Monday, October 31, 2011

Today Was Ugly

The S&P 500 index futures started selling off around midnight (Denver time) and steadily went lower from then until the 2 p.m (Denver) close of the NYSE.  Both the SPX and the Dow closed on their lows of the day and the selling in the final 5 minutes of trading accelerated. 

On the surface the analysts and media will blame the action on deteriorating situation with regard to the "bailout" agreement rolled out on Friday.  I lifted my leg all over it on Friday and several high profile analysts released similar analysis over the weekend and this morning.  While there is no doubt reality set in with regard to the latest kick the can down the road plan out of Europe and the market retraced some of the gains it had made in anticipation of some kind of holy grail deal, I believe that an even darker reality connected to the truth about the state of condition of the U.S. financial and economic system is starting to infect the markets.

To begin with, the GDP report on Friday looked great on a headline basis.  "However," if you dissect the components, it looks like a one-time shot.  To begin with, that highly manipulated and unbelievable "GDP deflator," which translates nominal economic growth into real growth was reported to be 2% vs. 3.3% in Q2.  This number is so manipulated it's not even worth debating other than to know that the true rate of inflation is probably running at more like 10%.  That is where the John Williams Shadow Statistics inflation number comes in using the methodology used by the Government in 1990 to calculate inflation.   The big contributors to Q3 GDP were personal consumption expenditures and federal government spending.  I'm sure the PCE reflected a much higher rate of inflation (i.e. higher amount of money spent on food and energy) than is accounted for by the GDP deflator.  We also know that domestic auto manufacturers pulled forward auto sales to those who can still afford a new car by taking advantage of federally subsidized financing deals and dealer inventory stuffing (both as explained in a prior blog post).  Both of those are unsustainable.

Here's some reasons why this "bump" in Q3 GDP is unsustainable and will likely be followed up in the next few quarters with a negative GDP print (also, don't forget that Friday's GDP report will followed up by several revisions and I would bet the revisions will be downward).  Earlier last week some big industrial manufacturers reported better than expected earnings BUT also issued a gloomy outlook:  LINK  The Conference Board's consumer confidence index was released and showed the lowest level of confidence since March 2009:  LINK  Also, although it received no attention from the mainstream media, a non-profit research group released a study that shows that the aggregate debt level of the States is over $4 trillion:  LINK  Well, in the context of that number, does Greece's $400 billion debt really seem like the source of global financial demise?

Finally, the Treasury announced today that it was going to have borrow $20 billion more this quarter - for a total of $305 billion - than was originally estimated and $541 billion next quarter.  Combined and annualized, that imply about a $1.8 trillion spending deficit for fiscal 2012 (which ends in September for the U.S. Govt).  The primary reason is that tax revenues are coming in lower than forecast:  LINK  Looks like the budget deficit will come in higher than expected and the economy will be generating less growth than is being reported.  Do you still trust the GDP number the way the Government calculates it?  The market began to sell off even harder today about the time the Treasury borrowing report was released.

The bottom line is that, for sure, the European situation affected the markets today.  But the fact remains that if the degree of problems in Europe are X, the degree of problems in this country are at least 3X, because the problems plaguing the European economy and political system are the same problems destroying ours, only those problems here in the U.S. are several multiples worse.

Friday, October 28, 2011

Was A Wrecking Ball Just Taken To The EU Taxpayer Bailout Agreement?

Looks like the German high court has issued an injunction on the German Parlaiment's ability to deploy taxpayer money to fund the new EFSF funding agreement.  Sourced from zerohedge quoting Spiegel Online: 
Germany's Federal Constitutional Court on Friday expressed doubts about the legality of a new panel of lawmakers set up by the German parliament to reach quick decisions on the release of funds from the euro bailout mechanism, the European Financial Stability Facility (EFSF). The court issued a temporary injunction banning the nine-person committee in the Bundestag from taking any decisions on the deployment by EFSF of German taxpayer money.
Here's the direct LINK

As I commented yesterday, the "rescue agreement" has a lot of holes in it that can ultimately only be funded realistically by printing money and expropriating the Taxpayer wealth from countries that still have middle class wealth to steal and give to the banks under the guise of "saving" Greece.  It's good to see a supreme court that is still independent enough from the tentacles of banking wealth that will take a closer look at everything.  That would never happen in the United States these days...

But wait, there's more:  The Italian banks are looking a gift horse in the mouth and are lifting their leg on any new capital raising requirements.  This is absurd.  Italy, on the cusp of financial collapse, gets an offer of a free lunch from German taxpayers (and U.S. per the terms of the rescue deal via the IMF), and all they have to do is pay the tip.  Here's the article from the Financial Times LINK

This is crazier than last night's World Series game.  I wouldn't short this market, but I wouldn't bet that yesterday's EU deal gets implemented the way it was drawn up...but I would get ready for A LOT more money printing by buying as much gold as possible below $2,000/oz and as much silver as possible below $40.

This was the German public's response to the EU rescue agreement:

Thursday, October 27, 2011

The EU "Rescue" Plan: A Whole Lotta Nuthin

Long on political hot air and rhetorical concepts, short on details and achievability.  Eventually the EU will require a couple trillion more in money printing/currency devaluation and the EU banks will require a Taxpayer bailout.  That's the bottom line if you don't want to read the rest and I've linked the actual plan below.

The Euro Summit produced the outline of a Greece/bank "rescue" plan that really is a fantasy plan of action more suited for children playing “slay the evil beast” video games with their Wii. In effect it does nothing to reduce absolute debt levels, it does nothing to address the core economic and financial problems that created the EU insolvency in the first place and it offers no real concrete plan for raising the necessary capital to fund the "rescue" plan. In short, this plan of action is about as real as that of the 2008 bank bailout by the U.S. Government/Taxpayer, which has actually led to a much bigger version of the same problems left unattended in 2008. The bottom line is that the EU game plan - unless Sarkozy can bamboozle the Chinese into coughing up $100's of billions in support, will require more money printing and EU Taxpayer wealth transfer to the big banks.

As I dig into and digest the detail of this Greek/EU bank bailout outline, it becomes obvious that this plan is very long on form and very empty on real substance. In addition to the 2008 U.S. bank bailout, it is also analogous to the debt limit extension agreement by Congress and Obama, which outlined a game plan to reduce debt over the next decade starting a few years from now, but enables further current increases in debt accumulation and money printing.

Briefly, the plan calls for a "voluntary" 50% write-down of the Greek debt held by the banks. It is "voluntary" because if it were mandatorily enforced, it would trigger $100's of billion in Credit Default Swap OTC derivatives, which would potentially bring down the global banking system. The derivatives rule enforcement agency - ISDA - has ruled that a default event will not occur as long as the writedowns are "voluntary." In order to pave the way for this capital hit the banks will take, the plan calls for the banks to raise in the range of $150 billion in fresh capital. I'm not sure where they think this money come from but I'm guessing that's why Sarkozy is headed to China to get on his knees and beg for help. On the assumption that the banks won't be able to raise this money, we should fully assume that the money will have to be printed up by the ECB and guaranteed by the EU Member State Taxpayers.

In addition to the bank requirements, the EU Members will contribute 30 billion euros (approx $42 billion) in new debt issued to Greece. The Member countries are not writing down their existing Greek debt holdings and the plan assumes that the countries that have bought Greek debt will be paid off in full. Hmmm - that's just plain funny. The non-writedown by the Sovereigns is nothing more than a charade to make the taxpaying citizens believe they won't be paying for this. But in the end it just gives “the can” another kick down the road to money printing and wealth transfers. The plan also includes a $140 billion financing program for Greece to be partly funded by the IMF - that is, on a pro rata basis by Taxpayers in every country which are IMF members, which means primarily pro rata by U.S. Taxpayers.

