Category: Global Economics
As goes Europe
This is the civil unrest that will come to the United States as soon as we enact our version of “austerity.”
“It was supposed to be a day of peaceful protest, with students exercising their democratic right to demonstrate against soaring university fees.
But anarchists hijacked the event, setting off the most violent scenes of student unrest seen in Britain for decades. Militants from far-Left groups whipped up a mix of middle-class students and younger college and school pupils into a frenzy.
The focus of the violence was Tory HQ in central London, where hundreds of thousands of pounds of damage was caused.”
This is called “fleeing the dollar”
Read this article and think about it. If the Chinese are willing to pay double what the previous market value is for a company (which is becoming a trend, not an anomaly), then you have a combination of a) undervalued natural resource companies relative to the US dollar and/or b) a willingness by the Chinese to dump their dollars at what is effectively an immediate 50% loss.
I say again. Think about that and what it means. Wonder why gold is over $1,300 and silver over $22?
The Great Haul of China:
Fears of Chinese land grab as Beijing’s billions buy up resources
Europe is bailed out. Who is next?
The markets have gone mad. I can’t for the life of me understand what there was to celebrate in today’s announcement that the world would print whatever money is necessary to bail out an entire continent. What in that announcement said anything but “we are all in deep trouble here.” What in that announcement said anything but “the bailout of the banksters is now the world’s problem.” And in the United States, what in that announcement said anything but “the U.S. taxpayer is now the guarantor of the world’s sovereign debt.”
Through taxes or inflation, the U.S. government or the Federal Reserve will put the cost of the bailout of the world’s nations onto the backs of the American taxpayer. Oh yes, each nation will certainly share in the pain of their respective country’s bailout as “austerity’ measures are put in place. But the U.S. will be asked to shoulder some of the burden “for the greater good” just as all of Europe has had to share in the reckless policies of Greece, Portugal, Italy and Spain.
And in the end, it will not work.
What we witnessed over the weekend was the assured destruction of our current financial system. Jim Sinclair in this case hit it dead on. If Greece’s problems spawned a $1 trillion bailout response, what will happen when California’s debt meets the same fate? “QE to infinity” as sovereign debt explodes into trillions of dollars of losses – all monetized until the major fiat currencies of the world explode in hyperinflation as people lose confidence.
Contrary to popular opinion, hyperinflation is NOT strictly a monetary event. It is a loss of confidence event. And the “confidence” shown by the knee jerk reaction of the world’s markets to more and larger bailouts will soon fade. When it does, look for the next big nasty down leg in the markets to return with a vengeance – that is except in precious metals and a few (very few) other sectors.
I have written in the past that if anything near a worst case scenario begins to play out in the debt markets, there would come a day when one will want all of their assets in tangible goods of one form or another. That includes gold, silver, oil, grains, farmland, etc – and NOT their paper representatives such as ETF’s or possibly even equities of companies who own them. You may need the real thing. That day may not be far off, and the likelihood of it actually coming is growing by the week.
Stay tuned and buckle up. What we saw over the weekend is one of the primary reasons you are saving in silver. Stay the course.
What (nearly) killed the markets today?
A nearly 1000 point drop in the DOW. Gold up nearly $30. What does is all mean? Well, that depends on who you ask at this hour. MSM news outlets are claiming a computer glitch or a mistake made when entering a trade. Others claim the markets are simply catching wind of just how serious of a problem exists in the currency markets with the sovereign debt problems in Greece and the Euro zone. Still others blame HFT - High Frequency Trading – that simply got caught without a negative feedback loop, ala the 1987 crash.
Whatever the reason, one thing is certain. Market sentiment is sure to have changed. All the spin that has been engineered by the MSM and PTB over the last year was undone in one, 60 minute roller coaster ride on Wall St. If nothing else was evident today, it is clear that someone – be it millions of individual someones – or a few computer programmers in the glass houses of the big investment banks – has a hair trigger when it comes to exiting the markets. That was on display for all investors to see today, and now people know that they can lose thousands of dollars in the blink of an eye. Investors now will have their finger hovering over the mouse clicker or on the speed dial number of their broker. “Sell NOW!” is on their minds.
18 months is not long enough for investors to have forgotten the pain that the market dive in late 08 and early 09 brought them. They saw their financial life pass before their eyes. Many were late to “get back in” and have recovered only a fraction of their losses. They will not stand by this time and watch the rest of it slip away. The question is, where will they go? If today’s market action did nothing else, it served to reveal in a 3 hour period where money will flow when the next down leg gains momentum (tomorrow and Monday will tell us if that is now). Places to be: US Treasuries, the US dollar, gold and silver and their equities. Nearly everything else got thrashed today.
Let’s look at these one by one. US Treasuries will be a safe haven only for a short period of time. That period could be days or months, depending on how quickly things unravel. Eventually, they too will join the list of asset classes doomed to fall. Ditto for the US dollar. In the game of cascading currency defaults, even the last man standing (which will NOT be the US dollar) will fall.
