index, the 50 day average ended at 234.16, with the 200 day average ending at 267.71.
With the Dollar very weak and precious metals very strong, it was no surprise to see mining stocks in recovery mode. For the XAU Gold Stock Index, the week generated a gain of 2.26 index points or 1.24%, with the index ending at 183.70, up from 181.44. For the XAU, strong gains on Thursday and Friday erased earlier pronounced intra-week losses, with the XAU gaining 5.26% from the Thursday low of 174.52, to the Friday close of 183.70, an advance of 9.18 index points in just two days. Other mining stock barometers also finished with gains, with the GDX ETF advancing by 1.45% on the week, with the HUI Amex Gold Bugs Index advancing by 2.31%. For the Small Cap Miners, which usually lag the action in the large caps by a day or two, the turn in large cap stocks provided only a modest boost to the weekly result. In the case of the FSO Junior Mining Index, the index managed to finish the week with a gain, ending higher by 1.41 index points at a close of 235.41, up .6% from last weeks close of 234.00. For the FSO Junior Mining Index, the 50 day average ended at 234.16, with the 200 day average ending at 267.71.
NOLTE NOTES
Friday’s reaction to the employment report was somewhat of a surprise, given that fewer job losses were “created”, however what spooked everyone was the big jump in the unemployment rate. The report left a sour taste in investor’s mouths, given the good news from the merger front (Verizon and Alltel) as well as good numbers from Wal-Mart (the “main” recipient of the rebate checks). Energy prices were in full retreat earlier in the week, but that reversed with a vengeance by the end of the week, as oil prices rose by their largest daily amount ever. There were plenty of places to place the blame for the jump in prices, however the reality will be ever-higher pump prices over the summer, cutting a bigger hole in consumer’s pocketbooks. Given the jawboning over the past week about the weak dollar, the Fed talked about keeping rates at present levels and may have talked themselves into a corner, as by the end of the week, the dollar had rolled over and with the weak employment report lower interest rates became a distinct possibility once again. The economy seems to be taking a back seat to the drama that is unfolding in the commodity markets – so keep an eye on energy prices and Monday’s market open.
We thought this week would be a toss-up, instead by Friday it threw up. For the week our indicators really didn’t move too much, but we are seeing a bit more volume with the recent decline than we have seen in a while, indicating that investors may be much more interested in cashing in and asking questions later. We have been watching the range between 1370 and 1425 that has contained the market since April. The 1350 level marks the halfway point of the rally from the March bottom that should contain any market decline if the market were bullish. However a break of 1350 could open the doors to another retest of the lows at 1270. Given the expectations currently built into the markets (shallow recession, real estate/financial problems mostly over) it is beginning to look to us that not only is another trip to 1270 very likely, but a breaking of that level is becoming more real as well. The next important resting spots would be 1225-1235 and then 1170 – at which point the markets begin looking pretty reasonable. If the markets are going to make a bullish stand, it had better come fairly early Monday; otherwise it could be a long and very hot summer.
Bonds wound up higher (and yields lower) even as commodity prices rose on the week. The comments from the Fed, effectively telling the markets they will not be cutting rates again has put the Fed in a box with the recent release of weak economic data. The model has not turned positive, although it was close last week – if commodity prices could continue their recent decline. While discussions ranging from Congress to the corner gas station about why prices have increased so much (see Friday’s move of $11) has created a secondary market in guessing how much speculation is embedded in the price of oil today. Centering around $30/bbl, IF speculators vacate oil, we could see prices once again approach $100/bbl, however our bet is for significantly higher prices before we get back to $100/bbl.
