◄$$$ THE USFED DISCOUNT RATE HIKE DEMONSTRATES LOST CONTROL AND DESPERATION TO HOLD PRIVATE BANK RESERVES. THE USFED ADMITS THE NEED TO EXTEND NEAR 0% LENDING, DENYING AN IMMINENT TIGHTENING CYCLE. $$$
The USFed raised the Discount Rate by 25 basis points to 0.75%, hardly distant from 0%. It is the rates banks pay for emergency loans. They painted a false story of removing the extraordinary conditions, of restoring the main crisis lending program closer to normal. No such thing! The move loudly demonstrates how the Fed Funds rate is out of their control. So they control what they can. They offer a smokescreen on the emergency window while maintaining a tight control over $1.2 trillion in so-called excess bank reserves. They desperately must not forfeit these funds, since they conceal the insolvency of the USFed balance sheet. These same funds are more accurately the Loan Loss Reserves for banks, and offset their deeply impaired credit portfolios with awaiting heavy losses. The only honest portion of the USFed message came with central bank admission that the action should not be viewed as a signal that it will soon boost interest rates in a new cycle. Record low borrowing costs near 0% are still needed to foster the recovery, it stated. The USFed cannot torpedo the housing bust further, and the USGovt cannot afford to pay more for its trillion$borrowings.
Moreover, President Obama says "No way!" to the prospect of a Double Dip recession. When the dreaded recession (which never stopped) continues in more obvious form, it will be interesting to observe Bernanke, Geithner, Obama, and the rest of the usual suspects squirm. Watch them doctor the USEconomic stats even worse. Watch them redefine many concepts. Watch them blame others. Watch them lie badly. Watch them open back doors for Goldman Sachs. Watch them squirm under pressure. This Discount Rate move is a signal of lost control for the Fed Funds rate. They decided to control what little they can and sound tough. Observe the 3-month and 6-month and 12-month USTBill yields. They barely budged after the new policy hit the bond market.
◄$$$ BRITISH SHOPS TURN VACANT AT A RAPID RATE, AN EYESORE. LITTLE GHOST TOWNS HAVE CROPPED UP IN SHAME. $$$
Without a full synopsis of the UK Economy, a tragic notable detail is worthy of mention. The number of empty shops blighting the high streets has tripled since the start of the credit crunch. A report shows 12.4% of shops in town centers are empty, compared to 4% in the summer of 2007. In some centers, fully one quarter of shops lie vacant. Rents are on the rise, and well placed lower cost shopping centers are springing up in the outskirts and suburbs. Venerable towns like Wolverhampton and Margate are named as the biggest casualties. See the Daily Mail (CLICK HERE). Not good news indeed for a nation that for many years was often referred to as a country of shopkeepers.
◄$$$ LATIN AMERICAN CRUDE OIL SUPPLY IS FALLING OFF THE CLIFF. SOON MEXICO WILL BE A NET OIL IMPORTER. VENEZUELA IS ON THE STEADY DECLINE. ON THE SUPPLY SIDE, MAJOR OLD-LINE OIL PRODUCTION CENTERS ARE ON THE SHARP DECLINE. A NEW IRAQI CHAPTER IS BEING WRITTEN, AS CONTRACTS TO ITS FORMER TRADE PARTNERS ARE RE-ENTERED, WITH NOTABLE AMERICAN ABSENCE. $$$
Since summer 2007, the Hat Trick Letter has warned of the powerful oil decline in Mexico. Their national oil output is led by an aging flagship Cantarell, the off-shore project. Its decline is in an accelerated phase. Lack of brisk revenue has curtailed proper maintenance at a time when the drug cartels are stealing oil, redirecting oil pipelines, and infiltrating the PEMEX national company. The Venezuelan national oil business is a model of inefficiency, cronyism, and corruption. Each story has been thoroughly told in these reports periodically. See the Oil Drum article (CLICK HERE). Check the many pages for a perusal of oil & gas production across the globe with technical details and dozens of charts.
Petroleos de Venezuela SA (PdVSA) is the state run oil & natural gas company. It is the largest employer in Venezuela, accounting for about one third of the national GDP, 50% of the federal revenue, and 80% of export revenues. In 2002, nearly half of the PdVSA workers walked off the job in protest against President Chavez. In the end PdVSA fired 18 thousand workers, draining the company of technical knowledge and expertise. Chavez replaced most key posts with his novice friends, who have steadily been skimming from the revenue stream. Ever since President Chavez infected the nation with his peculiar style of socialism and wrecked business policies, the Venezuelan oil machine has lost a cylinder every few years. Discouragement of foreign oil contract firms further contributed to its declining output. Expertise departed. The latest sign of failure is the order by Chavez to devaluate the bolizar currency by 50%, a ploy to deliver more bolizars to his own syndicate.
Iraq is in the long drawn out process of dividing up its oil rights. The Americans, despite a significant presence with military boots on the ground, fare poorly in winning at the oil auctions. European, Russian, and Chinese oil companies including Shell, Lukoil, China National Petroleum Corp, and British Petroleum are having a field day winning auctions to develop big Iraqi oil fields. Russia and other nations were in possession of valid oil contracts with Iraq when the United States, with its imperial strokes, dishonored and canceled them. Resentment is enormous in Russia and China board rooms, in the Kremlin and Beijing. Those parties are back to claim what was rightfully theirs, outbidding the Americans. Yet the US oil firms are not too angry, since they have skimmed tens of billion$ from the USGovt for six full years. The Fascist Business Model worked well for them.
◄$$$ SWITZERLAND PHASED OUT, DUBAI PHASED IN. $$$ A quick update on global banking change of important winds. The amount of money moving OUT of Switzerland is enormous, over 100 billion Swiss Francs per week, at a minimum on a slow week. The locations being abandoned are actually Switzerland, London, and Luxembourg, in a mass exodus of cash. Cooperation with the USGovt is the motive for flight. One must wonder what the prime threat was given by the American bank nazis. Switzerland, the once venerable fortress of banking and gold prestige, went in league with the US & London bankers in the 1990 decade, to their ruin. Neither Wall Street nor the USGovt comprehends the depth of the banking problems and migration of capital. The United States and London are left exposed in the open, highly vulnerable. The run on gold depositories, including the movement of cash, is staggering. Little known is that $1.0 trillion of Indian cash will depart from Swiss banks before mid-March. They too are distrustful. In fact, the German banker contact who shared the Swiss exodus volume also pointed out that between 150 and 225 Swiss financial firms (banks, asset managers, hedge funds) will fail in the current year, according to another expert source.
Money is going from Western Europe first to Singapore and Hong Kong, then much is finding its way to Dubai in the United Arab Emirates. Despite construction project busts and debt default in the city state, Dubai will emerge as a major banking center. It contains the life boats used by occupants of major sinking vessels. It enforces strict compliance laws. Its FreeZone is occupied by icon names like Halliburton, Microsoft, and Cisco Systems, along with a diverse scattering of very visible Chinese firms. They use Dubai to manage trade with Europe and Africa. The FreeZone total over 800 firms in its partner directory (CLICK HERE). Dubai is fast becoming a Chinese Protectorate. It will become a major gold trading and banking center. In time, Dubai will become the Switzerland of the Middle East, without a doubt. Its infrastructure is intact, clean, extensive, modern, just with new owner labels.
STILL EARLY IN DUBAI BUST
◄$$$ THE PERSIAN GULF DEBT PROBLEMS ARE MUCH WORSE IN DUBAI THAN REVEALED. DUBAI HAS MULTIPLES MORE THAN THE KNOWN REVEALED $80 BILLION IN IMPAIRED DEBT. FURTHERM ORE, KUWAIT HAS BEGUN TO SHOW ITS STRAIN AS IT STRUGGLES TO FIND CASH. $$$
Kuwait has mega-problems with excess debt and falling property prices, according to a key new source with Persian Gulf connections. Kuwait needs cash desperately, and has begun a campaign to raise cash. Zain is the biggest Kuwaiti phone company. It received a formal $10.7 billion offer from Bharti Airtel Ltd for most of its African assets, according to Al-Rai newspaper in India. The offer excludes the purchase of Zain's operations in Sudan. Bharti Airtel is a leading Asian integrated telecom services providers with operations in India, Sri Lanka, and Bangladesh. See the brief Bloomberg article (CLICK HERE).
A subscriber with broad experience on housing, insurance, and finance matters pitched in with a comment worthy of recount. Craig McC said, "Perhaps, this is a just a straightforward business deal. However, as Dubai's financial problems are resurfacing, I wonder if there is more than meets the eye. The sale of a prized asset indicates financial problems in Kuwait." The new Persian Gulf resource added, "Such suspicions are spot on. Not only the Kuwaitis have mega problems. Dubai has more then $385 billion in debt that has not been disclosed yet, much of it at risk!" Ouch! Wow!! Another $385 billion in hidden debt at high risk!! THEY ARE ONLY BEGINNING. Never believe the clowns and hacks and talking heads on the financial press who tell fairy tales that the debt default problems are contained. They are global, contagious, and are sure to continue to produce major shock waves.
◄$$$ DUBAI DEBT CONCERNS RE-EMERGE. INSURANCE ON DEFAULT IS CURRENTLY MORE COSTLY THAN THE PEAK CRISIS TIME 2 TO 3 MONTHS AGO. A SECOND ROUND OF DEFAULTS AND SHOCKS SOON COMES. $$$
Dubai debt concerns have not dissipated. The cost of protection against a default by the Persian Gulf emirate climbed to the highest level since November. The price of Credit Default Swaps on Dubai government debt jumped to 630 basis points on February 12th, up from 592 the day before, according to data provider Markit. Since the end of November, the state owned conglomerate Dubai World and its Nakheel property development subsidiary have not actually resolved much of anything. They only revealed the tip of the iceberg of bad debt from one of the most grandiose construction follies ever known in the history of mankind. The sheiks have routinely blocked attempts at disclosure. Dubai World could not meet imminent debt obligations, but worse, they have not revealed the full extent of their debt in the process of default. Dubai World defiantly stated that it would not pay interest until May, while it sought to reorganize more than $20 billion of debt. The rot is deeper, much deeper.
The price of the Credit Default Swap contracts eased lower after Abu Dhabi sheiks came through with $10 billion to aid Dubai, enough to ease the cash crunch. They managed only bought some time. Broader sovereign debt concerns have churned credit markets, as recent focus in centered on Greece's problems. Credit Default Swaps are a common type of derivative contract that, like any other bond insurance, makes a payout in the event of default, whose risk is reflect in the cost premium on the contract. A rising cost for CDSwaps indicates that investors are more concerned about loss from outright default (major loss), and thus are willing to pay more for protection against defaults. The Dubai CDSwap quoted at 630 basis points means an investor buying protection on $10 million worth of five-year bonds must pay $630k per year for insurance. Dubai World has debts of about $60 billion, revealed to date, accumulated during a real estate development binge last decade. Delayed projects, abandoned projects, absent buyer demand, and folded companies have contributed to a crisis where debt cannot be properly serviced. When news hits at a future date about an additional $385 billion in hidden debt, the CDSwap contract will shoot higher in cost. The global reaction will surely be one of shock, and wonder how deep the debt nightmare extends with other nations. The word 'contained' will be laughed at and mocked openly. Nothing is contained. Contagion is absolute, especially since Goldman Sachs has infected and corrupted every single bond market on earth.
Dubai World met with its creditor banks on December 20th to discuss restructuring plans with approximately 100 bank delegates, according to the London Times. After loan commitments to Dubai of $10 billion arrived from Abu Dhabi sheiks, laden vast savings from oil & gas income, certain large debts structured in Islamic bonds, were repaid in full. Dubai World obligations have been financed through the end of April 2010. Various subsidiaries pop up with need and are satisfied. The United Arab Emirates, in particular those in Abu Dhabi, are playing a reaction game where the intensity will pick up speed in the next couple months. They will lose control in the debt collapse. See the Market Watch article (CLICK HERE).
