Everything on the mend or is it Normalcy Bias?

As we wrap up the year, it is fitting to take stock to see where we've been, where we are and what the future might hold. The financial crisis of 2007-2010 has been averted, at least for the time being. Many banks and major institutions have been stabilized, propped up, bailed out or nationalized. Stock markets have largely clawed back from their sickening descents in 2008-2009. The world's leaders together with their central banks have exuded confidence in their ability to prevent disaster - "We will do what is necessary".

But scratching beneath the surface, worrisome signs continue and some new, very scary ones have appeared. While financial institutions have been stabilized, the credit-worthiness of entire nations has been imperiled in the process. As growing national debt in many nations, especially the U.S., has expanded to fund bailouts, chronic deficits and addictive spending habits, many nations have resorted to massive printing to make ends meet and to fund growing intervention in financial markets. Thus, while stock and bond markets, as mentioned earlier, have recovered, who has been buying? Well, the Federal Reserve, directly and indirectly, has massively entered the bond and stock markets. But take a look at mutual fund flows. Ordinary investors have been fleeing. The bond markets are even worse. The Federal Reserve has bought (with printed dollars) over a $Trillion to prop up bonds and keep interest rates low. They have especially tried to keep mortgage rates artificially low to "save" the housing industry as well. But interest rates have now begun to creep up, as many observers are beginning to see the inflationary pressures resulting from reckless currency expansions by the Federal Reserve, ECB and other central banks. Meanwhile, U.S. housing prices have resumed their downtrend. How long can governments artificially prop up markets and consumer spending without unleashing far greater tragedies like hyperinflation?  The commodity markets are sending big flashing warning signals. The chart below provides an idea of what the composite of various commodity prices, be they for hogs, wheat or copper are doing.

Rising Gold and silver prices, in spite of attempts by governments to manipulate them lower have also continued to flash multi-year warnings that something is not right.

Near-bankruptcies of entire nations are now being "averted" such as for Greece, Ireland, Iceland. Spain, Portugal, Belgium and many others are now on the short-term horizon. Meanwhile, virtually every nation's indebtedness is worsening by the day. Many U.S. States are seeking to avert bankruptcy (California, Illinois and many others). The U.S. financial situation continues to deteriorate in almost every respect - see the U.S. National Debt Clock.

So has the crisis been averted or have we simply kicked the can down the road a bit further and turned the can into a big tank? Are we engaging in classic denial typical of a normalcy bias? Or is there real plausible explanation of how we will be able to muddle through, relatively unscathed? Personally, after looking at what appear to be the facts, I don't think we can escape some very serious consequences of the irresponsible overspending, over-consuming and financial manipulation that has been taking place over the years, in spite of the ever more ingenious and ridiculous "initiatives" taken by our leaders and monetary authorities to put off that day of reckoning. At the same time, judging by the conversations I've had with many folks over the last year or so who seem to be either complacent or entirely unaware of anything amiss, I think that the normalcy bias is definitely alive and well. In spite of that, may I wish you all a Happy and Prosperous 2011!

European & U.S. Printing Spurs the Precious Metals

Recent events in Europe and the U.S. continue to support the thesis that governments simply don't have the stomach to take the actions necessary to bring spending in line with income. Whether it be in good times or bad, "now" never seems to be the "right" time to cut spending, raise taxes and balance the budget. So the can gets kicked down the road again. Mind you, this can is growing bigger by the day. In the meantime, since solely borrowing is no longer an option, governments are resorting to ever increasing levels of QE (Quantitative Easing), or printing to make up the budgetary and bailout-induced shortfalls. The precious metals markets see this and react by moving higher as increasing numbers of citizens become uneasy about the future of their national currencies. This is particularly so in countries such as Germany whose citizens still remind themselves of the carnage wrought by the hyperinflation and total destruction of their precious Marks during the Weimar Republic days. So, Gold and Silver have now moved to new highs against most major currencies. Below is a chart of Gold versus the $US.

European Contagion Spreading to more Banks

The debt contagion is spreading rapidly, almost virulently at this time. Here is a good article from Toronto's Globe&Mail newspaper illustrating why bailouts have gotten so much traction with superficially reluctant France and Germany. These two countries hold the lion's share of Portuguese and Spanish debt. Guess whose banks would collapse if Portugal and Spain are allowed to default (or if Ireland and Greece had been allowed to default).

Europe Debt Crisis Cheat Sheet

An excellent chart (courtesy of ZeroHedge) of the European Debt Crisis situation can be found here: European Debt Crisis Cheat Sheet. Read the titles and axis descriptions carefully. A fast glance can be misleading.
A sample:

 

Europe's PowderKeg: The Financial Cracks Deepen Some More

Not at all surprisingly, the financial dismemberment in Europe is continuing unabated. The Spanish situation is  described here. The Belgian and Italian situations are described here. Let's leave Portugal et alteri for another day. Some nations (France, Ireland and Hungary) have taken to absconding with their national pension funds to help relieve short term financial pressures.

Europe's PowderKeg: The Financial Cracks Deepen

Ireland has followed Greece while Portugal and Spain are looming larger on the horizon. The now familiar pattern continues. Spain and Portugal deny they will need assistance. The EU dismisses reports that it is preparing further bailouts. This is all nonsense. Why do they bother with such transparent posturing? A recent summary on Europe's Powderkeg here, courtesy of the Globe and Mail.

Governments increasingly propping up markets

The U.S. has been increasingly funneling money into a broad class of risk assets via the Federal Reserve's POMO and Quantitative Easing actions. POMO's are running 2 to 3 times a week lately. Thus, for example, in spite of continuing  equity fund outflows, stock prices continue strong and bond prices are close to major highs as the Federal Reserve now has purchased and holds about as much in U.S. Treasury Securities as Japan.

Now Japan has announced that it too will get into this game by allowing the Bank of Japan to purchase a broad class of assets, including ETF's.