Furthermore, the plan calls for the European Financial Stabilization Fund (EFSF) to be increased from its current $440 billion to roughly $1.4 trillion. This will be funded by the issuance of new EFSF bonds, which would be guaranteed by the EU. I guess the two biggest questions would be: First and foremost, who the hell would buy those bonds? Second, just how good is the guarantee? Without expounding on the obvious answers to those questions for the sake of brevity, the bottom line is that this mythic $1.4 trillion will, at the end of the day, ultimately have be fulfilled by more money printing by the ECB.

How will the EU pay for this? To begin with, the plan is based on the assumption that EU countries will be able to generate a considerable amount of economic growth and employment. Not sure how that will be accomplished, given that the entire globe is either slowing down or slipping into recession for the foreseeable future. The plan also requires a high degree of fiscal reforms, which so far to date appear to be next to impossible to achieve, notwithstanding Italy's bold move to raise the mandatory retirement age from 65 to 67 by 2026. In other words, beyond the flawed debt relief agreement, the real way to solve the problem of too much debt is to let economic activity produce the wealth required to pay off the debt incurred or force the parties responsible for creating the debt to take a big financial loss for making bad investment decisions. The EU plan offers neither, and realistically it will be fatal to assume that economic growth will generate the wealth required to discharge the catastrophic amount of debt that has been issued over the last 20 years by all Governments globally.

You can read the details of the plan here:  LINK

If you don't want to sift through that 15-page document, suffice it to say that it contains a lot empty rhetoric and absurd statements about austerity goals being established. I think the world has a better chance of seeing aliens from Mars than any of those goals actually occurring. For instance, the goal was set for Greece to reduce its debt to GDP ratio to 120% by 2020. This is a joke. Historically, whenever a country's debt to GDP exceeded 100% for any length of time, the country collapses. And Greece can't even pass measures to reduce its spending for a day right now. Short of more massive printing by the ECB, Greece will ultimately collapse. (By the way, the U.S. Treasury debt is on the cusp of exceeding 100% of GDP)

I could go on for a lot longer about how ridiculous - yet tragic - this latest Government financial chicanery has become. Suffice it to say that ultimately the ECB will be required to print a few trillion more euros and the European Taxpayers will be handed the final tab. I can guarantee you that the banks in some way will eventually be bailed out by the printing and the middle class.

As you can see, the stock markets love this plan. Gold and silver are up big as well, but for different reasons. When the lipstick wears off this pig, the markets will begin discounting the realities as outlined above and will make another upside down U-turn and head a lot lower. I fully expect when this occurs, most of the paper money that floods out of the global stock markets will, instead of flooding into near zero percent U.S. Treasuries, will flood into physical gold and silver and drive the price of each to much higher levels from here. And if gold and silver go up by X, the mining stocks will go up by 3X.
A year from now those who added to their gold/silver/mining stock positions will gratefully look back at the opportunity that has been presented by this latest price correction.  Those who have not bought any gold or silver up that point will either jump in and chase it higher or dig their head further into the sand and pretend to not see their collapsing wealth or the growing financial disaster surrounding them.

Wednesday, October 26, 2011

Obama Was In Denver Today - "Four More Years!"

He was prostituting himself to the college student constituency for votes, as they were a large part of his voting base in 2008.  I happened to see this new campaign poster plastered around town:

He's hasn't followed thru on any of his campaign promises yet, but now he's telling his Denver student audience that he's adding student loan relief and mortgage relief for all who need it to his list of promises.

I can honestly say that, given the pathetic front-runners offered by the Republicans, Obama won't need to campaign or promise anything in order to get re-elected. 

We just get four more years of the same policies started by Bush and expanded by Obama.

Tuesday, October 25, 2011

Housing Continues Its Death Spiral

Oct 20 (Reuters) - The Russian central bank will continue raising the share of gold in its gold and foreign exchange reserves, the central bank First Deputy Chairman Alexei Ulyukayev said on Thursday.  "We are not planning to step away from this path. We are acquiring huge volumes (of gold)," Ulyukayev told the parliament.
The Case-Shiller 20 city housing index for August was released this morning, showing a greater than expected 3.8% year over year decline.  Here's an article LINK  That kind of speaks for itself and I don't have a lot to say about it other than housing is still a long way away from finding some sort of "bottom" level.  Obviously the housing market ballooned up on the hot air of massive debt financing.  As the debt defaults continue to pile up, the value of the housing stock continues to implode.  The Case-Shiller chart below shows graphically the degree to which housing values will likely fall:

(click on chart to enlarge)

This chart is a few months old.  The latest index value was a little above 140.  The average long term index value is 100.  This index value is based on over 100 years of inflation-adjusted housing data.  Unfortunately, just like bubble markets significantly overshoot their "intrinsic" value to the upside, when markets go through a "regression to the mean" correction they often overshoot once again to the downside.  If you are a homeowner, you should hope that the mean index value of 100 is the bottom.  Of course, as we know, "hope" is not a valid investment strategy. 

I just heard another tragic short sale story.  A friend of mine lives in an area of Denver that traditionally was very upper middle class, with the average home trading for north $1.5 million during the bubble.  One of his neighbors had a huge house listed for $1.2 million.  It went into a short-sale contract with $1.7 million of mortgage debt.  Based on comps, we believe the contract price is around $800k.  The bank will now have to mark to market the mortgage and eat around $900k.  The house next to this one is in foreclosure.  Apparently several homes in this neighborhood are in various stages of default/foreclosure/short sale.  This isn't a newer "faux mansion" development - this is an older money area that had been considered  financially stable.

This situation is not unique to just this neighborhood, just Denver, just Colorado.  Most of the volume in foreclosures has occurred in the middle/lower end of the housing market.  Now the banks are going to have to start working on the higher end.  I know of at least 2 different people living in what were originally $1 million-plus homes who have not payed their mortgage for over a year and have not even been contacted by the bank about being in default.  When you hear about this, it means the bank is still carrying the mortgage at full value.  I have argued many times that the true, mark-to-market financial condition of U.S. banks is substantially worse than is being reported using GAAP financials and the numbers being pimped by Wall Street.

The moral of this is that our system - with or without the impending damage about to be inflicted on the global system by Europe - is headed toward a financial nuclear explosion that will make the Bear/Lehman/AIG explosion look like a hand grenade going off.  The next time you drive by a big home with expensive cars piled up in the driveway and you wonder how they are doing "it," the truth is they likely are not and are living on borrowed time.  And speaking of "overshooting" intrinsic value.  Anyone care to hazard a guess at the price at which gold will be considered to have "overshot" its intrinsic value?  I'm on record saying I can easily see $10,000 in intrinsic value for gold (that's for public consumption, I believe the price will be a lot higher).   Based on that chart above, gold's "overshoot" price would be $20,000/oz...

Monday, October 24, 2011

How Many Of You Have Money With Janus Funds?

NFLX update:   The stock is down $42 to $76 - almost cut in half overnight and down 75% from the 52-wk high.  Morgan Stanley, Vanguard, Janus, American Century.  Those are the Einsteins that own a big piece of NFLX.  The managers of these funds will get paid a lot money regardless of what happens to your wealth...

In yet ANOTHER of a long list of investments by Janus that turned into big blow-ups, Janus is the 4th largest holder of Netlix:  LINK  After hitting a high of $304 earlier this year, Netflix is down another $31 in after-hour trading today to $93, after providing disappointing revenue guidance.  That's 70% decline in value.  I think Janus has stepped on more stock landmines than any other large mutual manager.  You lay down with dogs, you wake up with fleas...

It Gets More Unbelievable Everyday

Obama is going to make a direct attempt to transfer more of this country's dwindling wealth from those who can still pay their bills to those who can't.  It looks like he's going to be able to implement an initiative to use taxpayer money to help very underwater homeowners refinance their mortgages without any Congressional authorization.  You know, it gets to a point at which you have to pull the plug on bad investments destined to get worse. Housing is one of those "investments."  I'm still trying to figure out why the originators of those mortgages, a lot of them private banks, are not going to be required to eat the loss.  If any of us make a bad investment we eat the whole loss.  How come banks get bailed out by "us?"