◄$$$ DUBAI STILL STALLED IN DEBT RESOLUTION. NOTHING HAS BEEN RESOLVED, LIKE AN OPEN SORE. WORSE, ITS WOUND IS SOON TO BE REVEALED AS MORE GAPING THAN PREVIOUSLY KNOWN. $$$
Delay is the main theme on the Dubai debt resolution. Dubai (the city state emirate) and Dubai World (the corporation) have not yet made an offer to creditors on the debt restructuring plan for the state owned holding company, according to the emirate's Dept of Finance. The desire by the UAE Govt was to give creditors enough time to understand the Dubai World business plan and review any future debt restructuring proposal. Dubai World, a state owned holding company, is rumored to be preparing to offer creditors 60 cents per dollar after seven years as part of a deal to restructure $22 billion of debt, perhaps with zero interest. Zawya Dow Jones reported these details, citing unidentified people familiar with the plans. The deal could be guaranteed by the UAE Govt but might not contain interest payments to creditors. See the Bloomberg article (CLICK HERE). Be sure to know what a truly pathetic floated offer this really is. An offer of 60 cents on the dollar after a 7-year wait with no interest is horrendous and an overt callous insult to creditors. We might soon see some opposing bids, which will make the scenery interesting. The more immediate term might see a shocker like only 20 to 30 cents per dollar submitted.
GREEK EXPULSION MODEL
◄$$$ THE GREEK DRAMA WITH DEBT IS DEEPLY INTERTWINED WITH EXIT STRATEGY IN THE EUROPEAN UNION. THE EURO CENTRAL BANK RELAXED ITS COLLATERAL BANKING RULES, THUS PERMITTING IMPAIRED SOVEREIGN DEBT (NOT JUST GREEK) TO PERMEATE MONEY MARKETS. SO AS THE E.U. BANKS PURSUE AN EXIT STRATEGY, THE GREEK BONDS WILL SOON DOWNGRADE OR DEFAULT FROM MISSED INTEREST PAYMENTS. EUROPEAN BANKS ARE VULNERABLE TO A SEVERE SECOND CREDIT CRISIS SHOCK WAVE. EUROPE IS CONSOLIDATING AT ITS MIDDLE CORE. $$$
The Exit Strategy for Europe is liberation of Germany from its welfare guarantor role. The entire landscape of Europe is on warning. The sovereign debt crisis has spread far and wide, but hidden from view is the banking system vulnerability. Nations from Greece to Spain, to Portugal and Italy (so-called PIGS nations) have experienced credit distress, budget cutbacks, political repercussions, worker strikes, and other disruptive events. The extent of the debt tentacles is vast across Europe. The factor given little emphasis in the financial press networks is the interwoven nature of the Greek debt in particular and the PIGS national debt in general across European banking systems. The Greek Govt debt is ¬330 billion in total, but in 2010 an amount of ¬50 billion short-term debt is due. That is the crux of their pending default. Both the magnitude and impact of Greek debt are similar to Lehman Brothers 18 months ago. Switzerland is highly vulnerable, owning a hefty ¬47 billion in Greek debt alone, equal to 12% of the entire Swiss GDP. The PIGS national debt is dispersed among major European members. One can find $331B in German banks, $307B in French banks, and $156B in British banks. The French sovereign debt plus the funded debt from the PIGS nations in French banks are sufficient to collapse France financially. One should be aware that Eastern Europe will fall directly after the PIGS nations are resolved, a further devastating blow to the Swiss banks, which own the majority of their ruinous mortgages.
The Euro Central Bank would prefer to begin its own Exit Strategy. Just like the US central bank counter-part, the ECB is stuck, but in a different way. The EuroCB exit outcome will be a resounding breakup fracture. Nations realize they must end the grand episode of easy money, the powerful programs called Quantitative Easing (QE). They cannot without major eruptions. The Bank of England has announced that it is freezing its QE program, spurring debate about the outlook for UKGilts, as bids are removed. The removal of the printing money bid for government bonds should push up bond yields significantly, at least in a real world. Southern Europe sovereign debt securities have tumbled in principal bond value. Yields have risen. Their Credit Default Swap contract for insurance has risen markedly. A recent snapshot in the first week of February showed the 5-year bond insurance cost for Greece to be 407 basis points, for Portugal 208 bpts, for Ireland 168 bpts, for Spain 167 bpts, and for Italy 143 bpts. These are very big numbers. Most recent data is 50% higher in some cases.
Credit crisis contagion is here in loud form. Nevermind the bond vigilantes. The sovereign default vigilantes have called Almunia's bluff at the Euro Central Bank. An incredibly crucial game is being played, calling the bluff of the German high banker command. The main question is whether Germany and the EuroCB will be able to resist the pressures for bailout of these deeply distressed nations. See the Zero Hedge article (CLICK HERE). My sources claim Germany will permit them to default and suffer the consequences. Germany wants its independence back, and to shed its creditor role for the crippled Southern European nations.
Greece must contend with a spiraling deficit estimated at 12.7% of its gross domestic product last year. That level is far beyond the 3% limit permitted by the Maastricht rules for the European Monetary Union. The contagion has spread from Greece to Spain and Portugal, the nations pulled down by a severe downturn in the property and construction industries. Mohamed El-Erian is an executive of bond giant PIMCO. He said, "It is going to take years to sort out the sovereign balance sheet issue. Europe has become a huge game of chicken, whereby the Greeks are waiting for help from the outside and donors are waiting for Greece to take a step forward." Other opinions circulate. Ron Paul, the USCongressional thorn and El Cid to face down the US Federal Reserve, put a quick fine summary on the Greek issue. He said, "The Greek government is the latest to come close to default on their massive public debt. Greece has insufficient funds in their Treasury to make even the minimum payments that are now coming due. Their debt level is about 120% of their gross domestic product, and their public sector absorbs what amounts to 40% of GDP. Any talk of cutting costs and spending is met with violent protests from the many Greeks heavily dependent on government payments. Mounting fears of default have sent shock waves through their creditors and all of the eurozone countries." No resolution comes without expulsion.
Over the last weekend, the major finance ministers convened a G7 Meeting in Northern Canada, away from crowds of onlookers, adorned an abundance of ice to reflect their own ice cold arteries. US Treasury Secy Tim Geithner uttered empty words, far from the decision rooms. He said, "European authorities gave us a very comprehensive review of the program now in place to address the challenges faced by the Greek economy." Thanks, Tim! More empty words were uttered by Alistair Darling, the Chancellor of the Exchequer from England. He urged Greece to stick to its plan to solve its debt woes, and assured the EuroZone would support the nation. He said, "We understand collectively that it is in all our interests that countries return to good economic health as soon as they can." Thanks, Alistair! At the same G7 Meeting, Jean-Claude Trichet utter even more empty words. The president of the European Central Bank said, "We expect and we are confident that the Greek government will take all the decisions that will permit it to reach that goal." Really, J-C? Even Luxembourg Prime Minister Jean-Claude Juncker uttered empty words. The head of the Eurogroup of finance ministers stressed that Spain and Portugal posed no risk to EuroZone stability. Really, J-C? See the UK Telegraph article (CLICK HERE). In my view Greece is to Europe what Thailand was to the Asia in 1998 before the great Asian Meltdown that shook the world to its core.
An important second part to the tale must be told. The Euro Central Bank has laid down a collateral policy for bank assets. They opened the door in in the autumn of 2008, after the collapse of Lehman Brothers, with loosened collateral rules that govern how banks access central bank funds. They permitted banks to use government bonds rated BBB or above in EuroCB money market operations, instead of continuing to require bonds rated A- or better. The temporary lax policy, intended to expire in late 2009, has been extended until the end of 2010. This is pure expedience at best, cowardice at worst, reckless to be sure. All throughout 2009, banks holding Greek bonds have been briskly exchanging them for other bond assets through the ECB window. Without such a mechanism, the Greek Govt bonds, and other sovereign bonds, would have fallen considerably in value. So sovereign debt across Europe has been supported by relaxed rules, hiding impaired value. The Greek banks with huge tranches of outstanding Greek bonds are at grave risk of sudden death, with or without continued EU membership. The money market mechanism in Europe serves as a near perfect parallel to the relaxed policy for trade of toxic mortgage bonds to the USFed within the United States. In Europe the banks have frequently suspended accounting rules and asset markdowns. Spain still holds gigantic tranches of mortgages, pretending they are linked to property assets with 25% to 40% higher value.
The likelihood is very high of broad sovereign debt downgrade this year. The process has already begun. Greek Govt bonds will certainly be excluded from any newly tightened ECB regime, no longer exchangeable. Banks will be caught in the cold. This January, senior ECB officials indicated that they intended to normalize the policy at the end of 2010, as part of their Exit Strategy extended in time. The reiterated intention has yanked the bid, and removed one key source of support for Greek debt. They are trash. Investors such as German insurance companies have scattered. They hold large blocks of weakened European sovereign bonds. The ECB debate over bank collateral has important consequences from ripple effects. The movement of funds has begun to take on distinct similarities to 'Hot Money' pulling out of emerging markets like Iceland or Latvia. The macro-economic effect is in focus from sheer volume of money flow in exit. Consensus is growing for an eventual Greek Govt debt default. What Wall Street appears not to factor into the equation is politics. The story is not only about economics, but politics, and the fading determination to maintain European unity. That mindset is slipping away, and the risky outcomes are unclear. Lessons will be learned from Greece, applied to Italy and Spain immediately, as in rapid expulsion. The German bankers wish to quickly exit from their costly national welfare guarantor role!! This factor is never mentioned in the mainstream controlled press, when it is the primary motive for action. At a cost of $300 billion per year, Germany has lost $3 trillion in wealth from this disastrous experimental decade, a fact not even comprehended by Wall Street. The German bankers want an end, but must manage the politics of expulsion.
The Greek debt saga has exposed two major fault lines, namely the level of government debt, and the exit strategy dilemma. The Greek credit impairment has been masked for the entirety of year 2009. Major investors do not have much faith in Greece putting its fiscal house in order, nor Spain or the United Kingdom. The day of reckoning is approaching fast. Central bankers are caught, trapped, stuck in an accommodative policy. The implications for a Greek Govt debt writedown in value, with suffered losses, will be powerful. Banks across Europe will suffer losses, not just in the Greek bonds but the bonds from other PIGS nations in a severe ripple effect. Regardless of removal and expulsion from the European Monetary Union, the banks across the continent will take major losses. The return of Greece to the drachma currency will come at a heavy cost to European banks, in a loud second shock, as bonds fall in value from aftershock. An important process will be set in motion at the bank level, as a result of ultra-easy artificial collateral rules. The door has been open for a full year to dump toxic bonds, scattered like poisonous fertilizer. So the Euro Central Bank wants to tighten its monetary policy? Not likely without enormous impact in this environment. See the Financial Times article (CLICK HERE).
◄$$$ DISTRACTIONS COME FROM BASELESS STORIES ABOUT LAST HOUR GERMAN RESCUE FOR GREECE. THE GERMAN BANKERS ARE PLAYING A FIRM GAME, OFFERING AID WITH CONDITIONS THAT WILL NOT BE MET. LATER AID DOES NOT ARRIVE, AND DEFAULT WILL OCCUR. THIS IS PREDICTABLE. GREECE HAS ALREADY REFUSED THE AUSTERITY REQUIREMENTS THAT WOULD HAVE BEEN ECONOMIC SUICIDE. STRIKES TIE THE HANDS OF ITS LEADERS. $$$
The last hour German rescue was touted across the Western press, this time led by Financial Times Deutschland. The financial markets and the people were told what they wanted to hear. The story claims Germany is planning an aid package for Greece, citing ruling coalition parties in an accord. The proposed package includes both bilateral aid as well as measures coordinated by the European Union. See the Market Watch article (CLICK HERE). WOW! What a relief!! Unfortunately, no shred of reality to the story. Germany is merely creating conditions for failure, thus providing Bonn and Berlin the opportunity to place the responsibility upon Athens for the Greek failure to comply. The conditions include economic arsenic designed to cause cardiac arrest to their banking system. The conditions are also a moving target never to be met. The EU has refused to reveal details of how it might help Greece raise ¬30 billion from global debt markets by the end of June. Investors are unsure whether this is high jinks constructive ambiguity to pressure Greece and keep them off balance, or whether the maneuevers reflect the deep reluctance by Germany to be drawn deeper in an EU fiscal union. Strange machinations have occurred in debt movement. A considerable amount of Greek Govt debt has been transferred to French banks. Perhaps German whiz bankers have set up France over the last few years to be bagholders of the debt, a condition to weaken their bargaining position later. France will become German squires in my view, when their own Day of Reckoning comes.