What a spectacle!  Governments using taxpayers' future money (they are just printing it up for now) to buy mortgage securities, bonds (their own, especially), stocks and derivatives! I'm pretty sure this will all end up very, very badly. And we thought that central state control and manipulation was the preserve of the old Soviet Union and China . . .

Sanguine thoughts from the MainStream Media re: Currency Devaluations

It's amazing what is going mainstream. Here is MarketWatch's David Callaway using terms like "Race to the Bottom" in reference to competitive currency devaluations with warnings about conditions that could lead to another depression. Bond bubbles, commodity bubbles, stock market bubbles - I guess it is becoming OK to talk about these things now that the artificiality of rises in these entities is becoming patently obvious to all, while the FED (along with most major Central Banks) desperately tries to keep everything afloat on an increasing sea of liquidity courtesy of modern day printing aka "Quantitative Easing". Gee, until recently, this stuff could only be heard in blogs and "radical" alternative news sites.

Bernanke: United States on Brink of Financial Disaster

Federal Reserve Chairman Ben Bernanke made an interesting speech yesterday which got very little attention from the mainstream media. CNN reported a pretty sanitized version. The Times of India was a little more direct. But the EconomicPolicyJournal Blog and other sources cut to the chase and give many more direct quotes. Pretty scary when you read some of Ben`s assessments. Not that we haven't heard a lot of this before, it`s just that the Fed Chairman is now saying it :-)

Why can't we just say "Printing" or "creating more dollars"?

This evening, I was just perusing the mainstream media, such as the WSJ, Marketwatch, Globe & Mail, etc.). There are many articles focusing on and worrying about what the Federal Reserve will do next (inflate or not). It seems that the FED has become the principal driver of almost every market now. Anyway, it is truly amazing how they just can't say "printing dollars" or "creating more dollars". Here are some of the terms used instead: boost liquidity, quantitative easing, opening the tap, further easing, monetary expansion. If it's a dirty act, maybe it sounds a little less dirty if couched in sophistry or made into a cool analogy.

I may as well use an analogy as well - watering down the wine! I'd prefer mine full strength, thanks.

Why are Commodity prices rising again?

Remember when commodities peaked in mid-2008 just before the financial crisis and then crashed (sort of), along with the stock market? Well, the CRB index, which is a good proxy for commodity prices, is right back to where it was in mid-2008. Yet, take a look at the Baltic Dry Index, which is a good proxy for world economic and trade activity. It is still mired and hasn't recovered. So why is the correlation no longer valid? My take is that commodities are rising in terms of a weakening U.S. Dollar and to a degree, against almost all currencies as a reflection of currency debasement. One of the more obvious examples is Gold, of course. Gold is really the currency of currecies and so far no one has figured out how to easily debase it. You can't print more of it. Quantitative Easing (QE) techniques won't produce more gold, only more dollars. So there you have it. Since it isn't industrial demand that is pushing prices up this time, then according to the CRB basket of commodities, dollars are just fast becoming worth a lot less, that's all.

Gold and U.S. Real Interest Rates

From a long-term perspective, Gold has a pretty good inverse relationship with real interest rates (nominal interest rates minus inflation). The chart below, courtesy of Damien Cleusix (Global Tactical Asset Allocation) depicts this pretty clearly. The last big period of negative real rates began in the mid 1970's and culminated in the huge interest rate hikes of the early 1980's that rescued the dollar and brought down inflation. We are in a similar period now, although nominal rates are a lot lower this time around and so are the (official) inflation rates. At this point it appears that the U.S., as well as most other countries, are still willing to debase their currencies in a hoped-for economic resurgence (doubtful, in my view). In that case, gold and silver still have a long way to go.

The U.S. is quickly running out of "tools"

After watching the antics of central bankers over the last several weeks, especially the failed attempts of the Japanese and Swiss efforts to bring down the exchange rates of their currencies and the increasingly pathetic attempts of the U.S. Federal Reserve to keep the economy and monetary systems afloat, it seems that there are fewer and fewer tools available to central bankers in the game of resuscitating a terminally ill patient.

Basically, what I see from the U.S. administration is a terrific amount of spin to put the best possible face on any release of economic info, from jobs to industrial production, clever techniques of revising previous months stats lower to make it appear that the current month's info is positive and above all, "quantitative easing", or "printing" by continuing to guarantee bad debt and by buying its own Treasury Bonds. Interest rates are at zero. They can't go lower. Gold is steadily rising and US debt is rising like a rocket. And Ben Bernanke says that he stands ready to print as required.

We are running out of time to arrive at anything resembling an elegant admission that we are living well beyond our means and to take the necessary albeit difficult road to reorient our policies towards far less consumption and far more production. Alas, it seems that we have chosen the futile path of printing and deceit to keep the entrenched system in place, however rotten and however more costly and difficult this will be when it inevitably topples.

Analyzing the Crisis of 2008-20??

Books dealing with the 2008-20?? crisis are now sprouting on store shelves. Two opposing schools of thought are exemplified by folks such as Paul Krugman, a Keynesian, on the one hand and Raghuram G. Rajan of the Chicago school, on the other. Paul Krugman's views are expressed in a book entitled The Return of Depression Economics and the Crisis of 2008 (review here) while Raghuram G. Rajan presents his analysis in a book entitled Fault Lines (review here).
I will not mince words. I see Paul Krugman as an apologist for current and past policies that blame everything and everyone else for the crisis, while advocating more of the same but in ever larger doses as a solution. Raghuram G. Rajan, on the other hand, belongs to a group trying to analyze past and present policies to see what went wrong and how to avoid the same mistakes today and in the future. I particularly like his article in the The Journal of the American Enterprise Institute critiquing Paul Krugman's head-in-the-sand views.

Investment Acronyms and Terms

Puzzled by the acronyms used on many otherwise fine investment blogs and business news sites? I've compiled a list of currently "hot" terms here. Hope this helps you digest some of the excellent articles on sites such as ZeroHedge

Housing, Mass Psychology and Contrarian Investing

Some more observations on the Canadian housing situation, mass psychology and illustration of the statistical value of being a contrarian investor - a great article by Ben Rabidoux on his Financial Insights Blog.