We thought this week would be a toss-up, instead by Friday it threw up. For the week our indicators really didn’t move too much, but we are seeing a bit more volume with the recent decline than we have seen in a while, indicating that investors may be much more interested in cashing in and asking questions later. We have been watching the range between 1370 and 1425 that has contained the market since April. The 1350 level marks the halfway point of the rally from the March bottom that should contain any market decline if the market were bullish. However a break of 1350 could open the doors to another retest of the lows at 1270. Given the expectations currently built into the markets (shallow recession, real estate/financial problems mostly over) it is beginning to look to us that not only is another trip to 1270 very likely, but a breaking of that level is becoming more real as well. The next important resting spots would be 1225-1235 and then 1170 – at which point the markets begin looking pretty reasonable. If the markets are going to make a bullish stand, it had better come fairly early Monday; otherwise it could be a long and very hot summer.
Bonds wound up higher (and yields lower) even as commodity prices rose on the week. The comments from the Fed, effectively telling the markets they will not be cutting rates again has put the Fed in a box with the recent release of weak economic data. The model has not turned positive, although it was close last week – if commodity prices could continue their recent decline. While discussions ranging from Congress to the corner gas station about why prices have increased so much (see Friday’s move of $11) has created a secondary market in guessing how much speculation is embedded in the price of oil today. Centering around $30/bbl, IF speculators vacate oil, we could see prices once again approach $100/bbl, however our bet is for significantly higher prices before we get back to $100/bbl.
Thursday, June 12, 2008
ENERGY SECTOR FACES UNCERTAIN FUTURE
Plunging oil prices are bringing major players in the market to the brink of having to make significant decisions. Their conclusions are likely to ripple through the marketplace for the next several months.
Prices for gasoline might have reached high enough levels to have dampened demand for crude oil in 2006, perhaps as early as the middle of the year, setting up the potential for lower prices says the International Energy Agency.
If the IEA is correct, and conditions have not changed, then the current decline in crude oil might be the first leg in a protracted decline for the price of oil.
If the analysis is correct, then the world's financial system is about to face a significant redistribution of buying power, as money shifts back into the hands of oil consumers and away from producers, both OPEC and non-OPEC, setting the clock back to 1998.
The implications are huge, from the financial, environmental, and political viewpoints.
As the 2008 presidential election nears, the Democrats would love to have high oil prices as a lever against the Republicans, tying high oil prices to the war in Iraq, and offering allegations of ties in the White House to big oil. But if prices remain low, the opportunity is lost, and a new issue will have to be raised. More than likely this seems to be health care.
At least two areas of the U.S. have ridden the high price of oil to a new wave of prosperity, as the farm belt has increased corn production and has become the ethanol belt, building distilling plants and creating a new industry. At the same time, cities such as Houston and Forth Worth have enjoyed real estate booms based on high oil prices in the former, and the exploitation of the Barnett Shale, a huge natural gas deposit for the latter.
That means that real estate prices and general employment conditions in these oil boom areas could be affected in significant ways over the next few months.
In Canada, tar sands have led to huge growth in Alberta, at the cost of what some are describing as significant environmental damage, and rising emissions of greenhouse gases.
And in parts of Indonesia and Asia, deforestation and illegal logging have risen dramatically as developers increase farm land to produce feedstock for biofuels.
If the biofuel and tar sand boom ends or is significantly reduced, long term environmental damage will eventually have its consequences.
Politically, three countries have ridden the price of oil to new prominence in the world: Russia, Venezuela, and Iran.
Russia has used its vast natural gas and oil resources to remove foreign energy companies as major players in its energy industry, as well as having flexed its muscles against Europe and its former republics by shutting down natural gas flow to various customers over the last 14 months.
Venezuela has turned high oil prices into a platform for socialism and wealth redistribution. And Iran has used the opportunity to position itself as a resurgent regional player in Middle East politics.
Yet, much of the success enjoyed by cities such as Houston, regions such as the farm belt, and countries such as Iran, have been built on the assumption that oil prices would remain at historically high prices, a notion fueled by the Peak Oil theory, and a consensus among analysts that due to production bottlenecks, the situation would not change for the foreseeable future.
Prices for gasoline might have reached high enough levels to have dampened demand for crude oil in 2006, perhaps as early as the middle of the year, setting up the potential for lower prices says the International Energy Agency.