Greece has quickly refused the austerity measures demanded by the European Union, which is controlled by Germany. The refusal came in the form of a denial by the Greek Govt finance minister, calling for its nation to take further austerity measures in debt reduction. The EU verdict amounted to a rejection of earlier Greek austerity efforts, viewed as too reliant on one-time measures and on negligible spending cuts. They demand Greece to reduce the deficit from 12.7% of GDP to 3% in three years. Olli Rehn, the new EU Commissioner for Economic & Monetary Affairs said, "Our view is that risks... are materializing, and therefore there is a clear case for additional measures. We expect that in due course... the [Greek] government will take additional measures to reach this objective." George Papaconstantinou is the Finance Minister of Greece. He argued that the EU needed to show more support to Greece instead of expecting more detailed austerity measures. The finance minister claimed "[Greece] is doing enough" to reduce its public deficit from 12% to 8% of GDP this year, under emergency fiscal cuts submitted for review.
The Euro Central Bank also joined by piling on demands and criticism. EuroCB president Trichet said that Greece must take extra measures to fix its budget deficit, and scrutiny of its economic indicators must be heightened. Senior figures at the European Commission believe that the plans announced so far could leave Greece short by as much as 1.25% of the 4% cut required by the end of 2010. Anger is in the open, as Greek Prime Minister George Papandreou is already furious at what he believes is a lack of real support for his country. Further strikes and union protest about austerity cuts have occurred and will surely continue. Distrust of Athens has thickened. Some culpability for deception belongs with the Greek Govt executive branch, as Greece had concealed the true size of its debt in order to meet the criteria for the European Monetary Union in 2001. The Greek Govt kept the transactions off the balance sheet by classifying them as sales rather than loans. See the London Business Times article (CLICK HERE).
PM Papandreou has appealed twice in a single week for the Greek people to accept painful measures, arguing forecefully that the country cannot afford strikes and blockades. Definatly, instead the biggest union of Greek workers approved the second mass strike in February, and worse, tax collectors began a 48-hour walkout. About 98% of the 14 thousand collectors joined the protest, an action by the POEDY-DOY union. Also striking for 48 hours were customs workers and Finance Ministry employees, who blocked entry at the airport border and finance ministries in central Athens. Farmers have been blocking roads and border posts for about two weeks to demand higher prices. They have a slogan for the strike, "People come first, markets & profit second." The spokesman for the big national GSEE union, representing two million workers, repeated the labor view that Papandreou had succumbed to the markets. See the Bloomberg article (CLICK HERE).
◄$$$ THE INTERNAL STRUCTURE OF EUROPE HAS FAILED. GERMANY IS NOT IN THE BUSINESS OF MANAGING VAST PROTECTORATES WITH HIDDEN DEBTS. THE VOTING RIGHTS ARE SOON TO BE SUSPENDED. MORE GREEK DEBT HAS BEEN FOUND. THE EUROPEAN SOVEREIGN DEBT SYSTEM HAS BECOME A FARCE, A JOKE, A WRECKAGE. TYPICAL GAMES HAVE BEEN PLAYED BY THE USUAL FUNDS, INCLUDING JPMORGAN AND GOLDMAN SACHS. $$$
The leading German news magazine Der Spiegel dealt with the thorny topic of failed structural integrity in direct tones. It wrote, "In the more than 10 years since the Euro was introduced, the Commission states, it has become clear that simply controlling the development of member state budgets is not enough. What that means, more concretely, is that the stability provisions stipulated in the Maastricht Treaty to regulate the common currency are not working, and member states need to better coordinate their financial and economic policy measures. That is precisely what Euro skeptics have said from the beginning, that a common currency cannot work in the long run without a common economic and financial policy. The governments of member countries ignored these objections, unprepared to give up a further aspect of their national sovereignty. The Greek Parliament and government are now virtually stripped of power. They are not allowed to decide on any new expenditures without EU approval. Finance Minister Giorgos Papakonstantinou is required to report every four weeks on progress made in budget restructuring. There were even calls at the European Parliament last week to send a special EU representative with extensive authority to Greece. The small country has become little more than an EU protectorate. See the Spiegel article (CLICK HERE). " By protectorate the journal means a German protectorate, a ward of the state, a big ward.
Greece is a debt sinkhole and a playground for investment banker abuse. The thermometer on the Greek debt situation is their Credit Default Swap insurance contract. Hardly a day passes without some updated indication of the Greek economic collapse. Never before under review, the CDSwap has been thrust to the forefront. Its contract price immediately gapped on the news of yet another indebted hole valued at $40 billion that must be plugged with evermore aid or rollover. Investors will eventually realize that the deeper they dig, the more indebted dirt they will uncover. Greece is a financial and political 'Debt Sinkhole' for anyone who tries to bail it out. See the Zero Hedge article (CLICK HERE).
Major hedge funds and investment banks have been implicated in attacks against the weakened Greek debt pillbox. The intrepid website Alphaville reported that the mysterious hedge fund cabal has struck again very recently, this time in Spain. More relevantly, the names associated are much the same as in the destruction of the US debt fortress. The same ones appear who are involved in Greece, Portugal, Dubai, and elsewhere. The list includes Moore Capital, Brevan Howard, Paulson & Co, JPMorgan Chase, and Goldman Sachs. See the Zero Hedge article (CLICK HERE).
An important insult and confirmation of second class status came when the European Union council of finance ministers threatened to cut off Greek voting power. The EU council demanded that Athens must comply with austerity demands by March 16th or lose control over its own official policies altogether on taxation and budgets. Cited is the draconian Article 126.9 of the Lisbon Treaty. While the move to suspend Greece of its voting rights is symbolic, it marks a constitutional watershed and represents a crushing loss of sovereignty. Austrian finance minister Josef Proll said, "We certainly will not let them off the hook." Some German officials have called for Greece to be denied a vote in all EU matter until it emerges from what they call 'Receivership.' Many Germans disagree about a broad EU support mechanism in the form of bilateral aid from EuroZone states, including Otmar Issing. Their elder Bundesbank statesman, Issing claims an EU rescue for Greece would be fatal, arguing that unflinching rigor is the only way to hold monetary union together without political union. See the UK Telegraph article (CLICK HERE). Unflinching rigor is the device used for expulsion with political cover.
GOLDMAN SACHS EMBROILED IN EUROPE
◄$$$ A FRESH GOLDMAN SACHS QUERY COULD RESULT IN A BAN FROM EUROPE. GSAX IS INVOLVED IN CORRUPTION LACED IN FINANCIAL FRAUD THE WORLD OVER. GRAND MISREPRESENTATION IN THE MARKETING & SALE OF EUROPEAN SOVEREIGN BONDS HAS GSAX ON THE DEFENSIVE, WITHOUT ITS TRAINED USGOVT PROTECTOR DOGS. $$$
The world is beginning to realize that Goldman Sachs is a rogue firm in control of the USGovt finance ministry, but worse, it is deeply involved in borderline criminal behavior in European sovereign bond trafficking. Simon Johnson, former IMF chief economist and current professor at MIT Sloan School is business, summarized well the GSax risk. He said, "We now learn, from Der Spiegel last week and the New York Times, that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November. These actions are fundamentally destabilizing to the global financial system, as they undermine the EuroZone area, all attempts to bring greater transparency to government accounting, and the most basic principles that underlie well functioning markets. When the data are all lies, the outcomes are all bad. See the subprime mortgage crisis for further detail. A single rogue trader can bring down a bank. Remember the case of Barings. But a single rogue bank can bring down the world's financial system." It is about time the world wakes up to GSax criminality and the threat from the activity of this cabal.
Obviously, Goldman Sachs will attempt to deflect the criticism, calling their hidden contract underpins business as usual. Well, perhaps corrupt bond markets are their specialty for business as usual. The GSax executives will seek protection from the USFed itself, which casts a long shadow. The case of bond misrepresentation by GSax next goes before the European Commission, as EuroZone budget issues are under their jurisdiction. Faced with enormous pressure, and even a desire to identify blame, the Commission will surely launch a special audit of Goldman and all its European clients. But does the Commission contain GSax alumni??? Precedent exists for formal bans. As was the case with Salomon Brothers twenty years ago, GSax could be banned from participation in certain government securities markets. Professor Johnson expects GSax will be blacklisted from working with EuroZone Govts in the foreseeable future. GSax consistently hid the full extent of Greek Govt debt, used credit derivatives in the support of existing debt securities, and thus misrepresented bond investors. GSax clearly placed positions to profit from the falling bonds it sold, just like with the US Mortgage Bonds. This is more conflict of interest, basic fraud, and lack of disclosure.
The firm has a specialty of making private gains for double dealing in conflict of interest that result in destabilization. They are loyal only to their executives and share holders, a private syndicate called an investment bank, now a commercial bank holding company. My firm belief is GSax is the center of a vast global financial crime syndicate. Johnson calls preserving GSax on incredibly generous terms from the USGovt difficult to defend, in the name of saving the financial system. Johnson said, "To allow the current government backed (massive) Goldman to behave recklessly and with complete disregard to the basic tenets of international financial stability is utterly indefensible. The credibility of the Federal Reserve, already at an all-time low, has just suffered another crippling blow. The ECB is also now in the line of fire. Goldman Sachs has a lot to answer for." Maybe, but so what? Who will impose punishment? Their retaliatory threats are never heard, only in the private phone calls and hushed meetings. In some respects, the USMilitary and the US security agencies enforce GSax threats. People who deny such extended reach simply fail to comprehend the modern day syndicate.
Jesse goes further in the same direction, when he said "There is a case to be made that the money center banks, in particular Goldman and JPM, are sometimes acting as instruments of US foreign policy." See the Cafe Americain article (CLICK HERE). The twin monoliths do the USGovt bidding and corrupt all markets they touch, for syndicate benefit. They are parasites of high order, protected by the agents in charge (US Presidential Administrations), feeding off the vast host of the entire US nation, ruining the financial foundation of not only the United States but Europe. Awareness is growing of what the Hat Trick Letter has been exposing of pure syndicate behavior for many years. Matt Taibbi best portrays the GSax juggernaut as a massive vampire squid with blood funnels well situated in any pool of money the world over. It is not possible to improve on such metaphors.
◄$$$ GOLDMAN SACHS FAILED TO DISCLOSE UNDERLYING GREEK SWAP CONTRACTS. THEY MISREPRESENTED THE GREEK SOVEREIGN DEBT. INVESTORS COULD NOT PROPERLY GAUGE THE INHERENT RISK. CALL IT FRAUD BY ANY NAME. $$$
Goldman Sachs specializes in advanced fraud. One cannot become a GSax Vice President without a fraud violation, an unspoken requirement, a rite of passage. They have been exposed with Greek Govt debt misrepresentation. GSax failed to disclose high volumes of currency swap contracts. GSax managed $15 billion of sovereign bond sales for the Greek Govt after arranging a currency swap that concealed the extent of its deficit. The important part of the picture is the lack of disclosure for the swap contracts in bond sales documents in the official prospectus, as required by securities laws. Then again, GSax is above the law. The violation occurred in at least six of the ten sales the bank arranged for Greece, according to a review conducted by Bloomberg. The syndicate giant GSax worked to raise funds for Greece totaling $1 billion in funding off the balance sheet in 2002 through the swap. The European Commission regulators admitted to knowing nothing about the secretive deal until recent days. Bill Blain is co-head of fixed income at Matrix Corporate Capital in London. He pointed out that such failure in disclosure would permit GSax, other bond underwriters, and the Greek Govt to obtain a higher bond price upon issuance. Therein lies the fraud. Blain said, "The price of bonds should reflect the reality of Greece's finances. If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled. The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case." The deception is out in the open. If done in the United States, the fraud would have been covered up quickly and effectively, probably never even reaching the mainstream news.