He is also going to roll out some kind of plan to bail out student loan borrowers.  You know, a lot of these student loans were granted to people enrolled at piece of shit for-profit colleges owned by corporate parents like Apollo Group (University of Phoenix) and Corinthian Colleges (DeVries).  For sure, there's some legitimacy to the education provided at these schools, but they are first and foremost set up to be giant student loan processing factories.   Now Obama is going to bail these guys out too.  The owners of these businesses generate a high level of revenues from student loans, take none of the risk associated with them and get all of the upside benefit.  Sounds a lot like the banking model, huh?   If you don't believe me, consider that Goldman Sachs has a very big ownership position in this industry.  It's some good mixed in with a lot of fraud and the Taxpayer gets the bad debt's the story LINK

Anyone who owns muni bonds is taking a lot risk that is not reflected in the rates being paid, even after the tax benefit effect.  Harrisburg, PA has filed bankruptcy, it looks like Stockton, CA is next and probably some cities in Rhode Island:   LINK  These are the "Greeces" of the United States - the relatively small problems which are getting all the focus despite the glaring fact that big States like California, Illinois and New York are hopelessly insolvent.  At some point there will be an avalanche of municipal defaults and muni investors will get annihilated.  The next time your genius financial advisor calls to pitch you on some "cheap" munis, you are an idiot if you don't hang up the phone and change advisers...

And now what, now that we know that it's not a question of whether or not the EU and our Fed will fire the printing press back up, but to what degree?  I truly believe that the current spike in the stock market is a combination of a massive short-squeeze/cover rally (NYSE short interest hit a record a couple weeks ago, leaving it ripe for a short-squeeze rally) combined with knee-jerk anticipation of the next big money printing initiative (i.e. massive currency deval).  We've seen glimpses of the size and format of the EU money printing program and the details of what the Fed has planned conceptually are starting to leak out.  It is my view that the market is already pricing in this "event" with this straight-up move in the market and we'll get a "buy the rumor, sell the fact" type of dynamic.  When the dust settles everyone will look around and see that the latest slug of printed money didn't solve any problems but left the paper fiat currencies further devalued. 

This currency devaluation, while not overt like the one implemented by the Swiss National Bank a couple of months ago, will manifest itself in the form of much higher prices for gold and silver.  This would explain why the big bank manipulators have been covering their paper short positions on the Comex - especially  in silver.  The best signal yet that the market has given us that this correction has run its course and a big, move higher will soon begin is that the large, speculative hedge funds have been selling down their long positions and adding to their short positions, taking the other side of the commercial manipulators. In 10 years of studying and trading the metals market, every time the hedge funds have taken the other side of the banks like this a massive move higher has soon followed.  Remember, in 2008 silver went from $21 down to $8.  But if you happened to buy in at $21 and held thru today, you are up 66% on your investment.  Got anything else that has given you that kind of investment performance?   The next move up should be even more eye-popping - how come your investment advisor wants to sell you munis and treasury bonds instead of gold and silver?

Friday, October 21, 2011

The New CFTC Position Limits

After taking a few days to read up on the new CFTC position limits, I wanted to post my thoughts.  I am specifically expressing my views with regard to how the new rules will affect Comex gold and silver futures. Unfortunately, while the new rules may make it more difficult for the big banks who manipulate gold and silver futures trading - primarily JP Morgan, HSBC, Goldman Sach and a few others - for a short period of time, I believe that there are enough loopholes and gray areas of definition in the language of the rules that will enable the big bank manipulators to continue manipulating unimpeded.  That said, I also believe that, as is always the case over 5,000 years of history, the natural forces of the market - Adam Smith's "invisible hand," if you will - will ultimately overwhelm any and all manipulation.  Gold and silver will eventually find their "natural" level of trading and it will be many multiples higher price than where they trade now.

Without reinventing wheel, I've consolidated two posts from which summarize the new rules into the pdf below.  I've slightly edited the original content and I've placed the key points in bold.  I just want to say that the new rules leave A LOT of room for loophole behavior and "exemptions."  I believe that those who are optimistic that this will sharply curtail JP Morgan's illegal manipulation of the silver market are placing entirely too much faith in our Government and in those who are in charge of enforcing the rules and laws already in place. 

Einstein defined "insanity" as doing the same thing over and over and expecting a different result.  To believe that the CFTC will do the right thing with regard to defining "swaps," and "position limits" and in granting "exemptions" is to once again repeat the mistake of placing faith in our Government - and is therefore insane.

Here's Silverdoctors' excellent synthesis of the "fine print" on the new rules:

(click on the "Full Screen" tab to see big beautiful print)

PositionLimits -

Even if Bart Chilton has the right intentions,  I refuse to believe that one man will be able prevent the banks from exploiting the areas of the rule that are open to interpretation and subject to the judgement of those in charge of enforcing the rules.  That notwithstanding. I fully expect the big banks to spend a lot of money challenging these rules in court.  That notwithstanding, just like every other instance in the financial markets legislative history of this country, I fully expect that the big banks will figure out several ways to get around these rules.  After all, I worked for a bank that had figured out a way to get around Glass-Steagall and had already been operating a securities underwriting and trading unit many years before G-S was repealed.  The ability to do so was part of an "exemption."

As I mentioned earlier, ultimately the market will determine the price at which gold and silver should trade.  The ticking time bomb for the paper market manipulators is the accelerating accumulation of, and demand for, the actual physical delivery of gold and silver.  Venezuela is just the latest example of a large gold owner who has decided to stop placing faith in the London and U.S. depositories and is repatriating its gold by moving it back to Venezuela.  As this trend accelerates, the paper manipulators will be squeezed out of business.  And yes we will eventually see massive defaults by entities like the Comex and GLD.

Of course, by that point in time there will likely be much bigger problems to deal with than the collapse of the Comex derivatives markets...

Have great weekend and don't forget:  IT'S TEBOW TIME IN DENVER!!!!

Wednesday, October 19, 2011

THIS Is Why We Own Gold - 10,000 Reasons

The big question we always get about gold is, "how do you know when the bull market will be complete?" I have always said that will occur when a big country/entity rolls out a new gold-backed currency and concomitantly revalues the price of gold substantially higher such that it provides a credible backing for this currency.  To me, China - or a China-led consortium - is the likely economic power to do this because it is large enough in terms of imports/exports to demand that all trade that occurs with it - and/or the consortium - has to be conducted in this new currency.  In this manner, the new global reserve currency - gold-backed - will be born.

With this idea in mind, Paul Brodsky has expressed what I consider to be the best analysis for gold that I have come across that also includes this idea of new gold-backed reserve currency.  This is a must-read and you can read that  HERE   Mr. Brodsky recently did an interview in which he laid the case for $10,000.  Here's the LINK  And finally, today the invaluable King World News published some more commentary from Brodsky in which he lays out the math for why $10,000 is his number: 
We figured you should take the monetary base and divide it by official gold holdings.  That would give you the price in terms of monetary inflation that it would be worth today.  Coincidentally, after we came up with that theory we went back and looked at what they used to use, the formula for arriving at the Bretton Woods dollar exchange value with gold at $35 and it was the same formula.  So if you were to divide base money by official gold holdings today, after QE2, you would come up with a price just north of $10,000 an ounce.
Here's the LINK

Now, there will always be hair-splitting debate over what variable to use in calculating where the reval of gold - and corresponding deval of fiat money - will take place.  My publicly-expressed view is $10,000 but I can also make the case for a much higher number.  To be sure, as this ultimate "reval event" draws closer, I fully expect that gold will easily go a lot higher than $10,000.  But 10,000 is a very safe bet.