If the IEA is correct, and conditions have not changed, then the current decline in crude oil might be the first leg in a protracted decline for the price of oil.
If the analysis is correct, then the world's financial system is about to face a significant redistribution of buying power, as money shifts back into the hands of oil consumers and away from producers, both OPEC and non-OPEC, setting the clock back to 1998.
The implications are huge, from the financial, environmental, and political viewpoints.
As the 2008 presidential election nears, the Democrats would love to have high oil prices as a lever against the Republicans, tying high oil prices to the war in Iraq, and offering allegations of ties in the White House to big oil. But if prices remain low, the opportunity is lost, and a new issue will have to be raised. More than likely this seems to be health care.
At least two areas of the U.S. have ridden the high price of oil to a new wave of prosperity, as the farm belt has increased corn production and has become the ethanol belt, building distilling plants and creating a new industry. At the same time, cities such as Houston and Forth Worth have enjoyed real estate booms based on high oil prices in the former, and the exploitation of the Barnett Shale, a huge natural gas deposit for the latter.
That means that real estate prices and general employment conditions in these oil boom areas could be affected in significant ways over the next few months.
In Canada, tar sands have led to huge growth in Alberta, at the cost of what some are describing as significant environmental damage, and rising emissions of greenhouse gases.
And in parts of Indonesia and Asia, deforestation and illegal logging have risen dramatically as developers increase farm land to produce feedstock for biofuels.
If the biofuel and tar sand boom ends or is significantly reduced, long term environmental damage will eventually have its consequences.
Politically, three countries have ridden the price of oil to new prominence in the world: Russia, Venezuela, and Iran.
Russia has used its vast natural gas and oil resources to remove foreign energy companies as major players in its energy industry, as well as having flexed its muscles against Europe and its former republics by shutting down natural gas flow to various customers over the last 14 months.
Venezuela has turned high oil prices into a platform for socialism and wealth redistribution. And Iran has used the opportunity to position itself as a resurgent regional player in Middle East politics.
Yet, much of the success enjoyed by cities such as Houston, regions such as the farm belt, and countries such as Iran, have been built on the assumption that oil prices would remain at historically high prices, a notion fueled by the Peak Oil theory, and a consensus among analysts that due to production bottlenecks, the situation would not change for the foreseeable future.
ENERGY: ANXIETY ON THE RISE
Big money players are starting to fret about the price of oil. The rumor mill in Davos, according to some sources in the trading pits and elsewhere is full of concern about what could happen to oil prices when the next geopolitical shoe drops.
Aside from a late arriving, but fierce winter, the energy markets face an increasing amount of geopolitical uncertainty. With the war in Iraq moving toward a crescendo, other global hot spots, especially Nigeria and Venezuela, offer investors both reasons to fret, and the opportunity to capitalize on any potential crises.
According to The Wall Street Journal, based on events at the World Economic Forum In Davos, Switzerland, the worry among the world's elite, politicians, and celebrities is that "the geopolitical and economic equilibrium that long enabled the oil industry to smoothly supply customers is a thing of the past."
Aside from wondering where the Journal and the big money crowd at Davos has been since 9/11, it is important to note that the situation has now reached the point where it might actually be starting to worry people who usually don't have to worry about a whole lot of anything.
The big money crowd is suddenly concerned that producers have the upper hand. Wow! Imagine that. Venezuela is nationalizing its oil industry, openly, while Russia has been doing it through a thinly disguised back door for several years, and has held Europe and its former republics hostage with natural gas pipeline closings for two Januaries in a row.
According to wire services and other sources, kidnappings in Nigeria are now a daily occurrence. And the U.S. is building an armada in the Mediterranean while increasing its naval presence in the Persian Gulf, as it puts pressure on Iran, in hopes of deterring Tehran's influence in Iraq.
Furthermore, the Journal, breathlessly reports: "Insurgents are sabotaging (Iraq's) vast petroleum industry and driving skilled technocrats into exile, threatening to cripple the industry for decades to come. Some experts worry that Iran and Saudi Arabia may be drawn into a proxy war in Iraq. That raises the specter of an energy-doomsday scenario: a conflict among the world's top three oil-reserve holders."