Goldman Sachs has been the subject of strong direct criticism by German politicians. They focus on Euro currency membership compliance matters. The Greek Govt finance ministry is also being criticized by other European Union nations for failure to disclose the swaps to the EU regulators. The potential is high for the fraud incident to blow up across the expanse of Europe. The EU statistics office (called Eurostat) last week ordered Greece to hand over information on the swaps transactions by the weekend post haste in an investigation that could quickly extend to other EU countries. The yield on Greek 10-year government bonds jumped on the news over greater debt to create an even wider spread over the benchmark German bunds. Simon Johnson cautioned that "When people start to fear that the numbers are not accurate, they fear the worst... From what we know, this is an egregious example of a conflict of interest. Even if the deal had been authorized, it does not let them off the hook." Thomas Hazen is law professor at the Univ of North Carolina. He said Goldman Sachs could face legal liability "if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading. But that would be a tough hill to climb, in terms of burden of proof. There would have to be some sort of smoking gun memo." The hunt for evidence is certainly on, and pressure to produce damaging such information will be great. GSax is on the defensive, especially after the AIG fraud.
European Commission officials made clear that the currency swaps in question do not necessarily break EU rules. However, they have called for a special audit. New rules are coming to tighten any possible loopholes. German Chancellor Merkel will push for new rules that will force EuroZone nations and banks to disclose bond swaps relevant to public finances. Collusion might have been rampant to falsify the financial data in order to represent the Euro as a functional currency. See the Bloomberg article (CLICK HERE). For over three years, the EuroBonds with German markings have not been exchangeable for EuroBonds with Spanish or Greek markings. This point has been hammered home several times in the Hat Trick Letter since 2006. A different bond value (both yield and principal value) thus signified a different underlying currency, yet the Euro currency traded interchangeably across the European Union. It has been and still is a phony homogeneity. Vast arbitrage strategies have been at work by GSax and many other financial firms. The different values of EuroBonds for each nation actually scream of a different Euro associated with each nation. The bonds traded gradually at wider and wider spreads versus the low benchmark German Bund. They therefore dictated a different Euro per nation, with a range of values. Goldman Sachs facilitated in the falsehood of European homogeneity, and enabled artificially high bond values at sale.
The Jesse Commentary provides an outstanding conclusion. He wrote, "This is in no way an excuse for the Greek government. But what Simon Johnson is saying is that Goldman is not only not blameless, but is enabling, complicit, and perhaps even presenting the opportunity for market manipulation and fraud to other parties. Typically they like to 'package' these scams and take them from one customer to another, so that greed meets need, as a corrupting influence. It is no different than a bank engaging in money laundering in support of the criminal activity of another organization. Is he right? Will the EU begin to act to curtail the transgressions of multinational banks based in the US? I think he may very well be. It is one thing to take on pension funds and speculators, and to run raids on companies. It is another thing to start taking on countries, and especially those not so alone and weak as Iceland. And even more than that. If it ever comes to the light of day, the complicity of a few central banks and governments in the actions of one or two of the money center banks in manipulating several global commodity and asset markets may ignite a firestorm of a political scandal of epic proportions." We might be at the dawn of global shun for US investment banks, the heart of the US financial crime syndicate. If these commissions are not careful, they might expose narcotics money laundering by US banks.
For additional reading on how Wall Street firms assisted Greece in masking debt, and how it actually generated the European debt crisis, see the New York Times article (CLICK HERE), or the Baseline Scenario article (CLICK HERE), or the Money Watch article (CLICK HERE).
◄$$$ ACTION TAKEN AGAINST GOLDMAN SACHS MIGHT BE FORTHCOMING. LOOK FOR INNOVATIVE ATTACKS TO CONSTRICT THE FUNNELS AND FLOW. EXPECT A MORE SUBSTANTIAL SCANDAL TO ERUPT. $$$
Craig McC, a colleague with insurance and construction experience in California, made a great conclusion. He said, "Given the many centuries of intrigue throughout Europe, I would think the ostracism of GSax and others would be approached in a Machiavellian manner. Countries might ban the enforcement and payment of derivative contracts, and ban banks in their countries from dealing with firms that are involved in high frequency trading or other activities that GS specializes in. In short, starve the disease carriers without attacking them directly." A ban of activities could be easier to enact into law than a ban on a single rogue villain parasitic firm like Goldman Sachs. A veteran global banker contact hinted of something far deeper regarding exposure of GSax criminal behavior. He wrote, "This will all unfold in an ugly manner. Just wait what else will be made public. There is a real eye-opener is just around the corner from being disclosed. The US will be held accountable and so will Goldman. The real war against terror needs to start on Wall Street and in the USGovt itself, their financial terror. The Axis of Evil is inside the United States itself." So expect a bigger scandal centering upon Goldman Sachs soon, the great vampire squid, the center of the U.S. financial syndicate. Exposure comes soon perhaps!!
◄$$$ MATT TAIBBI IS MAKING A CAREER OF FOLLOWING AND REPORTING THE GOLDMAN SACHS SYNDICATED CRIMINAL RECORD. HE PROVIDES AN EXCELLENT SUMMARY THAT READS LIKE A COURT INDICTMENT. EXPECT NO PROSECUTION SINCE GSAX OWNS THE FEDERAL COPS. WITH CONTROL OF THE USDEPT TREASURY, GSAX IS THE PRIMARY ORCHESTRATOR. $$$
Matt Taibbi is at risk, since exposing a crime syndicate often results in a shortened career and an early grave. Matt chronicles the trail in the Rolling Stone, an avant garde journal that once focused on marijuana and the Vietnam War. He begins by telling the story of the massive executive bonuses, a nice contrast to the hefty USGovt banker welfare funds received. He next cites the 'Swoop & Squat' technique to conduct the AIG insurance scam. The Town of AIG had lots of fire insurance policies, and GSax owned many of them. So they started the fires in the town to collect big. GSax demanded cash collateral from the policies, drained AIG, then pushed the USGovt strings to nationalize AIG, and finally stepped to the front of the line for contract redemptions. GSax shifted identities to become a bank holding company, and thus lined itself for much larger USGovt funds from the TARP slush fund system. The newly created 'Dollar Store' was done via intimidation, coercion, and unspeakable hidden threats to the USCongress. Matt details the rough sketch of the housing bubble supported by the mortgage finance bubble. Enter the USFed to buy up rafts and flotillas of toxic bonds from Wall Street firms, including Goldman Sachs. He describes the 'Rumanian Box' scheme. In it, the Wall Street firms, flush with TARP funds, refused to lend money to credit customers. The USGovt responded to a starved sector with even more temporary lending facilities, which Wall Street rushes to borrow. He describes the 'Nuclear Powered Balls' which essentially are the powerful Quant itative Easing, the massive print of new money to complement the 0% rates.
With Zero Interest Rate Policy (ZIRP) and QE, the Wall Street firms could blithely proceed with rape & pillage of federal finances, not giving a damn about the nation, the economy, or any recovery. Money would be squirreled away in offshore banks. He describes the rigged 'Big Mitt' games where the USGovt in political cover took advice from Treasury Borrowing Advisory Committee, a board loaded with Wall Street firms. The Public Private Investment Program (PPIP) was devised not only to purchase the most worthless of toxic bonds, but to tip off Wall Street firms into loading their balance sheet with them before selling at artifically high prices to the USGovt itself. He describes 'The Wire' which tipped off Wall Street firms ahead of time when major clients prepare to make large investments. Goldman Sachs is the superstar of frontrunning trades, and even was caught red-handed with NYSE insider scheme software stolen. But the FBI arrested the whistle blower and made GSax out to be a victim of precious proprietary software. Matt finally describes 'The Reload' which has the USGovt offer of stupid tax credits to sustain the housing prices for a while. Wall Street firms take advantage. See the intriguing expose by Matt Taibbi in the article entitled "Wall Street Bailout Hustle" in the Rolling Stone due for March publication (CLICK HERE). May Matt live a long life.
CENTRAL BANKS FRANCHISE FAILURE
◄$$$ A PAN-EUROPEAN SOVEREIGN DEBT CRISIS IS UNFOLDING. GOVT DEBT IS BOTH AT EXTREME LEVELS AND UNDER HIGH LEVERAGE, LOADED WITH TOXIC BONDS. A DELUSION OF REMEDY DRIFTS LIKE A CLOUD. GREECE THEN ITALY PLUS SPAIN WILL BE FORCED OUT OF THE EURO CURRENCY. THE GREEK TRAGEDY HAS AN AMERICAN CONCLUSION, WITH ZERO AWARENESS BY BANKERS AND LEADERS IN THE UNITED STATES. THEY ARE DETERMINED TO SPIN A RECOVERY WHEN DEDICATED TO WAR. USTREASURY DEBT IS BEING HEAVILY SCRUTINIZED FOR DOWNGRADE AND DEFAULT. THE EURO IS UNDERGOING A TRANSFORMATION NOT A DEATH. IT WILL RESEMEBLE A NEW DEUTSCHE MARK. $$$
After removing mountains of ruined bonds from private banks, government debt grew to extremes in Europe. It grew in parallel to the United States and the United Kingdom. A default cascade comes, as leverage grew out of control quietly. A run on private banks is assured, with a domino effect slamming against a wall of sovereign debt risk, soon on a global basis. Bank assets are an order of magnitude greater than national GDP sizes. Govt debt is the focus in the last two months, but private banks will take that focus later. For at least Europe, it is game over as debt is not resolvable. The Greek chapter might be a diversion from the core problem soon to erupt within Europe. Excess liabilities and leverage make for a witch's brew. The de-leverage process will knock many financial structures to the ground. Europe has a recent history replete with riots in urban streets, more than anywhere in the Western world. The inevitable fracture of the European Union will unfold slowly at first, then much more rapidly as the Greek Playbook is fully written and applied elsewhere. It is a manual to deal with failure of currency management. The Euro currency and Euro Bonds were not coordinated effectively, operating in two arenas, mired in a landscape with indefensible global currencies. Each nation under great debt distress will go its separate way and revert to the old currency, complete with massive devaluation and assured disruption. That includes Germany, with a twist.
The immediate obstacle is delusion of remedy. Italy is the top threat to Euro, so Nobel Prize winner Mundell believes, although some debate is found. Italy has a large total debt, but its annual fiscal deficit is the smallest of the PIGS nations. It cannot be bailed out practically. Greece and then Italy plus Spain will be forced out of the European Union, and out of the Euro currency. The Spanish Economy grinds slower, as resolution of debt is non-existent among their big banks, and as home prices have not adjusted lower. Spain is in denial, stuck in suspended state, its economy entering a deeper recession. When it awakens, it will default. It might awaken when forced to default. Witnessed is the failure of the Euro Central Bank, badly designed without proper authority since a cord of independence remained throughout. Europe cannot unite unless under a tight grip of vicious fascist dictatorship. All in time.
Like a tsunami, natural forces will strike the WashingtonDC shores in a global process that is unstoppable. A sequence is at work, with Southern Europe next in line, then England, finally the United States. Little do the US bankers and leaders seem aware, but the Greek crisis will circle the globe and strike America. The initial gongs were Iceland and Dubai, mininized in meaning as usual, denied for their ripple effects even to the foreign anking systems associated. The flaws of chronic government deficits, expanding government functions, and fractional banking have resulted in what Niall Ferguson of the Financial Times calls the fractal geometry of debt in a sea of vulnerabil ity. The USTreasurys are increasingly isolated by heavy domestic monetization operations and reduce foreign creditor purchases, both factors growing in dangerous detection. Last week Moodys Investors Service warned that the Aaa credit rating given the USGovt should not be taken for granted. The agency stressed the crippling ongoing deficits that are not in remedy mode. They seem to overlook the threat of rising borrowing costs and short-term emphasis since the Clinton years.
Taleb of "Black Swan" fame advises to short of USTreasurys, in particular due to Bernanke at the USFed helm and Summers in the White House economist corps. He regards the duo as reckless to monetary principles. Taleb points to a broken USGovt fiscal condition, reckless bank leadership, and a situation materially worse than a year ago. The USGovt must cut spending on the endless wars and dismantle grandiose siphons of funds by Wall Street and the Pentagon. Paul Craig Roberts warns of a path to USTreasury default. He has past experience in the USDept Treasury under Reagan. USGovt leaders in several branches show a dismal awareness of the depth of problems, still hellbent on recovery spin and aberrant war. Their designed stimulus missed the mark. Their economic spin tries to overcome the lack of revival whatsoever in the labor market, whose source they fail to comprehend. It is the lack of industry, since dispatched to the Pacific Rim then China. Their dedication to the Pentagon, assured by sacred channels of funds, and devotion to Wall Street, guaranteed by Goldman Sachs plants in control of channels, are the only firm element visible. Roberts believes the reserve currency system is flawed, and could be replaced by a system only if bilateral responsibility is imposed, a daunting challenge. The USGovt debt situation is far out of control. Since the debt rating agencies are under thumb, the likely next chapter is a serious decline in the USDollar, after a more certain path is laid for Europe. A repaired, reformed, renewed smaller Euro currency would be the potential death knell for the USDollar. A trimmed new version of Euro currency is what to expect, not its death, one better described as a new powerful Deutsche Mark.
