International Forecaster Weekly

Fiat Money And Schemes Collapsing

Goldman Sachs will get a hand slap, the Greek Tragedy continues, signs of growth not real, more market manipulation to report on, never incremental news, a broken system of risk-free trade and return

Bob Chapman | May 29, 2010

The DOE reported crude oil inventories up 646,000 barrels, gasoline fell 3.19 m/b and distillates rose 1.52 m/b.

The commercial paper market fell again by $2.6 billion to $1.073 trillion.

Goldman Sachs wants to settle with the SEC exactly as we predicted. They would neither admit nor deny and be fined $1 to $ 2 billion, which is chump change to them.

Lehman is seeking return of $8.6 billion that JPMorgan Chase seized before Lehman filed for bankruptcy. The claim is Morgan had unparalleled inside knowledge. There is no honor among thieves.

Part of the deflationary mode is borrowers are paying down debt and saving at a 3.4% rate. It could be the elitists, as we speculated months ago, want to take down the entire world financial system in the next 1-1/2 to 2 years. Hi Ho stimulus. The fiat Ponzi scheme is collapsing.

During the past few months the financial world and nations have been consumed with the problems of sovereign debt and so they should be. Debt is a worldwide problem, but that problem has been exacerbated by the ability of banks, brokerage houses and insurance companies to manufacture derivatives.

The Greek tragedy continues as the IMF and others get ready to fund not only Greece, but all the PIIGS as well. That includes Canada, the UK, which has refused to contribute, because they are broke, and the US whose end will be about $60 billion. Greece is rolling their old debt in order to bail out the banks. It won’t be long before Spain, Portugal, Ireland and Italy will be doing the same thing. The other euro zone members are saying why should we bail out these countries, which in turn are bailing out banks?

These euro zone countries are saying all we did was what everyone else was doing. Governmental debt has hit unprecedented levels worldwide. It is now called a sovereign debt crisis. Any recovery in any of these countries will remain anemic as long as this situation exists. More debt is being created via stimulus in some countries, and in others austerity has begun. In the US real growth is only 1.3%, and that is fading fast having fallen from 6.5% in the fourth quarter.

The top participant was penalized in 1985 at the Plaza Accord and in 1987 at the Louvre Account and as a result entered depression in 1992. That is Japan. Their debt is now 200% of GDP. Structural impairment still sticks out like a sore thumb. They are trapped in the same quandary, as Europe is, growth via debt. It is interesting to note that if global military spending of $1.5 trillion ended there would be o trouble funding debt. The US spends more than $600 billion a year, or over 40% of the world’s total, so they can bludgeon the world’s inhabitants into doing what the US wants them to do, it is called tyranny.

The foregoing is certainly not growth. Growth has to come from the development of domestic markets, not as it has been or is today via foreign trade and the endless creation of debt. The experiment of free trade, globalization, offshoring and outsourcing hasn’t worked. Look at what it has done to the US economy. It has gutted it. It has been based on the exploitation of what is essentially slave labor and the theory of comparative advantage. This method of impoverishing the US economy has been funded by the workers themselves via their savings and those of their pension plans. Instead of transnational conglomerates working with foreign governments to keep wages low they should be working to increase them. That never occurred to the Illuminists who run these corporations, nor governments such as China. As a result we have had the opposite effect. Slightly higher wages in China and much lower wages in the US. The ultimate result is going to be tariffs on goods and services to level the playing field.

The euro for Greece and others works both ways. The weaker members acquire a stronger currency and as a result a stronger economy based in part on the strength of its fellow members. Thus, Greece surrendered its sovereignty for the ability to create domestic debt. Unfortunately they cannot print euros, so they cannot devalue. Instead they default unless subsidized by other members.

The dollar had been probing lows on the USDX at 74 just several months ago. In order to solve the dollar weakness and sap euro strength a crisis was created. From out of nowhere Greece was exposed for its debt. Before this took place starting in October major NYC banks were accumulating dollars, because they knew what was going to happen, because they planned it that way. Do not forget Goldman Sachs knew all of Greece’s secrets - they created them.

The events in Greece have left many European banks badly exposed and riding to the rescue has been the Fed with a new swap facility. Last time, over 15 months, the Fed says they used $583 billion. The Fed is again printing money from out of thin air to be used by foreign nations to rescue European banks. They, of course, would have us believe it was to save the European financial structure, when the move was to save private banks that should have never made loans to Greece and other PIIGS, nor purchased their bonds. As professionals they knew better. Effectively the American taxpayer is funding these banks and they pay the price for this via inflation and greater debt. The Fed is further debasing the dollar.