In the meantime, I thought I would treat everyone who has not seen it yet to the gold investor's version of pornography, presented by my friend and colleague "Jesse" of Jesse's Cafe Americain:

In the meantime, until the reval/deval event occurs, I have to say that the precious metals sector still represents the best value and the best investment opportunity I have seen in over 30 years of investing, studying and speculating in the financial markets.  You can take that one to the bank - just don't use Bank of America.

Tuesday, October 18, 2011

Bank of America Takes Sleaze To A New Level

If you keep your money at Bank of America, you are an idiot.  BAC quietly moved $53 trillion in derivatives from its holding company to its subsidiary that holds $1 trillion in customer deposits and is insured by the FDIC.  If any part of these derivatives blow up, the Taxpayer will then be on hook for the $1 trillion in deposits. 

I said 8 years ago that we would eventually see things go on in this country that blow your mind.  This is one of them. Although this kind of move is permitted to a very limited degree by the Federal Reserve Act, there is no way in hell that the loophole was intended to permit $53 trillion of shit to affect FDIC-insured deposits.   Of course, the watchdogs who are supposed to prevent this kind of abuse are the same people who benefit from allowing it to occur.

That the BAC upper managment would be so completely devoid of ethics and do something like this is a tragedy.  That Bernanke, Geithner and Obama would allow BAC to do this is a testament to the fact that our system is collapsing.

You can read the details HERE

Bank of America Takes Accounting Fraud A Step Further

Bank of America's earnings report is more confusing than a Jackson Pollack painting.  It certainly shows the chaos and subjectiveness reflected by Pollack's most famous works.
                                                                  - Dave in Denver

Bank of America reported net income of $6.2 billion this morning.  As explained in my posts on JPM and Citigroup, the banks are using non-cash, non-economic accounting loopholes that allow them to basically create paper income in order to dress up their earnings reports and make them look good to the majority of investors and analysts who only look at headlines and/or only analyze the useless GAAP income, balance sheet and cash flow statements. 

In brief, here's what BAC did: of the $6.2 billion in net income, $4.5 billion was derived from their "fair value adjustment of structured liabilities" and $1.7 billion from the good old debt valuation adjustment.  The "fair value adjustment" is the revaluation of those nefarious Level 3 assets and liabilities that we really have no way of determining what they are worth because there are not really any observable markets in them.  They are the toxic crap that sunk AIG.  Here's the description from a recent BAC 10K:
Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and are significant to the overall fair value measurement are classified as Level 3 under the fair value hierarchy established in SFAS 157. The Level 3 financial assets and liabilities include private equity investments, consumer MSRs, ABS, highly structured, complex or long-dated derivative contracts and certain CDOs, for which there is not an active market for identical assets from which to determine fair value or where sufficient, current market information about similar assets to use as observable, corroborated data for all significant inputs into a valuation model is not available. In these cases, the fair values of these Level 3 financial assets and liabilities are determined using pricing models, discounted cash flow methodologies, a net asset value approach for certain structured securities, or similar techniques, for which the determination of fair value requires significant management judgment or estimation.
So this "fair value" technique of "guessing" provided 72% of BAC's reported net income.   The DVA of course is the income BAC is permitted to record when BAC's ability to repay its debt obligations declines. Both of those accounting tricks combined created BAC's $6.2 in reported net income. So BAC's entire reported income was the product of bullshit accounting maneuvers.  Bonus compensation will be paid to upper management based on bullshit.

The bottom line is that using my "however" adjustments, Bank of America had zero net income.  BAC also included a $3.6 billion one-time gain from the sale of China Construction Bank stock, which was used to more than offset a "mark to market" loss on its private equity portfolio.  Again, the loss on the latter is completely arbitrary and subjective.  If we net out the one-time gain and the private equity write-down, Bank of America actually would have reported a loss.  In other words, netting out all the one-time arbitrary and capricious accounting gimmicks, Bank of America's core operations LOST money.

These accounting rules that enable the banks to report a bunch of fantasy income were put in place after 2008 with the intent to protect these too big to fail banks from the ravages of the marketplace.  The people creating and enforcing these rules are the same people who have, do or will benefit from them.  The people who pay for the damage these rules hide are the Taxpayers.  It's getting really corrupt out there...

Monday, October 17, 2011

Citigroup 3rd Quarter Results Do Not Disappoint

my expectations that it would be at least as fraudulent as was JP Morgan's.  Caution:  investing based on bank earnings headlines can be hazardous to your wealth.

True to his corrupt character, Citigroup CEO Vik Pandit ushered in Citi's headline-reported bullshit by exclaiming that "Citi continues to navigate a challenging economic environment and delivered another quarter of solid operating results." 

Citi reported Q3 net income of $3.8 billion and revenues of $20.8 billion, both on a "headline" basis above Q3 2010 and 3 cents above Wall Street estimates.  Now for my "however" reality analysis.  Citigroup included $1.9 billion in its revenues by pretending to go out and buy back its debt at a discount (CVA) and it reduced its loan loss reserve by $1.4 billion.  By pretending to buy back its debt, Citi boosted its reported net income by 39 cents per share.  While it's not being discussed, probably because Citi didn't show the math in its earnings report like it did the debt buy back fiction, the loan loss credit is a direct add-in to net income, and thus contributed about 47 cents to its bottom line.  Both the CVA and loan loss fraud boosted Citi's reported, headline net income per share by 76 cents.    Both of these revenue/income add-backs are non-cash and did nothing to generate any kind of real cash flow or economic benefit for the company.  They are pure, 100% unadulterated earnings "management" - i.e. fraud - maneuvers.

So the TRUTH of the matter is that a better GAAP estimate of Citi's earnings per share would be 37 cents per share, instead of the $1.23 per share headline report.  A huge miss vs. Wall Street expectations.  If you look at just the "organic" business numbers, Citi's revenues declined vs. the same quarter in 2010.  It's business and net income are getting smaller.  Shining a spotlight on the truth therefore makes CEO Vik Pandit a liar, because the true business results are anything but "solid."  Here's the 8-K filed with the SEC, for anyone who wants to ruin their evening by looking through it:  LINK

Remember, Citigroup is still partially owned by the Treasury/Taxpayer, so when Citi pays that scumbag a big bonus this year, it will be your tax dollars he receives, not any kind of "economic rent" - i.e. real cash flow - generated by Citi's business model. 

Speaking of Taxpayer-owned "special needs" corporations, I see AIG is once again hosting lavish sales parties at expensive resorts.  You can read about it HERE  That's just more of your tax dollars going down the crapper in the form of expensive wine, food and - most likely at night - Charlie Sheen-style hookers. 

One more point on the Citi financials.  I don't have time to really go through the recent 8-K and latest 10-K and show where Citi is really committing fraud. But I can guarantee that on a true "cash basis" and "market value" basis, Citi is insolvent.

Sunday, October 16, 2011

OccupyDenver - Saturday 10/15/2011

Went down the check out the OccupyDenver  scene across from the State Capitol building after seeing a couple of riot squad SUV's loaded with riot cops drive by.  The crowd was larger than I had expected - about 1000 while we were there in the mid-afternoon and it expanded to an estimated 3,000 at night. The crowd was very peaceful and non-confrontational.

From what I saw, the cops - who were almost as many number as protesters during the day - were on edge and heavily harmed with billy clubs, guns and pepper spray, which was used to disperse the crowd at night and many people were arrested.  Here's some of the pics we took:

I expect that this "Occupy" movement will continue to grow in number and expand into a lot more cities.  Until Obama starts to deliver on the promises which got him elected, such as cleaning up DC and Wall Street and dismantling the totalitarian legislation implemented by the Bush neo-con Government, I expect that this movement will become restless and violent. 