Now to gold and silver. Today they showed their metal (no pun intended). Gold was firm all day long, steadily catching a bid in the face of major market turmoil. Silver was noteworthy due to its lack of volatility. This is the opposite of what happened in late 08/09′ when they both got crushed with the markets. Why? I have given this some thought, and in 08/09, the markets were under pressure because the financial system was failing. Now, however the actual “money” itself is failing. Big, big, big (did I say big?) difference. This is a trend that will continue throughout the remainder of this crisis, until our current fiat empire is replaced by something else.
And what about energy and other “hard” assets? Well, you saw that they will likely receive the same treatment – at least in the short term – as most other asset classes. The fear of “demand destruction” will outweigh the flight to tangible assets in the early stages. That simply means that energy and other hard assets will be great investment opportunities after the first wave of selling subsides. It will take some wisdom to know when to enter those markets.
If the markets somehow gather themselves tomorrow and are able to put this horror show behind them. It will only be temporary. Gold may pull back slightly, however people now know what to expect. More and more people will begin to accumulate precious metals and their shares. Even Larry Kudlow remarked today “Gold is now the world’s reserve currency. Amazing.” Not for those who have been watching this unfold for the past 3 to 5 years. Not for the Austrian economists. Not for those who read and study history. And last but not least, not for those who read and study their Bible.
Buckle up everyone. The next few days will be very telling. Let’s see how the overseas markets view today’s action.
The “C” word is back – contagion
Not since the early days of the sub-prime mortgage crisis have we heard the word “contagion” bantered about so much. We were assured then that it would be “contained.” It wasn’t This won’t be either.
ECB May Have to Turn To Nuclear Option
Last time it was 18 months between the initiation of the sub-prime and the financial crisis. I don’t think we’ll have that long this time.
These are financial weapons of mass destruction
From JS Mineset. The CDS”s must fail in mass because those entities that wrote them are bankrupt and cannot perform. The entities making these massive bets on Greek debt are in for a surprise if they think they are protected.
Jim Sinclair’s Commentary
Breach of contract is what you would sue for when an OTC derivative fails to perform.
If Greece fails the credit default swaps on Greek debt would fail in mass.
Citi sues Morgan Stanley over CDS, claims $245 million
(Reuters) – Citigroup Inc (C.N) sued Morgan Stanley (MS.N) on Friday for breach of contract, saying the Wall Street firm owed it $245.4 million for protection it bought on a loan.
Citibank bought a credit default swap (CDS) from Morgan Stanley & Co International in 2006 on a $366 million revolving credit facility it provided to an issuer of collateralized debt obligations (CDO), according to the complaint filed in U.S. District Court in Manhattan.
The swap obliged Morgan Stanley to pay Citibank the money as a result of a payment default on the credit facility to the CDO, known as Capmark VI, it said in the complaint.
Liquidating the CDO collateral did not cover the entire amount, and Citibank said it exercised its right under the CDS to have Morgan Stanley make up for the shortfall, but it refused, according to the complaint.
Citibank paid Morgan Stanley about $750,000 for the CDS, according to the complaint.
Morgan Stanley could not immediately be reached for comment.
The coming second wave…
For those who believe the economic crisis is over, I have a reality check here.
- Unemployment is above 17% according to government figures (see U6, not the touted U3 number) and nearly 22% if it were calculated using methodology used before 1994. Source Shadow Stats. Yes unemployment is generally a lagging indicator, however we are not in a normal business cycle here. This is a deleveraging cycle, and the two are very different.
- Social Security is due to go into the red in 2010 (meaning it will contribute to budget deficits, not lower them). Source “Gary North/Lew Rockwell.
- Commercial loan losses are just beginning to be felt in the financial sector. Source: Seeking Alpha, Wall St. Journal.
- Christmas sales are running under last year’s dismal numbers. The consumer (70% of GDP) is tapped out and pulling in the horns as they stave off personal bankruptcy and credit card default. Source: Gallup.
- Dubai’s debt default (technically anyhow it was a default) shows continued stress in the system.
- Then, there is this chart.
We are moving headlong into the next wave of mortgage resets. It took a full year into the first wave before the crisis hit the banks. So far, interest rates are low and the resets are hurting but not devastating. This chart is a major reason that the Fed will keep rates low for at least another year. At least they will try. Contrary to popular opinion, the bond market controls mortgage rates, not the Fed. What happens if the dollar continues to slide (it will) and the bond market demands higher rates for holding US treasuries (they will)? You’ve got it. Mortgage crisis II, only this time from an economic baseline much lower and more fragile than it was during the first wave.
If the economy were truly on the mend, the Fed would be talking about raising rates and a real exit strategy for all the liquidity they have pumped into the system. Remember when we were told by the Fed that the taxpayer would make a profit on the Fed buying these assets and selling them back to the banks at a profit? Their exit strategy should be to sell those assets back to the banks and get them off the Fed’s books, in turn receiving back the cash they lent out. That is how money is drained from the system.