As a result of what the public would call hocus-pocus, the price of gold has been rising. There are other factors making gold rise, but this is the latest. Finally professionals are paying attention to these problems, but more importantly, that the “President’s Working Group on Financial Markets” is manipulating all markets, but particularly the gold and silver markets. It won’t be long, within two weeks that a class action lawsuit, one of many by silver owners, will be filed against JPM Morgan Chase for manipulating the silver market. That should get Wall Street’s and Washington’s attention. This kind of suit is very difficult to defend against. Like Barrick Gold not many years ago, they admitted taking direction from the US government for hedging in the gold market, so will Morgan defer to the US government to explain their actions. Irrespective, Morgan will lose and the manipulation of the silver market and probably the gold market will end.

It should also be noted that the CFTC was complicit in this criminal activity. They had all the evidence and had to be forced to investigate. The Justice Department was forced to investigate as well.

This swap being done by the fed on the short-term could be somewhat injurious to gold, because the recipients are very liable to use some of those funds to short gold and silver.

As we explained earlier there is a fight going on between the dollar and gold for currency supremacy. The recent dollar rally was part of the plan to keep the dollar as the preferred asset or currency. It didn’t work all that well because gold rose more than the dollar. The dollar swap will be used to keep European banks from going under and that is inflationary. The Fed is obviously buying their subprime assets. The bank proceeds from the garbage sold to the Fed will in all likelihood be used to purchase US Treasuries. In a late note now that Fitch has lowered Spain’s credit rating from AAA to AA+, they’ll be even more pressure on European banks and government for Fed assistance. Now not only are the banks broke, but so are the governments. That said how could Treasuries be a store of value? They cannot thus; sooner or later professionals will be storming the gold parapets. If you think markets are currently volatile, just wait you haven’t seen anything yet.

There was a spike in purchase applications in April, followed by a decline to a 13 year low last week. As Fratantoni noted last week: "The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season."

Top national GOP recruit Vaughn Ward on Tuesday lost his primary in Idaho after a series of missteps by his campaign, throwing the Republican Party's chances in doubt against top-targeted Rep. Walt Minnick (D-Idaho).

Ward was trailing state Rep. Raul Labrador (R) 48 to 39 percent, with 90 percent of precincts reporting. The Associated Press called the race for Labrador early Wednesday.

Ward becomes the latest establishment favorite to go down in defeat, although his loss will more likely be chalked up to his campaign's myriad gaffes.

He was one of the first 10 candidates named to the final stage of the National Republican Congressional Committee's (NRCC) Young Guns program for its top 2010 hopefuls this cycle. Over the past month, however, his campaign has fallen victim to multiple charges of plagiarism, revelations that he didn't vote in the 2008 presidential election and a slip-up in which he said (in front of his Puerto Rican-born opponent) that Puerto Rico is a country (hint: it's not).

That opponent, Labrador, moves on to the general election and leaves national Republicans to evaluate where the race fits in their list of priorities this November. Labrador, an immigration attorney, is something of a blank slate to Washington.

He joined the NRCC's Young Guns program but has yet to reach the goals required to be named to the first stage of the program.

Given the right candidate, the freshman Minnick's district should be at the top of the GOP's target list. It went for Sen. John McCain (R-Ariz.) with 62 percent of the vote in 2008, but former Rep. Bill Sali (R-Idaho) severely underperformed the top of the GOP ticket, losing narrowly to Minnick.

Sali backed Labrador, while Ward was backed by former Alaska governor Sarah Palin (R).

Minnick has proven a savvy congressman, voting conservative on almost all major pieces of legislation and building a sizeable war chest for 2010. Republicans can't rely on merely a good environment to take him out.

In other races in Idaho on Tuesday, Gov. C.L. "Butch" Otter (R) and Sen. Mike Crapo (R) both overcame nominal primary opposition, as did Rep. Mike Simpson (R-Idaho), who faced a reasonably well-funded opponent and was a Troubled Asset Relief Program (a.k.a. bailout) supporter. All will be heavy favorites in the general election.

The federal prosecutors investigating Goldman Sachs are focusing on Timberwolf, the infamous "shitty deal" repeatedly cited in a tense Senate hearing last month, according to people who have been contacted by the Manhattan U.S. Attorney's office.

The probe raises the possibility of criminal charges against the storied Wall Street firm, which was charged in April by the U.S. Securities and Exchange Commission with civil fraud for allegedly misleading investors about another subprime mortgage-related security called Abacus.