Canadian Housing Prices - Bubble?

Canadian House prices seemed to have peaked in the Spring of 2010 (see nice chart here)  and some observers, including myself, think that real estate in Canada is poised for a much bigger fall. A very detailed analysis of the Canadian housing market, courtesy of Alexandre Pestov, can be found here.

Economic Sugar High Fading Fast - Revised Aug 24

A recent raft of indicators support the view that the sugar-high from massive stimulus (sovereign printing, borrowing) programs has begun to fade rapidly and that the U.S. economy along with many others is re-entering a nose-dive.
Today the Federal Reserve Bank of Philadelphia released a humdinger. The following chart says it all:

Of course, there are many other indicators from various sources, like the following:

So, hold onto your hats, we're going for a heck of a ride! Oh, and get ready for more sugar coming from Tim and Ben.

New: Existing-home sales plunge 27.2% - Released August 24th, 2010

Mutual Fund Equity Outflows

Recently, in spite of attempts to talk the economy up (see my previous post), various indicators are highlighting increasing stress in monetary, financial, equity and real estate. A potentially very serious problem relates to the 3 plus month consecutive outflow from equity funds which seems not to have been reflected in actual stock price levels. This begs the question of who, then, has been buying or how have the markets managed to stay level. A good commentary on this issue from Zerohedge here suggesting manipulation, HFT, etc., although I personally believe that the federal Reserve/Treasury, through its agents, are also supporting the markets at crucial times as well.

Keynes versus Hayek

The debate over deficit spending versus austerity continues globally. Both camps ultimately converge on the necessity of bringing spending, deficits and debt under control. Keynesians just don't think now is a good time whereas the von Hayek crowd wonders when have Keynesians ever thought it was a good time. The Brits under Cameron have seemingly joined Germany in the austerity camp. The U.S. under Obama is firmly in the "let's spend our way out of this mess" camp. Of course, spending one's way out of debt would probably cause even (or maybe especially) a 12 year old to be frightened by such logic. "Dad, I know you've already given me a year's advance on my allowance, but you see, I'm currently a little out of sorts so now would not be the best time to cut back on my spending and start paying you back and, besides, I'm hoping to spend my way out of my problems". H'mmm.

To me, the problem with Keynesians is that most are dishonest. They are supposed to spend more during tough times (deficits) and sock assets away (surpluses) for the rainy days in good times. The first part is easy. The second part rarely happens because it is the tough part and very unpopular. So there are few true Keynesians. Same goes for Communists. Most believe in sharing when it is the other fellow who is giving.

Anyway, some great discussion on the Keynes (deficit spending) versus Hayek (austerity) by Brady Willett and Dr. Todd Alway here.

Precious Metals Manipulation Entering Rough Waters?

The gold/silver manipulation game may be entering another stage as it appears that the increasing difficulty of securing physical delivery is leading to extraordinary measures by the London Bullion Market Association Banks (LBMA) to obtain bullion and to further obfuscate trading, delivery and inventory data - see LBMA Closes Off Public Access To Key Bullion Bank Trading Data

Double-Dip Gaining Traction

The mainstream press is belatedly starting to talk double-dip in the economy as a near-certainty as opposed to the 10-20% likelihood oft quoted earlier. Of course, this outcome was predicted at the outset by independent observers on the basis that the best that the stimulus could do was to postpone the day of reckoning at huge taxpayer expense. So we may now be entering the same situation but with considerably deteriorated public/private finances.
With a few exceptions, most Central Banks and Treasuries around the world will nevertheless likely pursue the same discredited and philosophically and morally bankrupt policies of the past, so we can except Quantitative Easing 2 (QE2) and associated stimulus and bailout policies to emerge shortly. My guess is that the amounts involved this time will dwarf QE1 by a considerable margin. In the process, national/sovereign debts will skyrocket to new levels and the world's financial system and underpinnings will decay further and tremble anew. These folks continue to peddle the notion that the answer to problems created by excessive debt, leverage, fraud and make-believe accounting is even more excessive debt, rigged accounting and rigged markets, be it bonds, equities, real estate or commodities. Be very, very wary of all markets!

Obama and Bernanke try to talk it up . . .

Unfortunately they are not directing a movie, where they can set the scene and the tone. I would suggest that they are truly worried by what they see to come up with such tripe. See this article for a taste. The American Tragedy continues with a combination of head-in-the sand, soothing words and fighting the symptoms (rigging markets, sometimes known as "interventions"). I'm as worried as ever.

The Bogus Bullion-ETF's

Stay away from bullion ETF's! At some point, these ETF's will disintegrate like Lehman's. Why? Because many of the same leverage tactics are being employed with lots of clever derivative instruments while the required gold or silver-backing is simply not there. You are buying paper gold, nothing else. When the @3%** hits the fan, these ETF's have little chance of being honored.

See this excellent article for more detail.

Gold Acting as a Currency

As markets and currencies gyrate, gold seems to be getting steadily firmer, even against the surging $US. Yet many commodities are well off their peaks. That's because many around the world are looking upon gold as not just a safe haven but as the premier currency of the world, one which central banks can't debase through reckless printing, monetization, quantitative easing or whatever euphemisms are in vogue to arbitrarily create more and more of any given currency.

That is not to say that certain Central Banks, Treasuries and their agents haven't tried to manipulate gold lower. They have and they are but with less and less success. But as more of the world's citizens seek out physical gold, the manipulation of the paper gold markets becomes less effective. It may, in fact, be creating a potential slingshot move for gold at some point.

Anyway, the "barbaric relic" is acting more and more like the most senior currency out there and slowly gaining the respectability that comes with it.

Massive Interventions and Manipulations

The world financial and securities trading systems are increasingly being characterized by massive interventions and manipulations. If governments or government agencies are doing it, it's called "intervention". Coupled with rising fear and uncertainty regarding the stability of the world's financial systems, this has resulted in increasingly chaotic and volatile market conditions with wildly gyrating markets.