◄$$$ CENTRAL BANKS HAD A MAJOR POW-WOW. THE MEETING SMACKS OF A STRATEGIC MEETING OF SYNDICATE DONS. THE BANK FOR INTL SETTLEMENTS STANDS AS THE CAPO DI CAPI. THE BANKERS ARE WORRIED. IF THEY ARE NOT, THEY SHOULD BE. THEIR CENTRAL BANK FRANCHISE SYSTEM HAS FAILED. THEY ARE WITHOUT EXIT STRATEGIES. $$$
Last week, a summit meeting took place with top bankers from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank. Fears are out in the open of a return to global recession, despite the fictitious US news on growth and trade. The news wires prefer to call it a secret meeting but it was held at a cattle station in the Australian NorthWest province that contains a resort facility turned conference center. The gathering was organized by the Bank for Intl Settlements last year. The two days of talks were shrouded in secrecy, with tight security. The event was expected to be dominated by Asian delegations, including governors of the Peoples Bank of China, the Bank of Japan, and the Reserve Bank of India. The agenda was certain to include major selloffs in world stock markets, global concerns over sovereign debt, the lack of job growth in Western nations, and the absent door away from ultra-easy monetary policy. A key part of the two day stressed jamboree was a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Zeti Akhtar Aziz. Influential BIS general manager Jaime Caruana took a prominent role in the talks. Federal Treasurer Wayne Swan addressed the central bank officials at a dinner.
The gathering came at an important time for the BIS. It has attempted to initiate an overhaul of the global banking system, which will include new capital rules applying to banks and more stringent standards regulating executive pay. Their past rules on bank reserves were ignored by the renegade US bankers, who instituted phony FASB accounting rules in total disrespect and disregard for BIS authority. Andrew Kaleel is CEO of H3 Global Advisors. He said, "This does feel like 2008 and 2007 all over again, whereby we had these sort of little fires pop up. They are supposedly contained but in reality they are not quite contained. Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.'' Exactly, debt structures are a global latticework. See the Australian News article (CLICK HERE).
These central bankers are undoubtedly alarmed how the Dubai debt default has set off a ripple effect worldwide, my forecast made last August. The watchword for denial of central bankers on deep credit market distress is 'CONTAINMENT' just like in 2007 and 2008. They collectively argued the subprime mortgage problem was contained. Instead, as cited here in the Hat Trick Letter, the subprimes were the trigger for an absolute bond contagion and global credit crisis. The Dubai incident sparked round #2. Central bankers are worried about the failure of their franchise central bank system, in unspoken words. The banker limousines are falling into their own sink holes, driving over roads paved by toxic bonds heading nowhere. They are totally trapped with no Exit Strategy, just like my claims for months. Most major industrialized nations are in the same position, trapped. In my view, the 0% rate is a major billboard not just of failure, but the end of the road. No reversal to normalcy is possible.
One must wonder if these central bankers are scared, whether they recognized their failed franchise system, whether they realize that a move to the exits away from current accommodation sets off a disaster, whether they realize the USTreasury Bond bubble is their latest abomination. Any exit would vastly increase the borrowing costs of government deficits, which are skyrocketing with stimulus, bailouts, and nationalizations. Better yet, one must wonder if they are aware of the wider scope of banker murders, as the volume has risen and the rank of victims has risen. One must wonder if they are worried that a breakdown of resistance for USFed disclosure of their balance sheet would set up a global upheaval against the criminal collusion of central bankers pivoted upon bond fraud, bond counterfeit, insider trading, rigged markets, and even narcotics money laundering.
◄$$$ AN ARCTIC G-7 MEETING KEPT FINANCE MINISTERS INSULATED FROM THE HEAT OF SCRUTINY OR OBSERVATIONS. THE MAJOR THEME WAS CONTAGION AND ISOLATED SYSTEMIC FAILURES. A HINT OF DESPERATION IS DETECTABLE, ALONG WITH CONFUSION AMONG APPROACHES AND SOLUTIONS. THE G-20 MEETING IS WHERE LEADERSHIP LIES, AS G-7 IS WHERE VICTIMS OF THEIR OWN DEVICES SPUTTER. $$$
The setting for the G-7 Meeting of finance ministers was Iqaluit Canada, deep in Eskomo country, more correctly called Inuit lands. The remote location rhymed with the lack of relevance for the entire G-7 forum gaggle. The agenda centered upon Europe's worsening debt crisis amidst fears that the fiscal sickness in Greece was spreading like a contagious disease. Recall that some central bankers claimed the problem was contained only a couple months ago. Worries intensified about a potentially huge bailout as destabilization of the EuroZone has captured world attention. Canadian Finance Minister Jim Flaherty, host of the meeting, said "I think we have to be very mindful of the potential failure of domestic economies and of the persistence of some toxic assets in some banks... We are all agreed that continued stimulus is necessary, that we have not seen entrenched growth, we have not seen an adequate replacement of public demand with private demand. Flaherty comprehends the coming systemic failure of individual weak nations, and heightened risks of huge public deficits. He does not see the futility of more stimulus in the form of the same toxin, additional debt. Expect a continued flow of new money growth and the debauchery of major currencies. EuroZone countries like the PIGS (Greece, Spain, Italy, and Portugal) are under increasing strain and focus, as financial markets reflect the contagion reality throughout Europe.
A cloud was cast over the meeting. Debt ratings agency Moodys Investors Service commented last week how the United States must do more to keep its AAA rating after the Obama Admin projected a deficit equivalent to 10.6% of GDP in 2010. Japan was warned by Standard & Poors last month that it might suffer a downgrade over its deficit. Regardless of debt sustainability, let alone prospects for repayment, the G-7 ministers have no immediate concern about their spending levels. They struggle to keep their economies on the path to recovery. German Finance Minister Wolfgang Schaeuble claimed the Euro currency would remain stable despite the problems in certain countries. He should be taken for his word, since he is clearly involved in the surgery to remove PIGS excess fat from the European core body.
One could not help to notice desperation, confusion, and a touch of irrelevance. The larger G-20 meeting that includes China, Brazil, India, and other upstart nations, that forum is where the power lies and the next chapters will be written. Financial sector reforms have consistently featured confusion, even moves further down the road to fascism. The approach by the United States was discussed for its far-reaching (destructive) proposals. In January, US President Obama called for limiting bank size, restricting proprietary trading, even severing their ties to hedge funds and private equity firms. Such extreme calls added to the previous demand for big bank fees. Clearly, the US direction is more toward communism than capitalism, from a position of fascism, a note not missed at the gathering. All discussion of the Chinese Yuan, the clear newfound dominant currency, was understood to be best held at the G-20. See the China Daily article (CLICK HERE). The main topic of the G-7 Meeting might have been how irrelevant the entire group had become to global economic growth, in fact a major drag.
◄$$$ DAVOS SECURITY CHIEF FOUND DEAD, A MYSTERIOUS EVENT IN ITSELF. THE WORLD ECONOMIC FORUM CENTERED ON EUROPEAN SOVEREIGN DEBT DISCUSSIONS, WITH A HINT OF CENTRAL BANK FAILURES, EVEN BANKING SYSTEM INSOLVENCY. $$$
The Head of Davos security was found dead in his room. The usual kneejerk conclusion by the police was suspected suicide. Hardly! More to this story! The police commander heading security at the regular meeting in Davos Switzerland was Markus Reinhardt, also head of police in the Swiss canton of Graubuenden. Forum organizers put the best face on the incident. World Economic Forum founder Klaus Schwab said in a statement that the organizers appreciated the victim's professionalism and kindness over years of cooperation. See the AlertNet article (CLICK HERE). It is impossible to be clear or confident of murder. Perhaps Reinhardt stumbled in on some criminal culpability, like with audio systems. If outside forces opposed to Western bankers and corporate chieftains wished to make a visible statement, Davos was such a place to do so. The billionaires are locked in a battle for global control. The adversaries to the 'Good Guys' dominate such forums as Davos. Starlets like George Soros, Jamie Dimon, former central bankers, CB staffers, and important conglomerates are icons at such meetings, along with many Western bankers. They call it an economic forum, but it is all about the private bankers, the biggest private bankers.
UNHERALDED GOLD BREAKOUT
◄$$$ GOLD HAS BROKEN OUT IN EURO TERMS, WITH NO FANFARE COMING FROM ANY GALLERIES. DOUBTS AND CONFUSION FUEL THE GOLD RALLY. WHEN CLARITY COMES TO EUROPE, EVEN IF FRACTURE, THE GOLD RALLY WILL END IN EURO TERMS. THE EURO WILL NOT DIE, BUT RATHER TRANSFORM TO SOME TYPE OF DEUTSCHE MARK. $$$
Nobody can dispute that Europe has captured global attention with the threat of sovereign debt defaults, a string of them potentially. While the asylum directs attention of the paper gold price in US$ terms, pushed down by incredible naked shorting of futu res contracts, the real story is the Gold price in Euro terms. It has broken out past ¬800. The Wall Street kings, the London masters, and the financial press infantry would prefer to cite the struggling Gold price in US$ terms. Without some degree of resolution in Europe concerning its sovereign debt and reformed currency alignment, the Gold breakout in Euro terms could reach the ¬940 to ¬950 range in the next few months. A gold price recovery and continued Euro decline would be sufficient. Its strength is evident in a surpassed ¬800 resistance level, a strong moving average uptrend, and strong stochastix index. Gold is a veritable refuge in the European sea of conflict and confusion. The strength of the Gold price in Euro terms should continue until the Germans establish clarity with the New Core Euro. They will order the financial surgeons to carve off the PIGS fat on the Southern rim, leaving the Central Europe core without the basket case burden. The Southern European nations fell victim to the same devastation that befell the United States, busted housing bubbles, ruined banking systems, outsized federal deficits, heavy import needs, and capital requirements impossible to meet. When the New Core Euro is clear, only then the surviving form of the Euro currency will rise with momentum, certainly challenging the USDollar. Only then will the Euro push toward 200/US$ in its exchange rate. It will be the Deutsche Mark by any other name, shared with its fiscally sound neighbors, as in Austria, Liechtenstein, the Benelux nations, and possibly one or two more nations including Denmark. Europe can consolidate into its solid core economically, where federal deficits are smaller and export trade is historically important enough to preserve.
◄$$$ GOLD IN BRITISH POUNDS IS BREAKING OUT. THE BROKEN U.K. FINANCIAL STRUCTURE AND DETERIORATING U.K. ECONOMY ASSURE THAT GOLD WILL CONTINUE TO RISE IN BPOUND TERMS. ITS CURRENCY HAS NO PROSPECT OF REVIVAL, NO RELIABLE CORE. NO DURABLE RECOVERY CAN BE ASSURED. $$$
The Gold price in British Pound terms is on the verge of breakout. Note the uptrend in moving averages and the possible bullish crossover in the stochastix. However, the United Kingdom cannot fall back into a strong consolidated core. It has none. UK finances are like the US finances, burdened by a financial engineering lunatic episode gone amok. The UK Economy was built for a decade atop a housing bubble, just like the US. The UK banks are insolvent, just like the US. The UK Economy is in an unstoppable deterioration phase, just like the United States but without benefit of the Printing Pre$$. One should be aware that the US shares its printed money booty with its London masters. The USFed even operates in British sanctuaries. The Gold price in BPound terms will rise until reality strikes, the dark cloud to descend upon Britain that rains sovereign default. The denial will grow louder and more shrill, whose intensity only confirms the inevitable. The BPound currency will sink together with the USDollar, their fate terminally linked from deep corruption and longstanding ties of the financial systems, dominated by investment banker cancerous metastases. Wall Street and London serve themselves and dominate whatever ministry is necessary to continue their own profitability. They killed their hosts, but before the hosts die, they will be gutted further.