I had to laugh because Ann Coulter was on Fox News telling the viewers that Bush allowed Lehman to fail and that Obama was responsible for bailing out Goldman and AIG.  I would like to correct that statement on behalf of the mildly retarded Coulter, because it was actually Henry Paulson, former Goldman CEO, who planned out - in conjunction with Tim Geithner - who was head of the NY Fed at the time - the game plan to let Lehman collapse and then devised the plan to bailout Goldman Sach and the other big banks who were catastrophically exposed to AIG - along with the scheme to have the Government takeover AIG.  All this was set-up before Obama took office, although recall that Obama and McCain suspended their campaigns to help devise this plan.  Geithner - despite being a confirmed tax cheater/dodger - was inserted into the Treasury Secretary position in order to oversee the implementation of the plan devised under Bush.

Obama - in a gesture of complete hypocrisy - claims to embrace the Occupy Wall Street agenda.  If that were even remotely true, Obama would immediately stop taking campaign money from Wall Street firms - which are Obama's largest contributors - and give back any money not spent that has already been accepted.

Unfortunately, as I explained to my companion, we will not see any change until the majority of the citizens of this country engage in some kind of revolt/revolution, as this has been what it has taken all throughout history to effect the kind of change that is now required to change our system.

Friday, October 14, 2011

Don't Believe The Hype

The monthly retail sales report was released to great media hype, as the "preliminary estimated" retail sales number for September was calculated to be up 1.1% from August and exceeded the Wall Street Einstein consensus estimate. 

HOWEVER, and remember, with me "however" always surfaces when I pull up the actual data and take a closer look at it than does that babbling bald moron on CNBC.  Here's the report if you would like to peruse the numbers yourself:  LINK  Now for "however:"  First, please note that the reported headline number is a "seasonally" adjusted estimate using some fancy computer model, per the footnote to the report.  I would love to see how the model calculates these "adjustments" so we can see if they are even reasonable.  But this is a big problem with all Government economic reports.   

Let's look at a few of the notable data points that the brainless wonders on television are self-flagellating over.  Everyone is gushing about retail and auto sales.  But if you look at the second table on the above link, you'll note that by far the largest jump in sales came from the gas pump.  Has anyone noticed that despite a big drop in the price of oil, the price of gasoline seems to keep crawling higher?  I would suggest that a large component of retail sales for September came primarily from gasoline sales.  Is that good for the economy?  To be sure, it looks like auto sales jumped a bit, and that was confirmed by the recent monthly auto sales report for September which was released at the beginning of October.

"However,"  it appears to me that the increase in auto sales, especially at GM and Chrysler, are being fueled by the big increase in subprime auto loans:  LINK  Wait a minute - didn't we get into the trouble that hit in 2008 because of subprime lending?  We know that GMAC, the finance arm of GM, went bust and was taken over by the Obama Government.  It was recently reincarnated with Taxpayer money (now called "Ally") and once again jumped heavily into subprime auto lending - this time backed by YOUR money.  This is exactly why auto sales at GM and Chrysler appear to be strong.  I might also note that, per the good due diligence of, most of these auto sales end up in being shelved at dealers.  Please note that an auto manufacturer books a sale once the car is loaded on a train/truck and leaves the factory lot.  The dealer then pays for its purchase using "warehouse or floor" financing provided by...GMAC (You).  This is not an attribute of real, organic economic growth.

Now for the final fork-insertion into the hyped retail sales report, which we now know is likely overstated by "seasonal adjustments" and inflation and is skewed toward gasoline sales.  Shortly after the retail sales report, the Michigan Consumer Confidence Index was released and was substantially lower than the Einstein consensus estimate.  In fact:   "Confidence among U.S. consumers unexpectedly dropped in October as Americans’ outlooks for the economy and their finances slumped to the lowest level since 1980."  LINK 

Hmmm, that's not good.  The only remark I have to say about this is that this report further reinforces my view that the Government is overstating its retail sales estimates.  After all, does it seem likely that people are out spending an increasing amount of money that they don't have if their attitude and outlook on the economy is the lowest that it's been since 1980?  The golden truth of the matter is that the Government is stuffing GM and Chrysler auto dealers with inventory using Taxpayer money to finance the stuffing (the Government subsidizes leases and backstops Ally's subprime loans), making auto sales look better than they really are.  Moreover, it looks like most of the increase in retail sales, ex-autos, came from gasoline sales.

So for any of you who poisoned your mind by reading the calculated risk blog or watched CNBC/Bloomberg, please re-read the facts as I just presented them.  Then "here's what I wantcha all to do for me:"   celebrate the truth and Don't Believe The Hype:

Thursday, October 13, 2011

Legalized Fraud

And if all others accepted the lie which the Party imposed – if all records told the same tale – then the lie passed into history and became truth  ("1984," George Orwell)
JPM reported $1.02 of earnings per share, ahead of the Wall Street Einstein consensus expectation of 92 cents.  HOWEVER, 29 cents - or 28% - of the reported number included a non-cash accounting gain which resulted from JPM exploiting a very controversial accounting rule that lets a bank essentially create income when the market value of its outstanding debt goes down in value.  Without this fictitious income, JPM would have reported 79 cents, well short of expectations.  Please read that again if you don't believe that you really read what I just wrote.  The truth is that if pour through JPM's earnings results with a critical eye, you'll see that underneath this accounting fiction that JPM's underlying business fundamentals are deteriorating.

How can serious investors trust ANY kind of earnings report that is put out by ANY financial institution?  What's appalling is the way the financial media looks at the headline numbers reported by JPM and lauds it for "beating" earnings and revenue expectations and remarks at what a great job JPM is doing.  And then casual investors turn on Bloomberg TV and see the accolades being tossed out or open the newspaper tomorrow and read how JPM's earnings report exceeded expectations, leaving said investor/observer with the impression that things are improving in our system.

The fact of the matter is that JPM's accounting presentation is legalized fraud.  The reporting of it by the financial media - which is financially supported by the advertising and promotional revenues paid by banks like JPM - is outright Orwellian.  Our entire economic and political system is on the very frightening slippery-slope toward the dystopic vision presented by writers like Orwell, Rand and Huxley.

Let's review how this legally fraudulent accounting gimmick works.  To be honest, I'm not even sure how the Financial Accounting Standards Board (FASB) OR the SEC ever allowed this idea to be made into a rule. It's literally legalized fraud. Although it's available to use for any company/entity, it was designed to apply specifically to Wall Street banks - any entity "with available-for-sale and trading securities" (the quote is from "Summary of Statement 159," FASB). In other words, this rule was designed to permit banks to further manipulate their accounting income (i.e. non-economic, cash-based earnings).

Here's how it works:  if the market value of a company's debt obligations (bank debt, bonds, etc) goes down in value, the company is permitted to recognize "accounting" income measured by the amount that the holding value (book value) of the debt obligation declines.  In other words, the company can create income based on the amount the book value of their debt declines, even though this decline typically reflects a higher degree of risk and financial instability.  The "income" is created by assuming that the company could go out into the market place to purchase and retire this debt at a big discount to what would be owed on the debt (the par or principal amount) at maturity.  You may need to think about this for a minute to really understand how the rule works, so that you can understand how pathetically flawed the logic is behind the rule.

Here's the coup de grace of this rule's absurdity, straight from FASB: "The fair value option is applied only to entire instruments and not to portions of instruments." In other words, in order for a company to book this accounting gain, it must take the full amount of market value decline on the entire debt issue - for each debt issue being used for this purpose -  under the completely mythical assumption that it could theoretically go out to the market buyback the entire amout of each debt issue at market value, thereby creating savings by retiring this debt at a discount rather than paying it off as it matures. Sound like anything that is anywhere even remotely close to being realistic, especially for companies with 100's of billions in debt outstanding?  The fact is, that when the market value of a company's debt obligations declines like this, it becomes even less likely that the company has the ability to go out and spend any cash to repurchase its debt.  This happens in reality very rarely.