Indeed, Stratfor.com recently reported that the Saudis and the Iranians are holding talks, with some predicting that the Saudis are acting as intermediaries between Tehran and Washington.
Perhaps the best data from the Journal is its analysis and summary on the demand side of the global oil equation, as summarized in the chart titled Growing Thirsts.
The U.S. consumes 20 barrels of oil per day, much of it from 21 foreign sources, with nearly a third, some 7.6 million barrels coming from Canada, Mexico, Saudi Arabia, Venezuela, and Nigeria. At least five million barrels per day come from places that are currently either politically unstable, or are openly unfriendly to the U.S. Iraq, Venezuela, and Nigeria account for 3.1 million barrels per day. If you add Russia, the figure then climbs to 3.5 million barrels per day.
More important is the fact that if you project potential conflicts to include countries such as Chad, Colombia, Algeria, and Lybia, you could shave another 2 million barrels or so off of the daily total. If something was to happen in Mexico, the U.S. Would lose some 1.5 million barrels per day.
It doesn't take a genius to figure out that at any time, anywhere from 20 to 30% of the U.S. oil supply is in danger of some kind of geopolitical event, without including more mundane things, such as hurricanes, earthquakes, and mechanical events.
Finally, the Journal notes that developing countries are increasing their demand for oil, as developed countries are not decreasing their demand, setting up a situation where demand is on the rise, and supply is stalling by many accounts, due either to mechanical, political, or just plain old depletion.
Aside from a late arriving, but fierce winter, the energy markets face an increasing amount of geopolitical uncertainty. With the war in Iraq moving toward a crescendo, other global hot spots, especially Nigeria and Venezuela, offer investors both reasons to fret, and the opportunity to capitalize on any potential crises.
According to The Wall Street Journal, based on events at the World Economic Forum In Davos, Switzerland, the worry among the world's elite, politicians, and celebrities is that "the geopolitical and economic equilibrium that long enabled the oil industry to smoothly supply customers is a thing of the past."
Aside from wondering where the Journal and the big money crowd at Davos has been since 9/11, it is important to note that the situation has now reached the point where it might actually be starting to worry people who usually don't have to worry about a whole lot of anything.
The big money crowd is suddenly concerned that producers have the upper hand. Wow! Imagine that. Venezuela is nationalizing its oil industry, openly, while Russia has been doing it through a thinly disguised back door for several years, and has held Europe and its former republics hostage with natural gas pipeline closings for two Januaries in a row.
According to wire services and other sources, kidnappings in Nigeria are now a daily occurrence. And the U.S. is building an armada in the Mediterranean while increasing its naval presence in the Persian Gulf, as it puts pressure on Iran, in hopes of deterring Tehran's influence in Iraq.
Furthermore, the Journal, breathlessly reports: "Insurgents are sabotaging (Iraq's) vast petroleum industry and driving skilled technocrats into exile, threatening to cripple the industry for decades to come. Some experts worry that Iran and Saudi Arabia may be drawn into a proxy war in Iraq. That raises the specter of an energy-doomsday scenario: a conflict among the world's top three oil-reserve holders."
Indeed, Stratfor.com recently reported that the Saudis and the Iranians are holding talks, with some predicting that the Saudis are acting as intermediaries between Tehran and Washington.
Perhaps the best data from the Journal is its analysis and summary on the demand side of the global oil equation, as summarized in the chart titled Growing Thirsts.
The U.S. consumes 20 barrels of oil per day, much of it from 21 foreign sources, with nearly a third, some 7.6 million barrels coming from Canada, Mexico, Saudi Arabia, Venezuela, and Nigeria. At least five million barrels per day come from places that are currently either politically unstable, or are openly unfriendly to the U.S. Iraq, Venezuela, and Nigeria account for 3.1 million barrels per day. If you add Russia, the figure then climbs to 3.5 million barrels per day.