 Unfortunately, again, none of these interventions and bailouts address the root causes of the problems which include debt, fraud and mismanagement on a broad scale across most nations. We continue to fight the symptoms and to attack the markets themselves in a form of shoot-the-messenger syndrome.

While much breast-thumping continues from world capitals about new regulations governing banks and market players, existing rules are not being enforced. Governments themselves openly break their own rules that were established for good reason in the first place.

My advice to retail investors: Stay away! You cannot compete with governments and hedge funds with massive resources and instant computerized trading capability creating an increasingly frenetic and schizophrenic marketplace. I get the feeling that a series of collapses will occur in a number of markets because everything is so artificial with normal markets pushed, pulled, constrained or strangled. Free markets are basically gone for the time being. Governments are the worst offenders in all this, beginning with the so-called zero-interest policy (ZIRP) which robs the world's middle-class savers who can either toss the dice in the increasingly casino-like stock and bond markets or park their savings in cash to take a loss after taxes and inflation.

The beneficiaries of most of these ill-conceived policies, on the other hand, comprise the irresponsible, incompetent and fraudulent. It seems clear to me that only a major collapse in a number of markets would finally force governments to their senses. Sad.

Bailouts not the solution to too much debt

Bailouts have now proceeded from the corporate, securities, banking and insurance sectors to the sovereign nation/state and even to regional sovereign blocks (EU). None of this has addressed the basic problem of rising debt. In fact, the bailouts are almost certainly just making things much worse.

We tend to get confused because we think that different rules somehow apply than those with which we are more familiar, such as bringing up our own kids. In the past, if our teenagers got into debt, we would probably have had a little chat with them about the potential dangers of debt. If they ignored our advice and got into debt further and got beyond their ability to service that debt, they might show up on our doorstep and ask for a bailout. Some of us might choose to help out, but only if the kids handed over their credit cards for shredding and agreed to a balanced or surplus budget regime. In other words, they would have to live within their means. At the same time, they would be told that if this happened again they would be on their own.

Now let's compare this with what we are doing in the financial world. We are telling nations that we will bail them out if they tighten up a bit and run smaller deficits (increase their outstanding mortgages at a slower rate). And even that is  a lot of hogwash, coming from the "parent" states who themselves are running deficits. So it's like telling your children not to keep borrowing faster than you are. The only thing temporarily keeping things afloat is that people still have some (misplaced) confidence in the parent states (like the U.S.). When you look at the skyrocketing deficits and growing debts of the U.S., it is sheer lunacy but this is where we have come.

Getting back to the parenting analogy, the big risk of these uncontrolled and spreading bailouts is that the kids are going to take the parents down with them. So instead of a relatively nasty and uncomfortable but small and containable default, we are risking the entire financial structure.

The only solution to too much debt is less debt, not more debt!

European Bailout in need of a Bailout

The much-heralded European $ 1 Trillion bailout seems to have largely fizzled. The Euro is trading at well below its value in US$ before the bailout announcement on Sunday. Also, Gold has hit an all-time record in many currencies. Things are getting more and more unsteady. When will the world learn that bailing out irresponsible banks, corporations or nations is not the answer and threatens a far worse global collapse as we are pledging more and more collateral in this exponentially expanding poker game.

So you think Greece is a deadbeat?

Before some of us get too haughty and pompous, it might be good to take a look at some of the structural deficit figures published by the IMF in their April, 2010 WEO update. I've charted some of these figures for ease of digestion:

Well, the worst of them all is the good old U.S.A. Ireland and the U.K look pretty sick, too. So, in addition to the oft-quoted and currently focused upon Greece, we have the oft-quoted Portugal, Spain and Ireland and sometimes U.K. and then the rarely mentioned but worst offender - the U.S.

Gold becoming a Currency

In the minds of goldbugs and a few economists (mostly of the Austrian school) gold has always been viewed as money rather than an ordinary commodity. Interestingly, Alan Greenspan was also an advocate of the gold standard at the beginning of his career.

But today may mark the day when many others have come to believe that gold is not only a safe-haven in times of turmoil but also a viable currency, one that cannot be debased at the whim of a central banker. While the world has been flocking to the $US to escape the ravages of the plummeting Euro, it has also been rushing into gold. Today's action was very telling. The US dollar rose smartly against almost all currencies and yet gold rose in US dollars by 30$ an ounce. And this on a day when most commodities, such as oil, tumbled.

The world is slowly losing faith in all currencies, it seems. Even the US$ is viewed by many in comparison with other currencies as merely the equivalent of the nicest house in a street full of crack houses - a relative and temporary refuge at best.

Markets Turning Unstable Again

The markets are showing signs of volatility and instability again. Don't pay attention to the American spin about a typo causing the problems. Well before the alleged typo at 2:30PM EST, the Asian and European markets were all over the place, oil was down sharply and gold was up in spite of amazing US dollar strength. The Canadian dollar was down 4 cents before trimming losses to 3 cents for the day. I won't even get into ballooning CDS spreads on European sovereign debt. Oh, and look at the Euro, courtesy of Zerohedge. These are all signs of markets in disarray.

The world's central bankers have a lot of tigers by the tails and things seem to be coming unglued once again. The potential Greek default is only one scene in the show. Massive debt worldwide, private and sovereign, combined with huge leverage, derivatives, bubbles created by artificially cheap money and years of lies and manipulation are slowly backing the banksters and their obliging central banks into a tighter and tighter corner. However, lest you think that they won't find a temporary way out yet again, please remember something I learned many years ago - "A politician up a tree is a very resourceful creature". It applies equally well to central bank governors and especially Wall Street. These folks have managed to put off the day of reckoning many times already. Can they do it again?

More on Sovereign Bailouts and Moral Hazard

Toronto's Globe and Mail newspaper had a good article today by Gwyn Morgan on the costs of the Greek and other bailouts to taxpayers of various countries and, more importantly, the link between bailouts and Moral Hazard, which engenders a cycle of even greater financial promiscuity and then more bailouts.