◄$$$ THE GOLD BREAKOUT IN US$ TERMS IS THE FINAL CHAPTER AND THE MOST POWERFUL REVERBERATION. IT REQUIRES TIME TO BUILD TOWARD CLIMAX. THE LACK OF GOLD METAL INVENTORY IS THE ACHILLES HEEL OF WALL STREET AND LONDON FINANCIAL CONTROL FOCUSED ON GOLD PRICE SUPPRESSION. NOTICE THE DOLLAR DEATH DANCE, PART II. WE ARE AT THE BEGINNING OF A GOLD RALLY IN ALL MAJOR CURRENCIES, THUS A LOUD GONG OF GOLD SUPREMACY AS A CURRENCY. $$$
The Gold price in US$ terms, despite the hue & cry, is hanging on well. It maintains support above the $1050 price, the level forecasted as worst case by James Turk of GoldMoney. The 2Q2010 should mark the start of a strong recovery phase. It has succumbed to two powerful downdrafts, aided to be sure by selling golden paper. Its long-term 50-week moving average remains in uptrend. In the last week, gold investors have sighted a bullish stochastix crossover in the making. Never have the COMEX and LBMA metals exchanges been in possession of less gold & silver metal inventory in their history. In fact, the suppression of the paper gold price has resulted in production ironically of physical metal placed by honest brokers as margin collateral. Margin calls result in forfeited metal posted as collateral. The metals exchanges are attempting to institutionalize the validity of derivatives in lieu of gold bullion. Remember the summer 2009 when the major houses openly advertised that gold bullion could be used to post margin on a wide variety of futures contracts. The criminal machinations are in a conclusion phase on gold price suppression. The US leaders of all stripes fail to comprehend the depth of the fiat currency problem, reflected in banking system insolvency and federal debt explosion. Gold has been and will continue to be the refuge, not the USTreasurys, which are locked in the final bubble. In fact, USTBonds constitute a Black Hole. Defense of the USTBond leaves the USDollar more exposed to a global selloff. Its defense also destroys the USEconomy.
When the makeup of the New Core Euro is clear, watch the US$ DX long-term decline resume, and do so powerfully. The trimmed version of the Euro will coincide with expulsion of PIGS nations and consolidation to a German core joined by its strongest neighbor partners. The globe will face the worst monetary crisis in history, with epicenter the USDollar. The sovereign debt defaults will come full circle, the start being September 2008, the conclusion an attack on the USTreasury Bond. The USGovt debt is unsustainable, growing worse, and will eventually break. Pure financial physics. Gravity will sink the US Ship of State and its tethered banker flotilla, even its imprisoned economic ramparts. The global reserve currency in the USDollar stands as the biggest travesty in the history of global finance.
The Dollar Death Dance part I occurred in autumn 2008. It was sustained by incredibly massive credit derivative redemptions and payouts, almost all in US$-based transactions. Thus the USDollar demand was extraordinarily high. The US$ DX index rose in paradoxical fashion, due to the ruin of the US financial foundation. The Dollar Death Dance part II began in December 2009. It has been sustained by a perception of the Euro currency being fatally broken. The USDollar has been beneficiary in the Competing Currency War, perceived as a safer acid pit of debt than other regional currencies. The Euro currency is undergoing transformation, not destruction. The European Union is fractured, but the integrity of core nations is assured. Furthermore, the Euro currency will fall back on its strongest core element, the German financial power. It will eventually resemble the Deutsche Mark, which Germany will permit usage by only its viable neighbor partners. Little do US banking and political leaders realize that the United States suffers from a macrocosm of forces that strike Greece and the other PIGS nations.
For an excellent brief analysis of the competition among Stocks, Gold, and USTreasurys, see the Kitco article by Graham Summers entitled "Which is the Real Safe Haven: Treasuries or Gold?" (CLICK HERE). He makes several great points, like whenever the USTreasurys look like they are on the brink of a meaningful breakdown, a Stock decline occurs, and funds flow heavily into USTreasurys. He believes we at the beginning of a rally in Gold in all currencies, a movement kicked off by the European debt problems. The Gold breakout in Euro terms is possibly soon to be joined by breakouts of Gold in British Pounds, Gold in Japanese Yen, and Gold in Swiss Francs, with the Gold breakout in USDollars last. When the surge is universal, Gold will be perceived as a stand-alone currency!
◄$$$ CHINA DISHOARDS USTREASURYS PERHAPS TO PURCHASE A HOARD OF I.M.F. GOLD. MOST OFFICIAL SALES ARE FOR CHINA. TRADE WAR PICKS UP. $$$
Nothing is clear and certain on this matter. But China has sold off some of its USTreasurys recently. Citigroup research believes China will immediately use the cash they pulled out of the USTBonds to purchase the 191 tonnes of gold from the Intl Monetary Fund. Bear in mind that NEVER is an official IMF gold story true, never. The Powerz have made the story sound like a big gold dump on the market. No way! In the past, IMF gold sales have masked the short covering trades by the mindless USGovt from a decade ago, run by Rubin. They were merely closures of short gold trades, with no sales at all, just short covers. The IMF owns no gold, so this sale is from a member nation in Europe. Alan Heap from Citigroup said, "The IMF announcement that the fund intends to sell 191 tonnes of gold sent a quiver through the market last week. However there was nothing new here. The gold is the residual from the planned sale of 403 tonnes which will partially finance new loans to developing countries... The bank said that sales would be phased over time. But also kept open the possibility of direct transfers to other central banks... The PBOC [Peoples Bank of China] is the most likely central bank buyer. The bank is deeply dissatisfied with the performance of its USTreasury holdings and has made clear its intention to diversify including into gold. In November and December the PBOC sold US$46 billion of Treasuries. They must be buying something." Notice the nonsense about IMF funding economic development. China is funding the development of emerging economies, not the West. And China gains more gold bullion in the process, which puts pressure on the crippled USDollar. The G-20 Meetings in recent months set an agreement that China would buy all the gold that IMF pledges organized as official Washington Accord sales. This is not their first big buy. See the Business Insider article (CLICK HERE).
◄$$$ SILVER POISED FOR MASSIVE UPLEG, IF A SUPPRESSED SLAM CAN BE AVOIDED. SILVER MIGHT BE MORE CRUCIAL THAN GOLD, AS FAR AS PREVENTION OF A METALS EXCHANGE DEFAULT. IF SILVER EXPLODES IN PRICE, GOLD WILL FOLLOW IT, NOT LEAD IT. $$$
Notice the potential for a massive Head & Shoulders reversal pattern, wrapped around a nice bullish triangle nowhere near resolution. A lower trendline has clearly formed. The battle line is the 19 price level, defended rigorously and illicitly. Governments and central banks own no silver, thus the greater vulnerability. Their silver poverty and deficiency motivates even grander schemes to naked short the metal in futures contracts. The battle will linger on for months in all likelihood. Expect greater propaganda to surface, as banker desperation reaches acute levels. At the same time, expect exposure of the interwoven frauds from the major metals exchanges, the leading exchange traded funds, and possibly the top mining firms. The syndicate control is slipping away very slowly. If the 19 level is overcome and overrun, the entire precious metals fortress and its corrupted columns could be crushed. The day is coming eventually, but not very soon. The timing is unclear.
◄$$$ G.L.D. AND S.L.V. FRAUD EXPLAINED IN SOME DETAIL. THE EXCHANGE TRADED FUNDS ATTRACT MORE ATTENTION FOR THEIR FRAUD AND CONGAME, MORE IN FULL VIEW. $$$
The Powerz attempt to convert paper to metal, but they create further complications. What it means for investors is they do NOT own gold or silver in either the GLD or the SLV funds managed by Street Tracks or Barclays. These ETFunds should never be used by investors. To begin with, the gold cartel manages them. The fund managers lease their bullion and hold paper derivatives. An important rule change by the COMEX, the US-based commodity exchange, allows ETF substitutes for precious metal delivery. Jeffrey Lewis writes, "The exchange allows investors to make good on their futures positions with gold & silver ETFs rather than the real assets, thus opening up the door for hugely distorted market prices. Under the clause 104.36 in the COMEX Rulebook, exchanges can take place on the exchange as long as the products meet certain criteria. After sorting through legalese, investors find that the criteria is not as demanding as one would expect from a multi-trillion dollar exchange, but is actually quite loose. COMEX requires that exchanges be made in economically equal products. For instance, a 1000-oz silver futures position can be used in the delivery of 1000 oz of silver, despite their inherent differences. This creates immense problems for investors, as well as the exchange itself. First, no silver actually trades hands, but only a silver derivative that has supposed claims to silver. Second, the Exchange Traded Fund is economically similar in that it has equal worth to the same amount of silver. However, investors cannot receive physical delivery from the ETF issuer. In essence, purely derivative investments are equal to physical metals in the eyes of COMEX, even though the reality is quite different." The Exchange Traded Funds are an extension of the paper congame that attract naive ignorant investors, whose own funds are used to neutralize their entire gold & silver demand.
Worse, the legal requirements behind the ETFunds permit them to make claims against third parties (a derivative) to track the price of gold or silver on the marketplace. This actually opens the door for large manipulation in the silver markets, whereby the fund managers can execute naked shorts in order to push down the market price. They do not track the price, but rather manipulate the price to drive it lower. The opportunity is created also for an oversupply of silver shares compared to what is actually in existence in the fund vaults. On the other end, ETFund shares end up meeting delivery demands on futures contract positions. The result is that derivative products from these corrupted funds can easily find their way into what one should expect to be a purely physical market. The situation is even worse than what Lewis describes well on the ETF share side. The gold from the Street Tracks GLD fund is being shipped to London in emergency measures to meet delivery demands, where angry allocated account holders remove their physical bullion. The same is probably true for silver bullion. So the ETFunds are robbing their investors from both ends, removing legitimate inventory and sending shares to match short COMEX positions. This is fraud par excellence. See the Kitco article entitled "New COMEX Rule: Another Reason to Fear ETFs" by Jeffrey Lewis (CLICK HERE). In time, the fraud from naked gold & silver contract sales, and the fraud of charging bank vault fees for accounts having no metal, both will be exposed.
◄$$$ GOLD OUTPUT BY NATION TELLS A STORY INDICATIVE OF THE SHIFT IN GLOBAL POWER. THE ANGLOSPHRE (INCLUDING SOUTH AFRICA) IS GASPING FOR BREATH. RUSSIA IS RISING. CHINA IS DOMINANT, HAVING TAKEN THE LEAD SPOT. $$$
China has taken the #1 gold output post since mid-2007. Both Canada and Australia have been surpassed in the process, in addition to the crippled South Africans. The SAfrican electricity problems and next their quadrupled tax levy will assure them an actual acceleration downward. Canada is seen (in black) falling from almost 12 million ounces in 1998 to less than 8 moz in 2008. Australia is seen (in yellow) falling from 10 moz in 1997 to under 8 moz in 2008. The SAfrican decline is seen (in blue) as a tragic cut in half. Notice China (in light brown) more than doubling output from 4 moz in 1996 to 9 moz in 2008. Russia (in dark brown) is rising but not substantially, to around 6 moz in 2008. The United States and Indonesia are the laggards.
◄$$$ GOLD MINERS OUTPUT EVENTUALLY WILL BYPASS THE GOLD EXCHANGES. SIMPLE DEMAND DYNAMICS DICTATE THAT INVESTMENT HOUSES WILL OUTBID THE CORRUPTED METALS EXCHANGES. THE MINING FIRMS IN TIME WILL REFUSE THE ARTIFICIAL LOW PRICES DICTATED BY THE EXCHANGES AND FIND A BETTER BREED OF CUSTOMERS. $$$
My full expectation is that the gold & silver mining firms will eventually rebel agains the corrupt London LBMA and the New York COMEX, which offer artificial low prices for metal bullion bars. The metals exchanges, replete with well-known corruption, offer lower prices to mining firms for their hard earned output. Paperhangers in the financial dens do not work at all. The USGovt and UKGovt sponsored corruption features selling gold & silver futures contracts without benefit of metal in inventory or metal posted as collateral. The result has been lower prices than what a fair market would offer. So in time, the investment houses will offer a higher price than the metals exchanges, especially since they have difficulty in securing gold bullion. The miners will accept the higher bid price. In the process a grand bypass will occur that denies further supply to the corrupt metals exchanges run by the LBMA and COMEX. The combination of lower price with absent supply is a travesty to Economic Mother Nature, who plans her revenge. The bypass will represent a rebellion against sponsored fraud, namely selling metal not in possession. The only resort for continued supply is for the syndicates in charge of the metals exchanges to attack the big mining firm stocks with more naked shorting, accumulate the stocks, start proxy battles to unseat senior management, replace the Board members, and thus annex the mining firms. That would be a cancer! The resort left to miners is to threaten to set their own prices or curtail their operations. Havoc comes!