More important is the fact that if you project potential conflicts to include countries such as Chad, Colombia, Algeria, and Lybia, you could shave another 2 million barrels or so off of the daily total. If something was to happen in Mexico, the U.S. Would lose some 1.5 million barrels per day.
It doesn't take a genius to figure out that at any time, anywhere from 20 to 30% of the U.S. oil supply is in danger of some kind of geopolitical event, without including more mundane things, such as hurricanes, earthquakes, and mechanical events.
Finally, the Journal notes that developing countries are increasing their demand for oil, as developed countries are not decreasing their demand, setting up a situation where demand is on the rise, and supply is stalling by many accounts, due either to mechanical, political, or just plain old depletion.
IRAQ: HARDER TIMES AHEAD
The situation in Iraq may be reaching the point of no return, if credible reports from multiple sources are not refuted, or events reverse dramatically.
The Drudge Report, breathlessly, and in red ink blasted the following tease on Tuesday evening: "NBC NEWS confirms a secret U.S. military report that says 'Iranian Agents' may be behind a deadly ambush in Karbala, Iraq that left five American soldiers dead. The report also claims the Iranian revolutionary guard is providing intelligence on U.S. and Iraqi military to Shiite extremists, in addition to sophisticated weaponry. Developing... "
Yet, despite the sensationalism of the tease, it is just another sign that the situation in Iraq is headed toward a new level of engagement, that of a total loss of control.
What the confirmation from NBC News is, though, remains to be seen, as other sources have been hinting at all kinds of Iranian involvement in Iraq for a very long time, as well as providing clues as to what the future holds, even more trouble.
On Monday, January 29, 2007, in this space we reported: [Middle East Newsline, a rather accurate web based intelligence service "A report by the Jamestown Foundation said Iran has expanded its subversion efforts and intends to fragment Iraq. Authored by U.S. Army analyst Mounir Elkhamri, the report said Teheran plans to annex the Iraq's Shi'ite areas and oil fields." According to the Jamestown Foundation Report '"Iran has now moved covertly and overtly onto Iraq to subvert Iraqi institutions and eventually to assume total control," the report said. "Iran has now entered a wider and more dangerous game by subverting the Iraqi police and armed forces into a 'greater Shia' cause, which Iran hopes will lead to the fragmentation of Iraq and the incorporation of oil-rich Shia lands into Iran."']
And on January 30, ABC News.com reported that the U.S. now has proof that Iranian made improvised explosive devices (IEDs) are largely responsible for the deaths of many American sources.
According to ABC: "The most deadly improvised explosive devices being used against U.S. soldiers in Iraq continue to come from Iran, and Iran continues to provide more tactical training, according to explosive experts working with the U.S. military."
In "The Blotter," an investigative reporting blog, ABC added: "U.S. intelligence officials say Iran is using the bombs as a way to drive up U.S. casualties in Iraq without provoking a direct confrontation, but a looming question remains. According to CIA Director Hayden and others, most of the EFPs are provided to the Shia militias, while it is the Sunnis who are responsible for many more U.S. deaths. Officials are now asking, could Iran be arming both sides of the sectarian violence?"
The New York Times reported: "Investigators say they believe that attackers who used American-style uniforms and weapons to infiltrate a secure compound and kill five American soldiers in Karbala on Jan. 20 may have been trained and financed by Iranian agents, according to American and Iraqi officials knowledgeable about the inquiry."
According to Debka.com, "Iranian colonel Fars Hassami, No. 3 in the Revolutionary Guards al Quds Brigade’s hierarchy" has been captured, and is being held and interrogated by the U.S. in Iraq. The Colonel is one of the recently captured "officials" at 'Iranian “liaison center” in Irbil on Jan 11' of this year.