Sovereign Default Risk

This chart courtesy of CMA DataVision http://www.cmavision.com/
but excerpted from a BBC News article entitled "Greece crisis: Fears grow that it could spread"

Moral Hazard Expands from Private to Sovereign Bailouts

The Moral Hazard problem which I first wrote about in 2008 (see http://bondbubble.info/ ) is now threatening to expand to Sovereign Debt as Europe worries what kind of precedent a bailout of Greece would have on Portugal, Spain, etc. On the other hand, withholding support to Greece (and Portugal and Spain, etc.) could spell the end of the EU. A good article summarizing the quandary can be found here.

Sovereign Credit Ratings Take a Hit

Sovereign credit problems moved to the forefront of financial concerns today as Standard & Poor's downgraded Portugal's credit down two notches to A- and demoted Greece's debt to junk status (BBB-). The market rushed out of equities across the globe and into the U.S. dollar and into US bonds as a supposed "safe haven". For how long will the $U.S. be a safe haven? It's like jumping from a crumbling building into one that is creaking in preparation for something similar.

Anyway, gold moved up $14, in spite of the $U.S. index being up over 1% on the day. Now that is a more realistic safe haven play.

There appears to be a lot more trouble ahead on the sovereign credit front!

Scotia Mocatta Vault Contents

In Canada, there exists a Bullion Investment entity called Bullion Management Group (BMG)
They sell paper gold but claim that:

"An essential feature of bullion is that it is not someone else’s liability like a bond or promise of performance like a stock. To maintain this essential characteristic of bullion, the Fund only invests in Good Delivery bars and stores them on a fully allocated, segregated basis. The Fund will not use derivatives or invest in securities or certificates of companies that produce gold, silver or platinum bullion. The Fund does not invest in pooled accounts, futures contracts, futures options or precious metals certificates."

Furthermore, BMG publishes bar lists for bullion stored on their behalf by ScotiaMocatta in Toronto. There are two bullion funds. One invests in a diversified manner in several precious metals. The second one just invests in gold.

Here are the links to the purported bar lists for items stored by ScotiaMocatta (a small excerpt appears below):

BMG Bullion Fund (Gold Bar List):         http://www.bmgbullion.com/doc_bin/goldbarlist.pdf
BMG Bullion Fund (Silver Bar List):       http://www.bmgbullion.com/doc_bin/silverbarlist.pdf
BMG Bullion Fund (Platinum Bar List):    http://www.bmgbullion.com/doc_bin/platinumbarlist.pdf

BMG Gold Bullion Fund (Gold Bar List):  http://www.bmgbullion.com/doc_bin/bmg%20gold%20bullion%20fund%20as%20feb%205%202010.pdf

Altogether we see about 107,000 oz of gold and 5.2 million oz. of silver plus about 50,000 oz. of platinum. These statements purport to reflect conditions at March 31, 2010.

Thus, just for one Canadian client fund, the amounts supposedly stored exceed that observed by Lenny Organ on his visit to the vault. In the case of silver, the observed quantity is close to 100 times less than BMG supposedly has stored there on behalf of clients.

While the above is all public information, it may well have escaped the attention of some folks. Maybe someone (Adrian or Harvey or Lenny?) have a view on this.

Gold and Silver Manupulation Hits Mainstream Media

With a delay of several days, the MSM is finally beginning to report the story on the whistle-blowers charging manipulation of the gold and silver markets. See this story published today in the New York Post Business Section.

Wall Street Credibility

Continuing with last week's revelations on creative accounting practices hiding the true position of America' premier banks, many more mainstream media sources are registering their dismay. For example, see here for a MarketWatch article.

Revelations on Banks Fudging Data through Repo 105

Today, even the MSM (Mainstream Media) came down on the banks with a piece in the Wall Street Journal on the usual suspects (Goldman Sachs, Morgan Chase, BofA, etc.) showing how they routinely fudge their figures at reporting times (end of quarters) through mechanisms such as Repo 105 made famous by Lehman.

There is very little that one can trust anymore as far as the major banking and financial institutions are concerned. Dishonesty and, in may cases outright fraud seems to be deeply ingrained in their culture.

Gold and Silver Fraud Revelations continue

rganFurther to the bombshells regarding silver and gold manipulation which were aired at a recent hearing of the CFTC (The U.S.  Commodity Futures Trading Commission), today Adrian Douglas and Harvey and Lenny Organ divulged another bombshell regarding the near absence of physical precious metals in the vaults of ScotiaMocatta (ScotiaBank, Canada). Listen to the King World News interview.

Silver, Gold, Manipulation and GATA and the CFTC

There are some major developments regarding silver and gold manipulation, GATA (Gold Anti-Trust Action Committee) and the CFTC (The U.S.  Commodity Futures Trading Commission).  Here is a YouTube video that summarizes things pretty well. If you haven't followed GATA accusations, now would be a good time to bring yourself up to speed on what could be a history making situation soon. To hear an actual interview on King World News with whistle-blower Andrew McGuire, go here.

Predatory Financing

The signs of predatory financing continue to show up everywhere. Greece and Goldman Sachs is but one example.
To see how deep the tentacles have reached, take a look at this story by Matt Taibbi entitled "Looting Main Street" which takes a look at the shocking financial story of Jefferson County, Alabama.

Predatory bankers notwithstanding, corrupt and short-term oriented politicians and financial administrators need to be actively complicit to make these schemes fly. So, really, I believe that we are looking at a culture of irresponsibility, greed, corruption, complacency and wishful thinking that has crept in over many years. No one wants to face the music and accept the consequences of past errors in judgment - not national governments, not state or provincial governments, not city administrations or individuals in most cases, for that matter. Instead, everyone is looking for ingenious schemes to put off the day of reckoning with even greater long term consequences.

Federal Reserve to Remove Bank Reserve Requirements?

Looks like the same bright lights who created the ideas of no money down on home mortgages and "you tell us what you earn - wink, wink", are at it again, this time at the Federal Reserve. Capital requirements for banks? What for?
Look here.