However, recently they announced their “exit strategy” is to perform a reverse repo. What this means is that they will sell their toxic assets for cash, thus “draining” that cash from the banking system. But wait. That’s not all. The reverse repo means they also agree to buy that asset back at a future date for more than they paid for it. Say again? Source: Financial Times
Yep. That’s right. This is a shell game combined with a game of hot potato. Follow the ‘taters.
1) Toxic assets (the ‘taters) are bought by the Fed for cash in late 2008 to stave off a banking system collapse.
2) Those assets are held on Fed’s books while banks supposedly repair their balance sheets.
3) Rather than the banks buying the ‘taters back at par or greater, making a profit for the taxpayer (who believed that?), they are being re-sold by the Fed back to the banks with an agreement for the Fed to buy them back later at a higher price, thus making a profit for the banks, and sticking the taxpayer with the ‘tatters once again.
Sick isn’t it. If anyone thinks this financial crisis is over, they are not watching what the Fed is doing. The toxic assets they bought are more toxic now than they were a year ago. They will never return to a state of health and at some point the ‘taters will have to be dealt with. IF this game can buy the Fed more time, then that is all it will buy them. There is no way out of this bankrupt mess. But the time bought will allow them to concoct a plan to further enrich the banking system while putting into place the follow up for whatever is left of our national currency.
Obama declared a few weeks ago that there is risk of a double dip recession. Also, the Federal Reserve has recently began to increase the Fed’s monetary base further, (despite their jawboning about an “exit strategy” – see above) following a pause following last fall and winter’s unprecedented doubling of the monetary base. At the same time, they are saying that substantial downside risks remain and interest rates are going to be held low for a considerable period. Why? The answers are above. We are moving headlong into the next financial crisis and this time it will include not just the financial markets, but the bond and currency markets as well. Gold’s rise to well over $1,000/oz is telling us the transition from a credit crisis to a currency crisis is well under way.
Do not be fooled. Be prepared. God, gold, grub and guns. I never thought I’d post that, but that’s what I see.
Housing resets.
The next shoe is about to drop.
There was a one year lag between when the sub prime resets began and it effected our financial system. Here comes wave 2…
Agenda – Grinding America Down (5 star!)
Black Swans are in Flight
It’s been quite a month. Heads down for 70+ hrs a week to launch a web site aimed at helping people understand and engage in the effort to return to honest money. The Honest Money Center is formed with the prayer that over time, it will have the same impact as the 10th Amendment Center is having.
With Utah passing their sound money bill into law, the first shot across the Federal Reserve’s bow has been fired. It very well could be looked at as a historical event in the decades to come.
Over the next few years, there will be an ebb and flow that will at times make it seem as though we are heading for a collapse in weeks/months. Then we may enter a period that makes it appear as though it may be many years. Keep your eye on the overall trend. It is still in motion. In my opinion there is nothing short of an act of God that will stop us from experiencing a form of what was written in the paper.
The precious metals markets are near all time highs again. Silver is on fire. It seems to want $40/oz before correcting. I still fully hold to my prediction that we will see a very sharp pullback in all markets, including commodities and precious metals sometime this year. The 2011 deflationary scare will likely begin when QE2 comes to an end or shortly before. That assumes it will end.
The unknown factor now in that equation is the shock that Japan’s woes will bring to the world economy. If it manifests itself prior to QE2 ending, we could see an extension or a roll right into QE3. This could possibly a) place the beginning of the correction in the May time frame and b) make it a very brief one, as it becomes evident that the Fed (and most of the world’s central banks) will print, print, print.
Should the Fed end QE2 in the face of a new global economic downturn, we will see a very ugly sell off again. Maybe not as bad as 2008, but breathtaking none-the-less. The result would be, there would only be a few weeks/months between the end of QE2 and a QE3, and QE3 would be a doozy.
Oh, and just a quickey on the Police State front. This from Republican Senator Lindsay Graham:
Sen. Lindsey Graham (R-S.C.), a military lawyer, is the first member of Congress to say the legislature needs to explore the possibility, however unlikely, of limiting some kinds of free speech – like Terry Jones’ Quran burning – that help America’s enemies. “I wish we could find a way to hold people accountable. Free speech is a great idea, but we’re in a war,” he told CBS’s Bob Schieffer on “Face the Nation.”
A great idea? But….. we are at war! Really? When was war declared? When does war predicate suspension of 1st Amendment rights? It is happening people. Help your friends remove their rose colored glasses before it is too late.
And I haven’t even spoken of the dire finances of the states and large municipalities….
As I said in the Outlook paper. Lots of variables. None can be perfectly predicted. Stay alert.
Now that the big push for the web site release is over, I plan to give weekly or bi-weekly updates. That’s the plan. We’ll see how it goes.
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