Investigators from the U.S. Attorney's office have reached out to individuals involved in the deal, including David Mapley, the former independent director of an Australian hedge fund who claims that the firm collapsed shortly after Goldman sold it $100 million of securities in Timberwolf, a $1 billion collateralized debt obligation.

In an interview with the Huffington Post from his office in Geneva, Mapley said that he has been contacted by the U.S. Attorney's office and that he expects to be interviewed by them soon. Mapley brought his complaints about Goldman's role in the deal to the SEC in December 2007, met with SEC lawyers several times in 2008 and he says that he continues to talk to them.

"Overall, the whole thing was a fraudulent concoction," says Mapley, who says that it was one of the most egregious cases he had seen in his decades working in finance. "We examined the whole trade, what led up to the trade, the way it was marketed and everything about it was inaccurate. You think you're buying one thing and what you see is totally different."

Among the most serious allegations, Mapley claims that Goldman sold Timberwolf securities to the fund at marked-up prices -- while Goldman's trading desk was busy shorting such CDOs tied to toxic subprime mortgage securities.

Mapley says that the hedge fund, Basis Yield Alpha Fund, where he was an outside director, ultimately went into liquidation "with Timberwolf tipping the balance."

To help us understand exactly what's going on, and why debt loads that have been growing for years have suddenly become a market-melting issue, I turned this week to Satyajit Das, an independent credit analyst in Australia. Though his vantage point is half a world away, Das is frequently sought out as a consultant by central bankers, government officials and fund managers for his unconflicted insights and his unusually clear explanation of the dense pathways of debt and its derivatives.
I started by asking why the sovereign bond crisis reared up to spook investors last week despite the lack of any new news.

"It's never incremental news -- it's how old news sinks into the people with brains the size of caraway seeds who populate the financial markets," he said from his office in Sydney. "They always depend on selective information and process it in uneven ways. Even smart people tend to believe what they want to believe, and they right now they're using the idea that central banks and governments will miraculously prevail as a crutch. This is magical thinking. I have said from the beginning that governments won't have enough money to bail everyone out."

Das believes the central problem is that governments have already spent more than $1 trillion in taxpayer-generated and borrowed funds but are not getting as much bang for their buck as expected. If you strip out government spending and low interest rates, he notes, there's not a whole lot of activity going on. The government has tried to prime the pump, but the pump is still just dribbling.

He suggests we not be fooled by recent earnings reports or government stats, pointing to U.S. bank earnings as especially inaccurate. JP Morgan has a balance sheet of $1 trillion and can borrow at essentially zero, he notes. So if they just go out and buy 10-year bonds at 3% they should be able to earn $30 billion a year. Yet the bank announced a profit of $3.3 billion last quarter.

"What does that tell you? It says they are losing money on everything else," Das says. "Strip out the gifts, and it's big net loss." And at big industrial concerns like General Electric, he argues, revenue growth is anemic -- so earnings growth is solely stemming from cost-cutting and layoffs.

In February, Defense Secretary Robert Gates authorized $150 million in security assistance for Yemen for fiscal 2010, up from $67 million last year.

Officials told Reuters the money would be used in part to bolster Yemen's special operations forces to lead an offensive targeting al Qaeda in the Arabian Peninsula, which claimed responsibility for a failed plot to blow up a U.S. passenger plane on Christmas Day.

The group has emerged as one of al Qaeda's most active affiliates, and the Obama administration recently took the extraordinary step of authorizing the CIA to kill a leading figure linked to the group -- American-born Muslim cleric Anwar al-Awlaki.

The U.S. government’s Aaa bond rating will come under pressure in the future unless additional measures are taken to reduce projected record budget deficits, according to Moody’s Investors Service Inc.

The U.S. retains its top rating for now because of a “high degree of economic and institutional strength,” the New York- based ratings company said in a statement today that was little changed from a credit opinion released in February. The outlook is stable, the statement said.

The government’s finances have been “substantially worsened by the credit crisis, recession, and government spending to address these shocks,” Moody’s analysts lead by Steven A. Hess wrote. “The ratios of general government debt to GDP and to revenue are deteriorating sharply, and after the crisis they are likely to be higher than the ratios of other Aaa-rated countries.”

Debt to revenue has more than doubled over the past three years and is now over 400 percent, which could lead to “potential stress” on finances, the report said.

“This whole financial crisis in Europe has actually benefited the U.S. government in its access to finance,” Hess said in a telephone interview. “The U.S. Treasury market has become once again, as it was during the recent financial crisis globally, the safe haven, and therefore lots of money flows into the U.S. Treasury market and that is a very positive.”