Now would you want to put your savings in a bank that didn't have any capital in reserves? Isn't fractional reserve banking already a shaky proposition when banks start to have less than 20% in reserve capital?

It's just another sign of the Alice in Wonderland thinking that is taking us further off the surface of this planet and closer to much bigger financial chaos.

Greece, Portugal, then Spain, the U.K. and the U.S.?

Today, the rating agency Fitch downgraded Portugal's debt to AA- from AA. This is not entirely unexpected. The U.S. dollar index surged on the news and commodities generally moved lower.

The rotating sovereign debt default death-watch continues. Several countries' financial situation continues to deteriorate in an unsustainable manner. The holes in the dikes are getting bigger and more frequent. In the meantime, equities and various other sectors around the world are blowing into greater and greater bubbles on the back of artificially low interest rates aimed at preventing (or shall I say forestalling) impending private and government debt collapse. The Euro is threatened, the British Pound is threatened and ultimately the U.S.$ is threatened as the focus rotates from one to the next to the next.

Do I sound a little concerned? Cynical? Well, it would help a lot if nations would start dealing with reality rather than engaging in Cinderella-like behaviour. Maybe then I wouldn't be so terrified by what I see.

At the base of this crumbling pyramid we have the U.S. and the world's current reserve currency, the $US. Unfortunately, this base looks pretty rotten. See my previous blog entry on the tragedy of America here.

More on Paul Krugman and China/US Reality

Well, I see quite a few people are astounded by Mr. Krugman’s puzzling non-sequiturs. I particularly enjoyed reading Peter Schiff's take on it here.   Peter Schiff is dead on!

Oh, and today March 21, 2010, yet another attack on Paul Krugman here by John Mauldin.

China, Paul Krugman and Alice in Wonderland

It wasn't that long ago that folks like Paul Krugman would lambaste the U.S. Government as well as American business and consumers for the growing addiction to cheap Chinese imports in exchange for a flood of dollars which were made possible by borrowing from those same Chinese. See, for example, this op-ed piece from 2005 in the New York Times. My, how times have changed. Today, Mr. Krugman and many others have apparently concluded that China is the problem rather than U.S. greed and short-sightedness. Not only is it all China's doing, but the solutions are really simple and, oh, we have the Chinese over a barrel too! Take a look at this piece by Paul Krugman published March 14, 2010.

The denials, frantic scape-goating and grasping for straws are very reminiscent of the type of logic used by hardened alcoholics. How sad.

China Reduces U.S. Treasury Debt Holdings

The figures for January 2010 are out and China continues to reduce its holds of U.S. Treasuries. See the Globe and Mail article here.  Looking at another of my posts showing the continuing slide in the U.S. financial situation, can you blame them?  They need to get out while they can but they are trying to do it slowly to avoid a general run for the exits by the market. That wouldn't help China or anyone else.

U.S. National, State and Private Debt Statistics

At USDebtClock.org there is a fantastic summary of animated statistics depicting all sorts of debt categories for the United States. The figures put into sharp focus the rapidly deteriorating financial condition of the U.S. in general.

Credit Card holders are dumping debt

Further to yesterday's blog on Debt statistics published by the Federal Reserve, here is more proof that one needs to be careful how to interpret articles that have lots of spin. This article from MarketWatch says that 90% of the reduction in credit card debt is due to credit card holders just walking away (defaulting) not from repaying amounts owing. Read the article here.

Lehman revelations continue

Articles appeared this week detailing fresh revelations on how Lehman "misled" investors. An example from BusinessWeek here. To me it is just more evidence of the fraudulent mentality that has overtaken a lot of Wall Street. For a lot more on the shenanigans on Wall Street and the Federal Reserve, see this special report.

U.S. Debt grows at slowest pace on record

This type of article can be a little misleading. See the one on Marketwatch, for example. The article is based on the Federal Reserve's report of March 11, 2010, available here. The Marketwatch article talks about consumer "deleveraging". But that is not what is happening in most cases. Consumers and business are walking away from their mortgages, defaulting on their loans and credit cards and declaring personal and business bankruptcies. So the level of debt is falling alright, but deleveraging? Deleveraging occurs when you are paying your debt down, not when you are defaulting on it. It's just more spin. Meanwhile, as you can see from the excerpt below, government debt continues to expand briskly. Some of these folks will eventually also walk away from their debts, methinks.

Percentage changes; quarterly data, seasonally adjusted annual rates

                  Total   Households   Business   State/local gov.   Federal
2009Q4        1.6       -1.2               -3.2                +4.7              +12.6

 

Auto-updating Gold and Silver Spreadsheet for Coin and Bullion Holders

If you are looking for an Auto-updating Gold and Silver Spreadsheet for Coin and Bullion Holders, see mine here.

China not interested in Gold?

Today a number of press reports appeared suggesting China was cool towards gold. See the Marketwatch article, for example.

Well, I guess you could say that it had the predictable effect. Gold promptly sold off about $12 before recovering most of this by the end of the trading day. The Chinese are getting to be every bit as good as Wall Street when it comes to manipulating the markets. They will pick up more gold at lower prices than otherwise possible as they downplay their involvement in the gold market. Who can blame them? China has a rising foreign exchange resrves to contend with.

Gold continues to migrate from weak to strong hands as the shenanigans continue.

The Fed's "Exit Plan"

As if the banks have not had a good enough series of meals at the public trough, here we go again. See this article from businessinsider.

Bond Bubble will Burst

Observers have been warning about the dangers of a bond bubble and what a collapse in such a huge market would mean. Recently, The Economist and many other mainstream publications have become more strident in expressing their prognostications and concerns. See this article from the Asia Times for an example.

Artificially low interest rates (aka free money) coupled with stimulus funds recklessly sloshing to and fro have inflated asset prices all over the globe. However, the most dangerous of these runups is likely the U.S. bond market. Banks, governments, agencies and investors have been borrowing short at close to zero percent interest and buying long bonds yielding 4 %. Just for good measure, anytime the bond market looked a little unsteady, the federal reserve steps in and buys a whole bunch. Sounds like bootstrapping, doesn't it? Anyway, this will need to be unwound sooner or later, just like any other market that has been driven up artificially (like the housing bubble in the U.S., sub-prime, etc.)