I really can't believe that anyone, especially JPM CEO Jamie Dimon, can take JPM's earings with this accounting bullshit layered in and present them with a straight face. Seriously. The fact that reporters in the financial media are doing celebratory back-flips over this earnings report is a testament to the degree of absurdity and lack of accountability that has enveloped our system.  That Dimon can present this garbage is an egregious insult to anyone who understands accounting and finance.  It truly is Orwellian.

The golden truth is that most Wall Street analysts, if they even understand anything beyond simple GAAP accounting, will gloss over this earnings abortion and move on by explaining that JPM's balance sheet is stronger than is required by the regulators.  Dimon refers to this as JPM's "fortress" balance sheet.  Without having the time to delve into the research and calculations required, I would bet my entire net worth that if I went line by line through JPM's asset base and applied true market value standards to its assets, that its book capital would fall well below regulatory requirements.  In fact, that's the reality for every Too Big To Fail bank.

Given that we've witnessed the big banks create massive paper earnings first using "mark to market" fair value accounting on their assets, creating gains for income reporting purposes and fictitiously marking up crap assets for regulatory purposes, and then use the "reserve release" gimmick to generate fictitious earnings last quarter, and now this "debt valuation adjustment" fraud to generate paper earnings this quarter, I can't wait to see what accounting fiction they roll out for the 4th quarter. 

Rest assured that this is entirely fiction and fraud made possible by a system entirely based on paper currency and phony "accrual" accounting rules that have value based on what the Government decides to tell us its worth.  So yes, JPM is only playing by the "rules."  But it's also fair to say the big banks like JPM paid the politicians handsomely to have those rules put in place.  We'll know we've truly transformed into Orwell's vision when the banks announce that the losses they are reporting are really gains.  Oh wait, that's what DVA accounting gold?

Wednesday, October 12, 2011

So Far "Operation Twist" Is A Colossal Failure

...except for the Treasury - and for investors clamoring for the short term "safe" paper that the Fed is selling and while the primary dealers (Wall St. banks)  sell back to the Fed the medium/long term paper that primary dealers have to eat in Treasury auctions in order for the Treasury to look like it is having no problem funding the Government's deficits.

Take today, for instance, the Fed auctioned off $8.87 billion in 18 month - 2yr paper that was met with nearly $70 billion in bid interest.  Then the Treasury auctioned off $21 billion 10yr Treasuries in what was one of the poorest quality Treasury auctions in 2 years.  The primary dealers, aka the Fed, had to swallow 58% of the auction.  You see what's going on here?  The Fed is selling short term "safe" paper into huge demand in order to make room on its balance sheet to indirectly monetize Treasury auctions.  This is de facto money printing. 

"OT" is supposed to reduce the yields on the "middle" part of the curve, thereby stimulating business investment and the housing market. In theory. It failed back in the early 1960's when it was tried the first time.  Let's take a look at what the market thinks of "Operation Twist."  When the Fed announced the new monetary operation on Sept 21.  Here's a "then and now" list of what the Treasury yield curve looked like:

                                                            9/21                        Today

                                    5-yr                .85%                         1.18%
                                    7-yr              1.27%                         1.74%
                                 10-yr               1.80%                         2.25%
                                 30-yr               2.85%                         3.25%

Hmmm....either the Fed's policy is a dismally brutal failure or all of a sudden the bond market decided that we might get some inflation.   Since the bond market has egregiously mispriced the true rate of inflation for the better part of the last 10 years, I would say the odds are greatly skewed toward the view that once again the Fed's trying to use monetary gimmicks to tinker with nature is appallingly flawed.

But let's call this "new" policy idea what it is.  Circle back to what we know about the Fed's operation since December 2010, when QE2 was announced.  We know that indirectly, via open market purchase operations, the Fed basically financed 100% of all new Treasury debt issuance.  Hell, Bernanke didn't even wait for the ink to dry on the bond indentures of some of the auctions, as Treasury CUSIPS not even a week old would show up on the Fed's subsequent weekly Treasury purchase operations (POMO).

So this Operation Twist, is really just another disguised form of the Fed shifting paper around on its balance sheet to take advantage of the surreal demand for short term "safe" paper in order to create the funds needed to make sure that the Obama Government can fund its operations.  Nifty footwork if you ask me, but quite obvious to the naked eye if you know where to look for the truth.

Hang onto to your gold and silver, because even if you ended up buying into the market at the recent top in September, I believe that a year from now you may have doubled your money from that point of investment.  It's been that pattern for the last 10 years and the fundamentals and technicals supporting the continuance of that pattern get stronger by the day.

Tuesday, October 11, 2011

No Surprise Here For Me

It was revealed yesterday that the Austrian bank - Erste Group - had $5.2 billion in undisclosed Credit Default Swap (CDS) derivative losses sitting on - or rather "off" - its balance sheet.  Here's a link from if you would like to read about the details:  LINK

To zerohedge and its slavish readers, this is being described as a "stunner."  But I've been arguing all along that the big banks have off-balance-sheet problems that are potentially far bigger and more destructive than what is revealed by the "on-balance-sheet" public financials.  Indeed, this is no "stunner" to me - in fact I would bet good money that the true economic, what's the best bid for size/mark-to-market, losses are far larger than $5.2 billion.

What is a "stunner" to me is that the research arm of the Erste Group has written some of the most compelling and thorough research available in support of the precious metals market:  In Gold We Trust  One would think that an institution that so thoroughly understands the gold market and the dangers of the current fiat currency system would also understand the concept of "counter-party risk" and the fraud that belies the entire OTC derivatives market.

For some reason zerohedge wants to blame the Erste Group issue on its auditors.  To be sure, the auditors probably know a little about the true condition of the CDS portfolio.  But they operate within the confines of accounting and regulatory rules as set forth by the Government.  Furthermore, accountants are just counters.  It's not their job to go find out the true market values of these securities.  If they conduct a sample audit, that would just consist of calling up the CDS trading desk at maybe two or three trading firms that make markets in these securities and getting price indications.  Trust me, having traded junk bonds for 9 years, which are illiquid but considerably more liquid than CDS securities, a market "indication" often bears no resemblance to the true value of an OTC derivative, especially if the Erste Group (or fill in the bank U.S. TBTF bank) wanted to unload a big position in any specific security.  And THAT dynamic is one of biggest problems with accounting for these types of securities.  Its part of the massive accountability problem that has been destroying our system for quite some time.  One would have thought that this would have changed after the damage inflicted by Long Term Capital and Enron...

Now, with the Erste Group we're talking about $5.2 billion.  The Erste Group's balance sheet (assets/liabilities) is roughly $280 billion in size.  And Erste is not exactly a big player in the OTC derivatives market.  Let's look at one of the big U.S. TBTFs and just do a "broad stroke" comparison.  Bank of America, for example, has a $2 trillion dollar balance sheet - over seven times the size of Erste Group.  And Merrill Lynch - now owned by BAC, was one of the bigger players in the OTC derivatives market.  So just on a "scale" basis, it's very safe to say that BAC is likely sitting ten times the amount of undisclosed losses in its derivatives book as the Erste Group.  I would bet a lot of money that the actually losses are substantially larger than that.

But if you want to look at the work published by Wall Street research analysts showing the "financial ratios and condition" of U.S.  TBTFs, nowhere will you see anything mentioned about off-balance-sheet liabilities.  These wind-up circus monkeys simply transpose the GAAP balance sheet data onto a pretty spreadsheet and say "see, the water is fine, c'mon in."  And then this garbage gets regurgitated in the financial media and through the world of financial advisors and brokers who want to take your money as they mindlessly reference this highly flawed research and tell their clients that the U.S. banks are in good's pathetic.

