Tag: "gold"

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.