The big difference is that the U.S. bond market is very close to the top of the pyramid as far as the world monetary and financial systems are concerned. A failure in this market could crash the U.S. dollar, the world's reserve currency, in addition to crashing government financing capability and markets generally. If you think the sub-prime mess was bad, it would be a walk in the park compared to where a bond crash would take us.

While governments have been been frantically trying to defuse our crisis, they are really playing double or nothing and risking everything, including the very foundations of our financial and economic structures. Heaven help us all.

More here.

Fort Knox Gold?

Doubts about the contents of Fort Knox and other gold repositories surface quite regularly. While certain views might fall into the conspiracy camp, there is a fair amount of circumstantial data to justify some healthy skepticism. GATA and Congressman Ron Paul are among the most vocal in demanding independent audits.

I would categorize doubts surrounding gold in repositories in three ways:

Missing Gold
Since U.S. gold repositories have had no independent audits for decades and since such an audit appears to be hotly resisted, there have been growing doubts as to how much physical gold is actually there.

Fake Gold
Reports circulated in October of 2009 that the Chinese had received a shipment of gold bars which, when tested using invasive techniques (drilling), were found to consist of gold-plated tungsten. I have not been able to find any mainstream news source to confirm this story. Another story detailing fake bars from the Ethiopian central bank is well-documented here.

Borrowed (lent out) Gold
This may be the more probable situation and would similarly explain the resistance to an independent audit. There has been plenty of speculation that while there is still gold in U.S. repositories, much of it has been lent out in the form of swaps or leases to the likes of JPMorgan Chase. Any such gold would thus be encumbered and not owned by the Treasury or Federal Reserve.

Ron Paul on Monetary Fraud

Ron Paul is a very active congressman who fights monetary fraud and lack of transparency in U.S. financial government operations, especially of the the federal reserve and the Treasury. He fears for the future of the U.S. with its unsustainable and immoral economic and monetary policies.

Ron Paul Calls for American Turn

Ron Paul is one of only a handful of U.S. congressmen who has the internal fortitude and ability to say the hard truths about America and who tirelessly fights to change the misguided direction America has taken financially, economically and militarily.

Gold Sounds Alarm

The 2008 financial crisis brought about some major initiatives from governments around the world, notably the U.S. and Britain, which basically embarked upon a program to borrow and print their way out of debt while the culprits and fraud artists continued to ply their trades. The result has been a new round of asset bubbles in the stock market and increased manipulations of all sorts by the Wall Street fraudsters. Currencies of the worst offenders (US and UK) are taking it on the chin but almost all currencies are being debased to some degree.

Despite the steady stream of encouraging results that are being given play, many in the world community continue to be alarmed as evidenced by the steadily rising gold price, which is now rising against virtually all currencies. Some of the biggest sellers of gold over the last 10 -20 years include Canada and the UK. It is sad that Canada sold virtually all of its official gold reserves during the last 20 years. From 500 tons in 1989 only 3 tons were left by 2003. So now we have less than Bangladesh, Iraq, Guatemala and Serbia. We sold most of it for around $300 to buy "interest-earning $US". I could say a lot more about this scam but I'll leave it for later.

The chart depicts the gold price in $US over the last 10 years or so. It is self-explanatory. So who, outside of investors and speculators, have been the big buyers? China, Russia, Belarus, Venezuela, India, Poland, Romania are a few.

Who are the biggest holders? The U.S. (if you believe that they haven't sold or loaned out most of it. Even some in the U.S. Congress don't believe it and have been trying to have an audit of Fort Knox without success), France Germany and Italy.

The rising gold price suggests that lots of folks are very worried and puts a lie to the notion that all is under control. I hope the worry turns out to be unwarranted but I personally cannot see how borrowing and printing can solve anything except possibly to temporarily put off the day of reckoning but at the cost of an even more impaired overall situation.

For more commentary on the US$ see my Markets page at: http://goldsilverstocks.info

Derivatives

In my view, derivatives are not bad in and of themselves. They can assist producers and users of materials or commodities and help, for instance, to insulate exporters/importers against rapid currency fluctuations that might wipe out the margins that they normally operate under. For example, I myself have bought "puts" which are a form of options, which are a form of derivatives, to insulate or insure myself against a possible fall in certain stocks that I have owned. As an owner of an underlying asset such as a stock I could also have sold (or underwritten) "calls" on my stock. This would give me an additional revenue stream from the premiums paid to me by those who bought calls in anticipation of a price rise of that stock (speculators, typically) or those who wished to protect themselves from a possible price rise in a commodity or industry (hedging). Note that in my example, I owned the underlying stock or commodity. Thus, if events turned against me, the writer of the call, I would be in a position to deliver the underlying asset for the original contract price and honour my commitments in an entirely unleveraged and safe fashion. Those who underwrite (sell) call options or similar derivatives without owning the underlying assets or only counting on other paper guarantees from third parties to bail them out of derivative positions are often referred to as "naked" or partially naked writers.

The current problem with derivatives is that increasingly, especially over the last 10 years, derivatives have become essentially an end in themselves. The value of these derivatives first began to exceed and in time to dwarf the underlying assets. Furthermore, many of those engaged in the profitable business of underwriting these policies were/are completely unable to honour their commitments (pay out the policyholders, so to speak) in the event of a dramatic reversal in the prices of the insured commodity, mortgage fund, the value or stock price of a corporate entity or other security or asset. In the simple example of my options calls described earlier, more and more derivatives came onto the market as naked or entirely leveraged instruments.