A silver shortage is very much here and now with shortages of coins. A subscriber from California sent me a message, saying "I just got off the phone with our coin dealer friend. He confirms physical shortage at the dealer level. Says he is almost out of silver. He is having to buy generic 1 ounce rounds at a price he feels he normally would be retailing them. However, if he does not have the inventory, it means lost sales since many people will not wait."
◄$$$ A COMING USDOLLAR CURRENCY CRISIS IS UNAVOIDABLE. VAST INCREASE IN MONEY SUPPLY PROTECTED FROM RELEASE (LIKE AN ABSCESS OR BOIL), INSOLVENT BANKING SYSTEM, USFED ACTING LIKE AN ENTIRE BANKING SYSTEM, LACK OF ALTERNATIVES TO INFLATING DEBT AWAY, FADING GLOBAL RESERVE STATUS, BIG U.S. STATES AT PERIL, BIG BANK LIQUIDATIONS YET TO OCCUR, AND A PLETHORA OF USMILITARY BASES, THESE ARE THE FACTORS THAT ASSURE A RENEWED USDOLLAR DECLINE INTO A FULL BLOWN CRISIS. $$$
Jesse of the Crossroads Cafe American gives a fine peptalk for the USDollar bears. He puts things nicely into perspective. He wrote, "No matter how they wrap it, spin it, try to hide it, we have seen an epic expansion in the US monetary base not seen since 1932. This monetary expansion has not yet reached into the broader money supply figures because it is not reaching the public. Bernanke has most of that liquidity bottled up in a few big banks collecting an easy riskless spread, with some of it chasing beta in the speculative markets. Ben can talk a tough game, and jawbone rates with his plans to someday return to normalcy. But at the end of the day, the US is playing out a well worn script that is highly predictable. There are three choices the Sith Lords at the Fed and their western central bank apprentices have at this point: inflation, inflation, and inflation. The only question is how and when it will become obvious even to the most stubborn believers in the Dollar Über Alles. Ben will seek to control it, to unleash it from its cage very slowly, spread the pain to the US trading partners overseas. The US dollar reserve currency status is faltering, but not yet under a serious assault. The monied elite will try to eliminate any serious competition, such as the Euro or precious metals, by any and all means possible. Greece is roughly 2.6% of the Eurozone GDP. California is 13% of the US GDP. How long they can continue this is anyone's guess. These things tend to play out slowly, over years. I do not expect the US dollar to fail precipitously in the manner of the Zimbabwe dollar or with Weimar Reichsmark, but rather to be devalued in a step-staggered manner, over time, until it stabilizes and the debts are liquidated. When the US starts closing the greater portion of its 700+ overseas military bases, we will know that it has become serious about financial reform and balancing its books. Until then, all is posturing, self-interest, demagoguery, and deception." See the Jesse Crossroads Cafe article (CLICK HERE).
◄$$$ THE MAJORITY OF GERMANS WANT A FORMAL RETURN TO THE D-MARK CURRENCY. THEY DO NOT WANT TO SAVE THE UNION. $$$
The sense is that the German people want the order and stability from the past under the Deutsche Mark currency. In her efforts to save the Euro currency, Chancellor Merkel appears to be going against the grain of a majority of voters. Such is typically a dangerous strategy for a politician. Unless of course, the talk is politically motivated, and the actions behind the curtains are to return to the D-Mark by forcing Southern European nations to return to their own former currencies like the Greek Drachma, the Italian Lira, the Spanish Peseta, and the Portuguese Escudo. Then later, after other nations revert to former currencies, Germany can do the same. Be sure to know that Germany will permit other solid nations on their fiscal balance sheets to share usage of the D-Mark. The new D-Mark will be called the Core Euro or the Nordic Euro, otherwise known as the trimmed down Euro. See the FazNet article in German (CLICK HERE).
CHINA DISTANCES FROM UNITED STATES
◄$$$ THE US-CHINA TRADE WAR CONTINUES TO RAMP UP. THE CHINESE WILL DUMP ALL NON-USGOVT GUARANTEED BONDS, IN RETALIATION FOR MILITARY WEAPONS SALES TO TAIWAN (PROXIMAL CAUSE). THE TRADE WAR HAS TURNED FINANCIAL. THE CHINESE MILITARY URGED A PUNCH AGAINST THE UNITED STATES. $$$
The dumping is to begin. Asia Times Online has reported that the managers of Chinese reserve have been notified via an explicit directive that any non-USGovt guaranteed securities must be divested. The Chinese military officials want to punish America by selling USTreasurys, by attacking the US system at its most vulnerable spot, the financials. All risky US$-based assets are to be sold, including asset backed bonds and corporate bonds. The order is given to hold onto explicitly guaranteed USTreasurys and USAgency debt securities. The Treasury Investment Capital (TIC) data indicates vividly that Chinese enthusiasm for MBS/Agencies over the past year has been extremely low and minimal, matched by the total lack of interest by Bill Gross at PIMCO. No longer are US$-denominated bonds wanted at the State Administration of Foreign Exchange (SAFE) nor at China's large commercial banks. The directive has already been communicated to American securities dealers, according to market participants with direct knowledge of the events.
The usual debate has come. The Chinese Govt motive might be basic risk aversion. They might be acting with political motive. The expected termination in March of the US Federal Reserve special facility to purchase mortgage backed securities has caused their bond yields to rise. They might be selling before the end of Quantitative Easing. They might be divesting the most risky assets before a USDollar decline certain to resume. The US$ counter-trend rally has run perhaps its full course. My view is that the Chinese divestment decision is urged by all the above motives. Due to timing alone, Beijing leaders put front & center the Taiwan weapon sales as a key motive, and thus the political element in the trade war has turned a financial theme. In past years, Beijing has not mixed investment and strategic policy.
Speculation has come that some decisions are being evaluated that the Chinese Govt leaders are soon to lift labor wages broadly across their economy, and thus reduce a key component to the trade war. This is a traditional economic response, one that must eventually be permitted in the still controlled Middle Kingdom. Higher permitted labor costs would cut Chinese export competitiveness while boosting domestic spending power and sustaining economic growth, in textbook fashion. Premier Wen Jiabao might soon permit greater domestic prosperity. That would be a deft stroke, but might initially result in lower employment. Some domestic pressures might be mollified while the bilateral trade gap with the United States might diminish. Tao Dong is a Credit Suisse economist in Hong Kong. He said, "Wage increases are a better option because they largely benefit Chinese workers. Currency appreciation will only result in Chinese exporters losing out to competitors in countries such as Malaysia and Mexico." The strategy could result in the Yuan currency to gain 3% this year, argued Tao. A 13% ordered increase in the minimum wage in Eastern China's Jiangsu province clearly lays out how higher worker pay will play an important role in the internal restructure of the fastest growing major economy, again argued Tao. Ben Simpfendorfer is an economist with Royal Bank of Scotland in Hong Kong. He said, "[The wage decision] argues against a large one-off yuan revaluation." We should see one or the other option.
One thing is crystal clear. China will embark on a reform path of its own design, not one dictated by the USGovt or Wall Street. If greater negotiation leverage comes, great for Beijing. If greater embarrassment comes to the Obama Admin, so be it. Check a recent disclosure in the China Securities Journal. The government backed daily newspaper accused the USGovt in a front page editorial of playing the exchange rate card. It claimed strongly that, just as China did not interfere with US Federal Reserve purchases of USTreasurys. They wrote, "the United States has no right to interfere in China's exchange rate policy. Whether or not to appreciate [the Yuan currency] is our own business. Whether it will appreciate, when and by how much is an integral part of China's monetary policy." See the Asia Times article (CLICK HERE). It is interesting that an editorial piece openly mentioned USGovt monetization of bonds, considered the most destructive illicit behavior to undermine a foreign held reserve asset.
Senior Chinese Military officers have proposed that their country boost defense spending, adjust military deployments, and possibly sell some US$-based bonds to punish the USGovt for its recent arms sales to Taiwan. The USGovt and USMilitary continue to abuse and piss on creditors. Retaliation is the norm, either direct or indirect. See the Reuters article (CLICK HERE).
◄$$$ CHINESE RESERVES HIT $2.4 TRILLION. TRADE FRICTION CONTINUES TO RUB RAW. CHINESE RESERVES ENABLE THEM TO MANAGE DOMESTIC SHOCK WAVES. BEIJING RESPONDED TO GEITHNER COMMENTS WITH A STATEMENT THAT THE YUAN CURRENCY IS PROPERLY VALUED. BARBS GO BACK & FORTH LIKE A PING PONG BALL. $$$
The Chinese reserves have hit a record $2.4 trillion, equal to $2400 billion. The Peoples Bank of China issued a forma statement in mid-January. Their national reserves grew by 23% on an annual basis. For the full year 2009, foreign reserves rose $453 billion, surely sufficient to offset some shocks. Furthermore, Chinese banks extended 379.8 billion Yuan (=US$55.6 billion) of new loans, pushing the annual total to an record high 9.59 trillion Yuan. Their M2 money supply jumped 27.7% in December from a year earlier. Liquidity is massive, and bubble risk abounds. The PBOC has permitted open conjecture that a 3% Yuan appreciation versus the US$ could occur, in order to raise domestic costs and to reduce export trade. Raising the bank reserve ratio might also be used to slow perceived bubbles. The risk is to destabilize the Chinese Economic juggernaut, as bubbles rest precariously from property to stock markets. Purchases of other currencies have been routine to prevent the Yuan from appreciating. The role as US creditor has been amplified in the process, as China holds $799 billion in USTreasurys. Their currency reserves grew by $127 billion in 4Q2009, compared with $141 billion in the previous Q3, as the trade surplus and foreign investment channeled in cash. In December, direct foreign investment more than doubled from a year earlier to $12.1 billion. Foreign businesses continue to make entry. See the Bloomberg article (CLICK HERE).
On a repeated basis, Chinese leaders publicly state the Yuan currency is properly valued. Their response came one day after President Obama promised to take a tougher line with Beijing over currency and trade. It is all talk from a debtor nation, an embarrassing display. Chinese foreign ministry spokesman Ma Zhaoxu insisted the value of the Chinese Yuan was not the main reason for the large trade surplus with the United States, the Yuan was at a reasonable level, and China was not pursuing a trade surplus. He declared, "At the moment... the level of the yuan is close to reasonable and balanced." He called for continued dialogue, trade cooperation, and avoidance of accusations. Chinese trade figures released in December showed China likely to overtake Germany as the #1 global export nation. The Chinese claim exported goods worth $1.2 trillion in 2009, while German exports are expected to register at $1.18 trillion. Without question, the Chinese Economy is adapting to over-capacity and asset bubbles that threaten a retreat. Their massive reserve war chest enables them to manage the bubbles and their reduction. But bubbles rarely can be controlled in reduction. One major risk for that war chest is its heavy thread of toxicity from US$ contamination. In no way is the outcome certain on whether a bust comes. The excessive construction of both factories and property is acute, and must be adjusted. See the British Broadcast Corp article (CLICK HERE).
◄$$$ CHINESE EMPTY BUILDINGS HAVE BECOME A MAJOR PROBLEM IN THE COMMERCIAL SECTOR. EXPERT ANALYSTS ESTIMATE BEIJING COMMERCIAL BUILDINGS TO BE 50% VACANT. THE CHINESE GOVT CLEARLY IS ATTEMPTING TO KEEP THE LABOR FORCE EMPLOYED AND BUSY, AS DECLINING PROPERTY PRICE PRESSURES LOOM POWERFULLY LARGE. THE OVER-CAPACITY EXTENDS TO FACTORIES AS WELL. $$$
Empty buildings dot the Chinese landscape like weeds, as companies took advantage of the $1.4 trillion in new loans last year to build yet more skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos believe their property market is in a huge bubble, one that accompanies a bond bubble (of foreign type) and factory bubble. Beijing properties are 50% vacant. Chanos writes, "There is a monumental property bubble and fixed-asset investment bubble that China has underway right now. And deflating that gently will be difficult at best." He predicts a property crash. Last November the European Union Chamber of Commerce in China said a glut of factories is inflicting far-reaching damage on the global economy, stoking trade tensions, and raising the risk of bad loans. Nomura Holdings, Japan's biggest brokerage, pointed out that the Chinese growth has provided more than one third of world economic growth in 2010. Digesting the debt from a popped commercial property bubble, reduced bank lending, and credit portfolio writedowns will serve as a major drag on growth lower for years to come. To determine how exposed Chinese banks are to real estate debt is problematic, maybe impossible, since loans to some state-owned companies (registered as industrial lending) have been used to invest in property.