Debka offers significant detail into the situation noting that "The interrogation of Hassami and his four fellow detainees yielded some eye-openers, supplemented by sweeps of their offices and computers." Most significant, if the Debka report is correct, is the fac that "Col. Hassam was found to have been in charge of Iranian operations in northern and central Iraq - from Kurdish Irbil down to the northern outskirts of Baghdad – and all links with Iraq’s Shiite militias, including Moqtada Sadr’s Medhi Army, and Sunni insurgent groups. Hassam was the live wire behind Iran’s military, intelligence and logistic operations in the violence-stricken towns of the northern half of Iraq, Tal Afar, Mosul, Haditha, Kirkuk, Samarra, the Banji refinery town, Tikrit, Ramadi, Falluja and Baquba."
What is emerging, though, is a picture of a country that is falling into something beyond civil war, Disorder, in the sense of physics, as in the Disorder that results when the limits of Chaos are breached.
According to Stratfor.com, the recent battle in An Najaf, where over 200 "insurgents" were killed, and several hundred others were captured, was the result of a sectarian dispute over a religious holiday parade that several groups wanted to stage in the town.
Stratfor suggests that the official story of a "cult" that was planning to assassinate Shiite cleric, doesn't hold up.
According to Stratfor: "An Iraqi Shiite messianic group the government has labeled a cult, and which it says fought with U.S. and Iraqi troops over the weekend near An Najaf, Iraq, issued a statement saying it was not engaged in the battle that resulted in the deaths of 250 militants and the cult's leader. Cult spokesman Abdul Imam Jaabar said the cult is peaceful, denying that it has ties to the "Soldiers of Heaven," which the Iraqi government said plotted to kill senior Shiite clerics."
Stratfor fuels the fires of doubt further by adding: "Not only is this perhaps the most bizarre incident in almost four years of incessant violence that has ravaged the country, the government's version of what allegedly transpired raises more questions than provides answers."
This is what we find most troubling about this incident, and about the entire U.S. involvement in Iraq: "The report about a dispute over holding a procession suggests the group in question was engaged in a local power struggle. The Shiite establishment made up of the country's largest Shiite group, the Supreme Council of Islamic Revolution in Iraq, and Prime Minister Nouri al-Maliki's Dawa Party, faces opposition from several groups at the provincial and district level in the Shiite south -- such as from the al-Sadrite Bloc, al-Fadhila and other smaller factions. Regardless of its identity, the group in question likely wanted to use the occasion of Muharram to gain control over certain areas in the south. The government got wind of its plans and decided to pre-empt it. This would also explain the implausible official version, which was designed to justify the killing of fellow Shia during the holy month.
The Drudge Report, breathlessly, and in red ink blasted the following tease on Tuesday evening: "NBC NEWS confirms a secret U.S. military report that says 'Iranian Agents' may be behind a deadly ambush in Karbala, Iraq that left five American soldiers dead. The report also claims the Iranian revolutionary guard is providing intelligence on U.S. and Iraqi military to Shiite extremists, in addition to sophisticated weaponry. Developing... "
Yet, despite the sensationalism of the tease, it is just another sign that the situation in Iraq is headed toward a new level of engagement, that of a total loss of control.
What the confirmation from NBC News is, though, remains to be seen, as other sources have been hinting at all kinds of Iranian involvement in Iraq for a very long time, as well as providing clues as to what the future holds, even more trouble.
On Monday, January 29, 2007, in this space we reported: [Middle East Newsline, a rather accurate web based intelligence service "A report by the Jamestown Foundation said Iran has expanded its subversion efforts and intends to fragment Iraq. Authored by U.S. Army analyst Mounir Elkhamri, the report said Teheran plans to annex the Iraq's Shi'ite areas and oil fields." According to the Jamestown Foundation Report '"Iran has now moved covertly and overtly onto Iraq to subvert Iraqi institutions and eventually to assume total control," the report said. "Iran has now entered a wider and more dangerous game by subverting the Iraqi police and armed forces into a 'greater Shia' cause, which Iran hopes will lead to the fragmentation of Iraq and the incorporation of oil-rich Shia lands into Iran."']