In the United States, 5 large commercial banks represent 96% of the total derivatives outstanding. You will recognize the names pretty quickly: JPMORGAN CHASE BANK, BANK OF AMERICA, CITIBANK NATIONAL,GOLDMAN SACHS BANK, HSBC BANK USA NATIONAL. The top one is JPMORGAN CHASE. It has assets of almost 2 Trillion $ but has derivative exposure of $87 Trillion. Or take a look at Goldman Sachs. It has assets of only $162 Billion yet has derivative exposure of almost 32,000 Billion, or 32 Trillion, or over 180 times its assets. The U.S. GDP is only about $15 Trillion. Does this look like a problem? Bubbles upon bubbles. It sends shivers up and down my spine! Furthermore, an additional really troubling thing is that the first 4 of these in particular basically run the federal reserve and the U.S. Treasury Department. Operating at such leverage levels, these are simply disguised Ponzi schemes. It's like borrowing not 90 or 100% of the value of your house but the equivalent of borrowing 10, 100 or 300 times the value of your house. So why do they do it? Well, the premiums and profits, of course. Now these are all just financial manipulations and there is no true profit no more than there is any GDP or value associated with it. But many people have become very, very rich in the process of hollowing out America (and, again, to a lesser extent, Canada). You and I are picking up the tab to bail these folks out. You see AIG provided "insurance" for these bozos, so if it didn't get bailed out, the real culprits would hang - the likes of JPMORGAN CHASE. Now some argue that Greenspan, Bernanke et alteri were taken in by mathematicians whose models explained that leverage could be made riskless via complicated hedges. Well, it is hard to believe that such apparently sophisticated and educated folks could be that naive. In the end, they totally abdicated their responsibility to enforce sensible reserve requirements for banks, pretending that derivatives are "different" and needn't be compensated for. The so-called ratings agencies were complicit as well. Take a look at this article from 2 years ago. Everyone was looking the other way - knowingly! The sales pitch to us is: We have to rescue these banks (and corporations, insurance companies, mortgage lenders, yada, yada, yada because otherwise the whole world will collapse and suffer. How does one suppose that all that money being borrowed or printed on our behalf is going to occur without some very serious impacts and suffering -ours? Overall bailouts now amount to about $30,000 for every man, woman and child in the U.S.

Many of these folks should be in jail. Instead, most of them are just fine, some of them employed at the Treasury or federal reserve or key US gov't posts: See here or here. The second article deals with a possible conspiracy and I can't comment sensibly on that aspect but further along in the article there is a great list of positions occupied by former Goldman Sachs folks, including our own Bank of Canada Governor, Mark Carney, h'mmm. As yet another sidebar, one may wish to note that most of these banks are on the top 10 of Obama's contributor's. See here. In case one thinks that this is limited to one presidential hopeful, look at this article from the Washington Post. More Goldman Sachs related stuff here.

Now, honestly, anyone who wanted to know that unbridled, massive derivative creation and trading was going to bring major trouble had no trouble knowing or finding out. Some very well spoken and well known individuals and organizations have been sounding the alarms for a long time. See the article below, for example. Warren Buffet warned about derivatives being a "financial weapon of mass destruction." When? In 2002. See the following: http://www.marketwatch.com/story/derivatives-are-the-new-ticking-time-bomb (there are 2 pages here). Numerous analysts and writers have warned and commented on the growing dangers.

One of the biggest derivative debacles had to do with mortgage debt. While debt is OK and even necessary to a degree, excessive debt is one of the most serious cancers possible in an economy, whether it be for an individual, a family unit, a corporation or a nation. Cheap mortgages were pushed onto equally hungry potential homeowners and speculators to earn commissions for the brokers and packagers of this debt (sub-prime being the worst). The packaged securities were subsequently insured (derivatives, again) and traded to pension funds, investors, etc. Problem was that many of the folks receiving these mortgages or liar loans, as they were sometimes referred to, could not possibly pay their monthly installments. The lenders knew that but didn't care, often telling borrowers that they could sell the house for a higher price in a few months, so not to worry. Well, we know what happened. We have pyramid schemes or vapourware everywhere, it seems.

GM (not really derivatives but still operating in an artificial environment and part of the bailouts, so I will comment) Companies like GM were doing the same crooked things that Nortel did. In Nortel's business-to-business dealings it was called vendor financing. Nortel would "sell" telecom equipment to a firm who didn't have money by advancing a loan for its purchase and would record a sale and profit from the transaction. In fact it had given away merchandise in exchange for a questionable IOU. GM's business became exactly the same. They have not been so much in the business of selling cars as operating a specialized lending facility. The customer walks into a dealership, takes a car and leaves an IOU in return. If these folks were credit-worthy it could work but increasingly people are borrowing for everything - couches, printers, cars, homes, holidays, etc. and increasingly a lot of folks can't service the debt. So a lot of these IOU's have become junk debt. "As of October 15, 2008, GMAC had $173 billion of debt against $140 billion of income-producing assets (loans and leases), some of which are almost worthless, in addition to GMAC Bank’s $17 billion in deposits (a liability). Even if GMAC liquidated the loans and leases, it couldn’t pay back all of its debt." The above is from the GMAC Wiki.

Finally, an entertaining article on debt abuse (and some GM comments) from 2004: http://www.gold-eagle.com/editorials_04/willie060904.html

Gold and Silver Resuming Uptrends

Not surprisingly, Gold and Silver are resuming their uptrends. Today's release of Federal Reserve minutes continues to support the view that low interest rates and expansionist money supply policy will continue. The precious metals seem to be on their way after a near month-long correction. See here for charts: http://goldsilverstocks.info

The looming tragedy of America

As 2010 begins, the tragedy of the decline of America and betrayal of its founders looms larger. An excellent article by Darryl Robert Schoon describes it all so eloquently and painfully here.

BAILOUTS & THE MORAL HAZARD

Economically and monetarily speaking, the Western world, particularly the U.S. has been in trouble for a long time. We've had a series of rolling crises which have been masked or papered over by the Federal Reserve, the U.S. Treasury, Wall Street and the Central Banks of the world, all in an attempt to keep the party going.

The bailouts have increased the problem of moral hazard. At the moment we are in a bailout phony money phase with artificially low interest rates, rising commodity and stock prices. watch out for the big bond bubble ahead along with many other problems most likely manifesting themselves in 2010.

For more see: http://bondbubble.info