But the golden truth of the matter is that lurking below the surface are financial nuclear bombs that could detonate at any time.  See Bear, Lehman, AIG for what this looks like.  And 2008 will have been "the good old days" once this daisy chain of disaster is triggered. Today there's not only the massive exposure to financial sector Credit Default Swaps, there's the massive exposure to sovereign debt CDS.  AND, the OTC derivatives holdings of the TBTFs are much larger than it was in 2008.

So yes, maybe the Erste Group disclosure was a bit of a surprise to some - and a "stunner" to the editor of zerohedge - but if we really dig for the truth and take a look at what's going on in our own backyard, there are not "stunners" buried, but massive catastrophes.

Monday, October 10, 2011

Today's Market Action Reflects The Latest Systemic Farce

Does anyone take the Merkel-Sarkozy dog and pony show seriously any more? Perception management is not a solution.  (see link below for quote source)
When I got onto my futures software yesterday and saw that the S&P 500 futures were up quite a bit I began to look for any credible news that might be the source of the ebullience.  Of course, the partial "bailout" of Dexia was not good news, especially with regard to paper currencies, and the bond market is rewarding Belgium for its action with higher sovereign bond yields today (that's a negative, in case you were wondering).

Then I saw that Merkel and Sarkozy, who were putting their heads together to solve the EU's problems over the weekend, had issued a statement that they would make sure that the EU Einsteins would eventually have a plan that would prevent the big banks from collapsing.  They would issue their plan for that plus saving Greece in three weeks.

Huh?  Seriously?  For whatever reason, the equity markets in Europe and the United States seem to be willing to suspend disbelief and put more blind faith into empty rhetoric.  Sounds like voters in the U.S. who still think Obama is doing good job. 

So I queried someone who's view and market knowledge/perspective I highly respect and who has plenty of his own skin in the game with this:  "Your thoughts here?  My inclination is that this is a low volume holiday short-cover ramp on basically no news and that we will sell-off either this afternoon or later this week.  That Merkel/Sarkozy statement is full of 'fluff.'"

His response was "my thoughts exactly," and sent me link to this brief commentary by Charles Hugh Smith, who I rarely read but with whom I often agree: 
The problems of the global economy are not based in perception, but in the reality of prices, balance sheets and income statements, vast concentrations of wealth and power, precarious systemic imbalances, ruthless exploitation, and command economies mismanaged by Central State/Bank policy and manipulation. Sarkozy and Markel's absurdist theatrics--"we have a secret plan right here in our pockets"--are not just incredible, they are uncredible
Here is the LINK  The same "gut" reaction I had when I saw the "Merkozy" statement last night and now I feel even more strongly about this conviction.

What this means is that I expect the markets to retrace today's theatrics once everyone in the U.S. has returned from their Columbus Day break.  I still believe there is a lot of disappointing and bad news ahead of us and the markets will soon reflect this by heading south again.  What I do believe is that the probability increases by the day that the next big downside "event" will be reflected in the markets by a massive rush into physical gold and silver.  This has been going on all along in India/Asia/Russia/Middle East anyway, while the short term-oriented U.S. funds dump all of their paper gold and silver (futures, GLD, SLV).

Hold on tight because once the downside volatility in the metals has "washed out," the upside will be breathtaking.

Friday, October 7, 2011

My Take On Today's Jobs Report

Aside from the fact that - for the most part - the report is nearly completely meaningless because it's so blatanly manipulated, here is a chart that is so horrifying, you can probably enlarge it and use it as one of your Halloween decorations.  Happy Halloween those who are unemployed and actually would like to find a job because they're sick of living off the Government tit:

I may have a post tomorrow if I don't get too distracted by all the great college football on!

Thursday, October 6, 2011

Hugo Chavez Issues A Wake-Up Call To Paper Gold Shorts

Venezuela will begin repatriating its gold reserves from Western nations by mid-November, the central bank head said on Wednesday...first boat laden with reserves would be back by mid-November. "It will be here as soon as possible, no later than in a month-and-a-half," he said...Venezuela's gold abroad is in England, Switzerland, the United States, Canada and France
Here's the reuters LINK

I've been wondering when we would next hear about this ever since Chavez first announced the move during the summer.  Interestingly, the nations who hold VZ's gold are the very same nations who participate in active "fractional" bullion safekeeping storage operations.  This means that there are many multiples of paper claims - futures, forwards and OTC derivatives - issued against the actual known - i.e. "officially reported" - physical inventories held by the bullion vault banks in these countries. 

Anyone worried about counter-party default risk?  Ask Madoff investors and AIG counter-party banks (Goldman, JP Morgan, et al) how they feel about counter-party default risk...know where your gold is?

No Longer A "Barbarous Relic," Gold Is A "High Quality Liquid Asset"

The initiative is supported by the World Gold Council, who recently submitted evidence to the Basel Committee for gold to be included in banks' "Tier 1" assets by European banking regulators, recognising gold’s growing relevance as a high quality liquid asset.
The "initiative" refers to the decision by LCH.Clearnet (London Clearing House) - the world's largest clearing agency for fixed income securities - to accept gold as collateral for "clearing" trades.  This is huge. Here's the press release:  LINK

For those who don't know, every trade for every security needs to "cleared" - i.e. securities and cash need to be mechanically/electronically delivered and title to securities transferred.  The clearing house steps in matches the buy-side and the sell-side, making sure that both the funds to pay for the trade and delivery of securities occurs (let's keep it simple and not introduce naked shorting and all the rule violations that go on, especially in the U.S. and Canada).  If one side of the trade fails, the clearing house - in this case LCH - assumes the liability.

In other words, in exchange for guaranteeing both sides a trade, clearing firms require collateral deposits by anyone who wants to be a member of that particular clearing firm (i.e. these days anyone who wants to trade).  And we're not talking about just 100 share lot daytrader trades.  Typical institutional "block" bond trades are in the 10's of millions.  Big money.  Big counterparty risk. If you look at your own account, every security position in there will have the "fingerprints" of a clearing agency on it.  This is big business with big dollars involved and big risk if a big counterparty to the trade fails before it clears.

The acceptance of gold as collateral (remember the term "good as gold?" It's back) is beginning to proliferate.  JP Morgan announced several months ago that it would accept gold as collateral for loans;  the CME - parent of the Comex and one of the largest futures trading exchanges in the world - started accepting gold a year ago.  Another very large, global firm - ICE (Intercontinental Exchange, which trades futures, OTC securities and also functions as a clearing agency) made this move right after the CME did.  And the Russian Central Bank, within the last year, announced that it would accept gold as collateral in its member bank lending transactions.

Everyone see the trend here?  What is slowly creeping back into the mainstream business world is this idea of gold as a currency.  It took about 40 years from the time Keynes declared gold to be irrelevant until the world went fully fiat in 1971.  It's taking even longer for gold to be reinstated as the ultimate currency, but the truly sophisticated global market engineers are now moving in that direction (notwithstanding Donald Trump, who is not sophisticated but who recently announced that he would take gold as collateral in business deals - we all know he has plenty of worthless, bankrupt casino chips that no one will take).  Surely everyone understands by now that Keynes' economic theories are a complete failure...

Myself and a colleague back in 2002 predicted that one of these days we would be able to buy a dream house for less than 10 ounces of gold.  Based on what I'm seeing in the housing market and the developing markets in gold, I am still standing by that view.  The question in my mind is not "if," but "how many ounces less than 10 it will take?"

At some point, I don't know when, there is going to be a global rush into gold - when the majority of businesses and the masses begin to understand why these wealthy, sophisticated financial operators are now using gold in their mix of business - that will make everyone understand why some very bright people are forecasting eventual prices for gold that are unimaginable to most people who refuse to believe or accept what is going on in the global financial system.