Tuesday morning rumors and a FT story about Germany extending its short-selling ban prevented US stocks from a larger opening decline and generated a rally after the opening onslaught.

One rumor said the ECB would cut its 1.00% benchmark rate by 50bps generated a rally in US stocks after the opening carnage.

Any ECB rate cut would pressure the euro, which in turn would induce traders to sell European sovereign debt, which would exacerbate Europe’s debt-death spiral.

On Tuesday morning, the NYSE invoked Rule 48, which allows the NYSE to suspend the requirement to disseminate price indications at the open. Looks like all that technology isn’t very useful – or does the opaqueness aid and abet the connected few in their desire to operate with ‘an edge’?

Tuesday’s rally got a second-stage boost during midday when Cong. Barney Frank stated that forcing banks to spin off their derivatives operations “goes too far” in regard to financial reform.

There is a new dynamic that most people cannot cogitate: The current crisis is not the usual crisis of a private-sector firm or problem appearing that needs a public sector bailout.

Now, the public sector needs a bailout and there is no private sector entity large enough to bailout the public sector. So government officials and central banks are trying to euchre the markets and people into accepting the notion that the imploding public sector can bailout itself out by increasing its indebtedness.

In the Nineteenth Century and early Twentieth Century the private sector (i.e. JP Morgan or Europeans) bailed out governments. Then the Twentieth Century movement of gigantic government that increased its size and control over the private sector produced governments and central banks that would bail out private sector firms. But now, governments and central banks are too large for a private sector bailout.

This of course, destroys the multi-decade concepts of risk-free rate of return, Keynesian economics, freely-traded markets, buying every market dip, central bank omnipotence and child-like belief in a supra entity that stands ready at all times to bailout everyone in order to prevent another depression.

Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year. At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010. The result is a major shift in the source of personal income from private wages to government programs.

The trend is not sustainable, says University of Michigan economist Donald Grimes [How is this different that Greece or most of Europe?]

A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.

US Plays Down European Crisis but China Worried The United States suggested Europe's debt crisis would have minimal impact on global growth, but China took a more pessimistic view, warning it would impact demand for its exports and other regions would suffer too.

Loans guaranteed by the Federal Housing Administration, the U.S.-owned mortgage insurer, may be involved in more home-purchase transactions than borrowing financed by Fannie Mae and Freddie Mac.

FHA lending last quarter may have topped the combined volume of government-supported Fannie Mae and Freddie Mac in a home-lending market that’s still a “government-financed market,” David Stevens, the agency’s head, said today at a conference in New York, citing research by consultant Potomac Partners.

This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system.”

The Conference Board's confidence index rose to 63.3 for May, the highest reading in two years. 58.5 was consensus. If you have been playing along at home over the past year, you already are assuming that future expectations once again soared. You are correct.

The Conference Board’s ‘present conditions’ increased to 30.2; but ‘expectations for the next six months’ surged to 85.3, the highest level since August 2007. The stock market peaked in October 2007.

In October of last year  <> [1]we wrote an extended piece discussing the conflict between the bankrupt Lehman Brothers estate (i.e., its unsecured creditors) and Barclays, in which JPMorgan played a prominent part, as it was the critical tri-party repo clearing bank on all of Lehman's collateral that would subsequently go to Barclays. As we summarized, extortion attempts back then by Barclays only had the adverse effect of making Jamie Dimon very, very angry: "Barclays' attempt to nickel and dime JPM (and the US taxpayers) so infuriated Jamie Dimon that he penned an angry letter to John Varley <>  [2], Barclays Group CEO (which CC:ed Barclays' president Bob Diamond), threatening with litigation in case Barclays is intent on sticking JPM with Lehman collateral that it thought was without value and not worth assuming in a time when every single day stock prices were crashing further lower." As we expected in October, the resolution would most likely involve litigation, as by dint of its collateral clearing position, JPM had unprecedented knowledge about Lehman's affairs: a special status that would likely be abused in a court of law. Sure enough, here is the lawsuit: the estate of Lehman Brothers, desperate to pick another several bps in recovery on their Lehman General Unsecured Claims, has sued JPMorgan, claiming Jamie Dimon's bank pushed Lehman into bankruptcy by forcing it to turn over $8.6 billion in collateral. As Lehman was completely insolvent long before JPM demanded any incremental collateral comfort, claiming that JPM was the catalyst for Lehman's bankruptcy is absolutely the same as saying that Goldman forced AIG's bankruptcy by increasing its collateral demands. While both arguments are ludicrous, should the JPM case proceed to court, it is tantamount that AIG immediately seek legal action against Goldman Sachs on identical grounds.