And on January 30, ABC News.com reported that the U.S. now has proof that Iranian made improvised explosive devices (IEDs) are largely responsible for the deaths of many American sources.
According to ABC: "The most deadly improvised explosive devices being used against U.S. soldiers in Iraq continue to come from Iran, and Iran continues to provide more tactical training, according to explosive experts working with the U.S. military."
In "The Blotter," an investigative reporting blog, ABC added: "U.S. intelligence officials say Iran is using the bombs as a way to drive up U.S. casualties in Iraq without provoking a direct confrontation, but a looming question remains. According to CIA Director Hayden and others, most of the EFPs are provided to the Shia militias, while it is the Sunnis who are responsible for many more U.S. deaths. Officials are now asking, could Iran be arming both sides of the sectarian violence?"
The New York Times reported: "Investigators say they believe that attackers who used American-style uniforms and weapons to infiltrate a secure compound and kill five American soldiers in Karbala on Jan. 20 may have been trained and financed by Iranian agents, according to American and Iraqi officials knowledgeable about the inquiry."
According to Debka.com, "Iranian colonel Fars Hassami, No. 3 in the Revolutionary Guards al Quds Brigade’s hierarchy" has been captured, and is being held and interrogated by the U.S. in Iraq. The Colonel is one of the recently captured "officials" at 'Iranian “liaison center” in Irbil on Jan 11' of this year.
Debka offers significant detail into the situation noting that "The interrogation of Hassami and his four fellow detainees yielded some eye-openers, supplemented by sweeps of their offices and computers." Most significant, if the Debka report is correct, is the fac that "Col. Hassam was found to have been in charge of Iranian operations in northern and central Iraq - from Kurdish Irbil down to the northern outskirts of Baghdad – and all links with Iraq’s Shiite militias, including Moqtada Sadr’s Medhi Army, and Sunni insurgent groups. Hassam was the live wire behind Iran’s military, intelligence and logistic operations in the violence-stricken towns of the northern half of Iraq, Tal Afar, Mosul, Haditha, Kirkuk, Samarra, the Banji refinery town, Tikrit, Ramadi, Falluja and Baquba."
What is emerging, though, is a picture of a country that is falling into something beyond civil war, Disorder, in the sense of physics, as in the Disorder that results when the limits of Chaos are breached.
According to Stratfor.com, the recent battle in An Najaf, where over 200 "insurgents" were killed, and several hundred others were captured, was the result of a sectarian dispute over a religious holiday parade that several groups wanted to stage in the town.
Stratfor suggests that the official story of a "cult" that was planning to assassinate Shiite cleric, doesn't hold up.
According to Stratfor: "An Iraqi Shiite messianic group the government has labeled a cult, and which it says fought with U.S. and Iraqi troops over the weekend near An Najaf, Iraq, issued a statement saying it was not engaged in the battle that resulted in the deaths of 250 militants and the cult's leader. Cult spokesman Abdul Imam Jaabar said the cult is peaceful, denying that it has ties to the "Soldiers of Heaven," which the Iraqi government said plotted to kill senior Shiite clerics."
Stratfor fuels the fires of doubt further by adding: "Not only is this perhaps the most bizarre incident in almost four years of incessant violence that has ravaged the country, the government's version of what allegedly transpired raises more questions than provides answers."
This is what we find most troubling about this incident, and about the entire U.S. involvement in Iraq: "The report about a dispute over holding a procession suggests the group in question was engaged in a local power struggle. The Shiite establishment made up of the country's largest Shiite group, the Supreme Council of Islamic Revolution in Iraq, and Prime Minister Nouri al-Maliki's Dawa Party, faces opposition from several groups at the provincial and district level in the Shiite south -- such as from the al-Sadrite Bloc, al-Fadhila and other smaller factions. Regardless of its identity, the group in question likely wanted to use the occasion of Muharram to gain control over certain areas in the south. The government got wind of its plans and decided to pre-empt it. This would also explain the implausible official version, which was designed to justify the killing of fellow Shia during the holy month.
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