Wednesday, October 5, 2011

"New Price"

I haven't given the condition in the housing market a good beating lately.  So, with a limited amount of time to write today, I wanted to share some thoughts/observations.  To begin with, with interest rates approaching zero in the area of the Treasury curve where mortgage rates are set per Fed policy, one would think that we should be seeing some sort of recovery in the housing market.  I think, to be sure, we saw an ever-so-brief-and-small bounce in prices and volume in some markets early in the summer.  This was likely fueled by a temporary drop in overall inventory in some markets, which occurred from the temporary slow-down/delay in foreclosures while the banks had their wrists slapped by the regulators.

Having said that, we never really saw any real month-to-month or year-over-year "bounce" in overall home sales this summer.  In fact, in the "heart" of the selling season this year sales declined.  As I eyeballed the weekly mortgage applications reports this summer, it looked like there was an occasional week-to-week bounce in the applications for purchases, but the majority of the mortgage activity, since rates were falling, was in refinancing.

The reason I was thinking about the housing market is that, over the last 5 or 6 years, I've grown accustomed to making a visual note whenever I'm driving around the metro-Denver to observe the number of "for sale" signs I see, as I tend to drive through a lot of different areas over the course of any given week.  Denver has always been considered a "homogenous" representation of what is going on demographically economically across the country. What I've noticed recently is that, despite the fact that the primary selling season is over, there are still a lot stale "for sale" signs and - at least in the area of Denver where I live - a lot of new signs have been put up in yards since Labor Day weekend.  And now I've been noticing multiple listings per block.

In addition,  I've been noticing a lot of "new price" or "price reduced" signs.  To be sure, it can be argued that my sample size is limited or not "random."  But I have been noticing this all over the city. One particular house was originally offered at the beginning of the summer for about 10% below the price it could have received at the peak of the housing market (yes sometimes I pull the tear sheet to observe offering prices).  I noticed yesterday a "new price" sign and the new price was 10% below the original price offered and the seller had changed brokers.

Now, there's a lot of "randomness" and statistical "noise" in just one observation like that.  But what the proliferation of signage as we go into the slow season for home sales tells me is that sellers are starting to get nervous/desperate again.  And at some point we are going to see a meaningful percentage of the "shadow" market transform into the actual market and prices will have to be competitively reduced in order for the most desperate to move their home.

Coincidentally, a colleague sent me this article on the precarious financial condition of those still making their mortgage payments and gainfully employed: 
One in three Americans would be unable to make their mortgage or rent payment beyond one month if they lost their job, according to the results of a national survey taken in mid-September...Sixty-one percent of those surveyed said if they were handed a pink slip, they would not be able to continue to make their mortgage or rent payment longer than five months.
Here's the LINK

Unfortunately, it looks like the housing market is getting ready to go into another downward death spiral.  Anyone who thinks that this is the bottom right now is living on another planet.  Even more unfortunate, I expect that Obama will exercise his ability to use Fannie Mae and Freddie Mac to try and prevent this death spiral with a massive Taxpayer subsidized mortgage refinancing program.  He's already hinted that he can do this without Congress.  He also claims that it won't cost this country anything...

Don't believe that any more than you would be willing to believe that the housing market has bottomed.  Obama's ploy will be nothing more than another whorish ploy to get votes as 2012 approaches.  The truth is, however, that we are on the verge of heading into another big systemic black hole that will make the one we went into in 2008 look gold?

Monday, October 3, 2011

Will Morgan Stanley Be The REAL Tipping Point For The U.S.?

GOLD -- Is not like any other asset.  Gold represents eternal wealth.  I accumulate gold, but I never sell it.  In a severe bear market, the only item that you can trust absolutely to survive is gold.  Gold is the ultimate insurance policy, which is why I don't worry about it and am not tempted to sell it when it declines.  - Richard Russell

Forget Greece/Europe.  To begin with, California alone is a bigger problem than the "PIIGS" less Spain, collectively.  Then throw in Illinois.  With Greece/Italy, we know what the Too Big To Fail Bank exposure is "on balance sheet."  And it doesn't look nearly as bad as that of the European banks.  HOWEVER, can someone please tell me what the "off-balance-sheet" exposure is?  We don't know.  What we do know is that the credit default swap and general derivatives holdings of TBTF's have gone up substantially since 2008.  This is largely an unregulated market and the accounting for it is largely hidden from sight, using off-balance-sheet accounts for which there is very little regulation and oversight - and almost no enforcement of that which is actually in place.  This off-balance-sheet "stuff" is what caused the de facto bank collapse in 2008.

This brings me to Morgan Stanley, the stock chart of which I have been watching for several weeks now, as it has performed even worse than its comparable banking rivals, like Goldman, JPM and Citi.  I saw an article last week which shed some light on this, and I didn't save it so I don't have a link, but it turns out that, including its off-balance-sheet exposure, Morgan Stanley is technically hugely insolvent if you were to do an honest mark-to-market valuation of its balance sheet.  And then there's this news out from the Financial Times which cites hedge funds who are pulling their business from Morgan Stanley: 
Morgan Stanley’s stock fell more than 10 per cent and the price of credit insurance on its debt rose to the highest level since early 2009 as nervousness around the bank caused some hedge fund clients to reduce their exposure, people familiar with the matter said.
Here's the LINK  Recall that in 2008, this was one of the red flags with Bear Stearns before it collapsed.  The reason you don't want your account with Morgan Stanley, or any big bank for that matter, if it collapses is that these banks take your securities and hypothecate them to banks, who lend them money against your securities.  In other words, broker/dealers use your securities as a source of liquidity and short term funding.  They can, in fact, leverage your property up to 140%.   SIPC doesn't cover the kind of numbers this game is played with by hedge funds.  So any hedge fund that doesn't want to stand in line and wait for their turn in the liquidation line will pull their funds from Morgan Stanley, thereby making MS scramble for liquidity.  It's an ugly, irreversible spiral once it's set in motion.

To circle back to my opening paragraph, IF in fact there is a run starting on Morgan Stanley, this could easily set off the kind of domino effect created by the Bear Stearns collapse in 2008, on whom the plug was pulled in March 2008.  But we didn't see the full effect of the behind-the-scenes damage until AIG collapsed and the former Goldman Sachs CEO who was Treasury Secretary jammed through the bailout of Goldman, et al.

I honestly believe that, short of a massive new printing program rolled out by the Fed and the ECB, we are going to see a systemic collapse that will dwarf that of 2008.  Here's a little color to back my view from the Telegraph UK, which is probably the most objective source of mainstream media in the anglo world:  LINK
All of the problems in 2008 were either completely "papered over" and discharged or overtly and not-so-overtly shifted to the balance sheet of the U.S. Treasury aka the Taxpayer.  None of the sources of the problems were fixed and many have become even more severe, such as the derivatives and bad asset problem.  What's even more severe is the counter-party default risk, which is why hedge funds are leaving Morgan Stanley.  This is the "tell-tale heart", in my view.  Interestingly, and before I saw the FT piece on MS today, I was discussing with a colleague about how for some reason this concept of "counter-party risk" has escaped the attention of the media and bubblevision gurus, when in fact it should be one of the main areas of focus for anyone making a serious attempt to either clean up the system or avoid disaster.
Given that no one will ever clean up the system short of complete collapse, here's what you can do to insulate yourself as best as possible.  Make sure your brokerage accounts are with non-bank brokers who don't do much in the prime broker area.  Charles Schwab and Fidelity would be my suggestion.  Second, move as much of your paper (cash) wealth as possible into gold and silver that either you safekeep yourself or you know damn well is not being hypothecated or used in some fractional scheme, like GLD, SLV, Kitco, Monex, etc.   If you're worried about gold, please read this commentary from the CEO of Seabridge Gold, who succinctly explains what happened over the last two weeks and why gold actually doing what it's supposed to be doing:  LINK