Jack Rodman is president of Global Distressed Solutions, an advisory private equity and hedge funds that works with Chinese property and banking. He has made a career of selling soured property loans from Los Angeles to Tokyo. A current resident of Beijing, he sees a crash looming in China. He counts 55 empty office buildings in Beijing, with another dozen likely candidates. Rodman estimates about 50% of the Beijing commercial space is vacant, a floorspace volume greater than all leased properties in Germany's five biggest urban office markets in 2009. Chinese banks have NOT reduced valuations on their balance sheet with writedowns. Real estate broker CB Richard Ellis Group measured the Beijing office vacancy rate at 22.4% in 3Q2009, the 9th highest of 103 markets they track. The Ellis tally does not include newly opened buildings, thus a discrepancy.
Patrick Chovanec is an associate professor in the School of Economics & Mgmt at Tsinghua University in Beijing, ranked China's #1 university by the London Times. He said, "You have state owned enterprises, using borrowed funds from the stimulus, bidding up the price of land, not even desirable plots of land, in Beijing to astronomical rates. At the same time you have 30%-plus vacancy rates and slumping rents in commercial property. So it is just a case of when you recognize the losses, or do not." The contrast between vacancy and elevated property price is stark, a resolution demanded in the last several months. Excessive bank lending led to property prices in 70 cities to climb 9.5% from a year earlier, the biggest jump in 21 months. Banks have been urged by the China Banking Regulatory Commission to strictly follow real estate lending policies, and to reasonably control lending growth. The Peoples Bank of China today recently ordered banks to increase reserves by 50 basis points (0.5%) effective February 25th. The current level is 16% for big banks and 14% for smaller ones.
James Chanos is the founder of Kynikos Assoc based in New York. He maintains a dire view of China as far as its prospects for property price declines. He predicted that China could be "Dubai times 100 or 1000." Real estate prices in Dubai have fallen almost 50% from their 2008 peak as the United Arab Emirates struggles under at least $80 billion of debt. Imagine the further price declines when the rest of the hidden Dubai debt breaks down. The commercial property space under construction in China has not abated. Building activity continues recklessly and mindlessly, as though keeping the labor market busy is more urgent than keeping the buildings occupied. At the end of November the new Chinese construction in 2009 was the equivalent of 6800 Burj Khalifas, the 160-story Dubai gigantic skyscraper. A serious decline in the property market should be accompanied by a surge in non-performing loans. The Shanghai office of the banking regulatory commission said on February 4th that a 10% drop in property values would triple the ratio of delinquent mortgages in that city. Chinese and Hong Kong construction banks have fallen in market capitalization as a result.
Over-capacity stands as a threat uniformly across the entire Chinese Economy. Their linkage of the Yuan to the USDollar from 1999 to 2005 is the underlying cause for massive bubbles, just like what formed in the United States. Their growth and trade surplus sustains their bubbles. The Chinese Economy has vast over-capacity in manufacturing as well. Check their investments in new factories and properties in 2009, which surged 67% to 15.2 trillion Yuan. That amount surpasses the Russian gross domestic product. Excess Chinese steel capacity reached about 132 million tonnes in 2009, an amount that eclipses the 87.5 million tonnes from Japan, the world's second biggest producer. The European Union Chamber of Commerce in Beijing reports what they call a looming deluge of unnecessary cement capacity under construction. See the Bloomberg article (CLICK HERE).
◄$$$ CHINA CURRENCY DISRUPTIONS ARE IMMINENT. A SUBSTANTIAL UPWARD VALUATION COMES. THE LEADING GOLDMAN SACHS ECONOMIST EXPECTS A 5% YUAN CURRENCY RISE THIS YEAR. $$$
Jim O'Neill is the Goldman Sachs Group chief economist. O'Neill believes China could be poised to permit its Yuan currency to strengthen up to 5% in order to slow the world's fastest growing major economy. He responded to the Chinese central bank decision for bank lenders on February 12th to set aside larger reserves. He said, "I have a strong opinion that they are close to moving the exchange rate. Something is brewing. It could happen anytime. They need to do something to slow the economy down and deal with the inflation consequences. The more they do, and the sooner [they do it,] the better." O'Neill forecasts the Chinese Economy will expand 11.4% over the year 2010, which is currently growing between 12% and 14%. Officials in Beijing have blocked gains in the Yuan currency. Tight controls have been in effect since July 2008, after the Yuan had strengthened 21% against the US$ from the previous three years. In July 2005, the Chinese Govt officially permitted the Yuan to float under guidelines. The still under-valued Yuan provides continual advantages for Chinese export firms, without a doubt. O'Neill anticipates the Chinese Govt could possibly allow the Yuan to rise 5% in a single thrust event revaluation. He refers to a single sudden event. Afterwards, he surmises that the Yuan would then trade within a bigger band, or else trade against a larger basket of foreign currencies. The important factor is to counter international pressure. That pressure has grown acute, as the Yuan recorded its biggest weekly decline in more than a year last week on speculation that importers bought USDollars before Chinese New Year holiday last week. The Yuan depreciated 9 basis points last week to 6.833 per US$. See the Bloomberg article (CLICK HERE).
◄$$$ CHINA HAS BEGUN TO SERIOUSLY DIVEST FROM USTREASURY BONDS. FORGET ALL THE TALK, THE DISPUTE ON THE GLOBAL STAGE. BEIJING SOLD A WHOPPING $34.2 BILLION TREASURYS IN DECEMBER, AS JAPAN MOVED TO TAKE THE TOP#1 SPOT AS LARGEST OFFICIAL HOLDER OF USGOVT DEBT. $$$
China is no longer posturing about offloading USTreasury debt. It is now real, evident in the data. The most recent TIC data confirmed the USGovt potential nightmare, as China is actively dumping USTBonds. Call it reaction to Taiwan military weapon sales, or response to favorably high US$ exchange rate and lofty USTBond bubble principal value, or prudent diversification in management. The justification is not so important as the new pattern of behavior. In December China sold $34.2 billion of USTreasury debt. They actually sold $38.8 billion in USTBills but purchased $4.6 billion in long-term bonds. They removed a chunk of short-term holdings, placing more pressure on USGovt finance in the immediate sense. Their total USTreasury holdings were reduced to $755.4 billion. In the process, they relinquished the top US debt holder rank to Japan, which added $11.5 billion in holdings to arrive at a total of $768.8 billion. Japan has a totally different motive to lift the US$ exchange rate and bring down its Yen currency, so that exports can be sustained. Dan Greenhaus is chief economic strategist at Miller Tabak in New York. He said, "Clearly, the Chinese are looking elsewhere at the margin for investments. Central banks in general have been scaling back their exposure to Treasurys, no doubt related to a reversal of the flight to quality trade from late 2008 and early 2009, while also reducing their exposure to USTBills." Heck! Maybe China sees no quality in the quality trade, or no haven in the safe haven.
The other EYE-POPPER is the massive rise in United Kingdom holding (in olive green). See the chart below. UK holdings increased from $230.7 billion to $302.5 billion in December alone, a stunning $70 billion increase in a two month span. Keep in mind that in USTreasury auctions, a huge constant is Direct Bids from investment firms and Indirect Bids from central banks. The UK centers typically purchase on behalf of Arab Petro nations, so as to conceal their identity of direct bidders. The UK centers typically also are used as subterranean hidden locations for illicit US & UK central bank slush fund operations that conduct transactions in large monetization operations. Also, the UK is the headquarters for a huge raft of hedge funds. The UK in my view handles the gargantuan bids that enable completed USTreasury auctions, with massive self-dealing.
The USGovt buys its own debt with Printing Pre$$ funds, then labels the auction a success in a monstrous public farce, repeated over and over again. The easy inference is accumulated US debt under the radar. See the graph where the steadily rising Japanese total (in red) has overtaken the Chinese total (in dark blue), highlighted in the rose circle. This shift has deadly bearish implications for the USDollar and is bullish for precious metals. If China stops buying USGovt debt, the USFed will be forced to monetize a greater portion of the auctions, creating currency at a blistering pace, in full view isolation. The US$ would be at risk of a decline due to an inflationary tailspin, easily observed. The USGovt triple-A credit rating cannot stand after removal of a principal creditor. Eventually, investors will stop resorting to the USTreasurys as a safe haven, and instead will begin turning to precious metals. A bubble can never be a safe haven.
The official USDept Treasury International Capital (TIC) data for December 2009 contains other pertinent data. Net foreign purchases of long-term securities were $63.3 billion. Given that far more, like $200 to $250 billion, is sold in USTreasury auctions, one can conclude without benefit of math education that the USGovt is monetizing between 50% and 75% of its new and refinanced debt securities. It buys its own debt with Printing Pre$$ funds. Foreign total holdings of US$-denominated short-term bonds decreased by $67.7 billion. Foreign holdings of USTreasury bills decreased by $53.0 billion. See the Zero Hedge article (CLICK HERE).
Generally, international demand for US$-based financial assets has slowed significantly. Net purchase of long-term Stocks, Notes, and Bonds totaled $63.3 billion for the month of December, compared with much greater net purchases of $126.4 billion in November. Including short-term securities such as Bills and Stock Swaps, foreigners purchased a net $60.9 billion in December, compared with net purchases of $30.7 billion in November. Some details are telling. Foreign demand for USAgency Mortgage debt (i.e. Fannie Mae & Freddie Mac et al) registered net purchases of a mere $49 million in December after net purchase of $5.9 billion in November, a tremendous 99% decline, a veritable disappearing act. Net foreign purchases of stocks were $20.1 billion in December after net purchases of $9.7 billion in November, an actual rise. Investors sold a net $7.9 billion in US Corporate bonds in December, the seventh straight month of net sales. See the Bloomberg article (CLICK HERE).
◄$$$ CHINA TO BUY MORE GOLD THIS YEAR. THEIR PEOPLE ARE HUGE BUYERS, TURNING SAVINGS TO GOLD HOLDINGS. THE PULLBACK IN THE CHINESE GOVT USTREASURY PURCHASES OPENS THE DOOR TO MUCH BIGGER OFFICIAL GOLD PURCHASES. $$$
With the well publicized decline in USTreasury Bond purchases by China, much more gold accumulation is anticipated. China once bought half of new USTBond issuance in 2006, then only 20% in 2008, and recently a mere 5% last year. In 2010 they are sellers. Many international bank analysts expect bond yields must rise substantially this year. They as usual ignore the vast monetization machine operated by JPMorgan, which buys USTBonds with Printing Pre$$ funds, the phony money. JPMorgan also uses powerful Interest Rate Swaps to push down bond yields, funded in secrecy. With the signfiicant stimulation programs targeting the Chinese domestic market in 2009, the Middle Kingdom stands at risk of triggering a surge in price inflation. The Chinese Economy is lined up as a potential victim of its own broad stimulus. Chinese money supply increases of 30% are experimental, and should produce predictable results. Never before has such stimulus been attempted on this scale. Even less ambitious official money supply amplification programs have almost always resulted in notable price inflation in the past. China is no different.
Once can expect the Chinese people to continue to buy the historical protection against inflation in 2010. To hedge against their own ordered price inflation, gold investment should continue powerfully. Last year China surpassed India as the top private gold consumer in the world. Both good and bad, China is the world's biggest gold producer, ahead of South Africa and Australia. The good side is that their people can readily find gold to purchase. The bad side is that their demand will not be directly noticed in the global gold market. However, Chinese mining output will NOT be supplying any gold to the global market.
Thanks to the following for charts StockCharts, Financial Times, Wall Street Journal, Northern Trust, Business Week, CIBC Bank, Merrill Lynch, Shadow Govt Statistics.