Dear All,
Eurozone authorities this week gave the Euro-calamity a mighty kick down the road with a Greek "rescue plan" that -- should it be funded, buys them a day or two before the next act in the drama begins. It is a farce and it is only the beginning of what will be successive rescues. Led by the IMF (i.e. the United States) European political leaders are piling new debt upon debt, further exasperating the problem and calling it a plan. While Europe's debacle is made more complex by this bailout, the disastrous finances of Ireland, Portugal, Spain and Italy will come to a head as France likely loses its AAA rating. Massive Euro and dollar printing is coming. European banks are toast.
It's practically a waste of time following the plan details, press conferences, cancelled meetings, spin-laden communiques and other meaningless gyrations characterizing the crisis. The plot is entirely predictable and the politicians seem always the last to get it. Perhaps the most revealing aspect of the Greek default is the International Swaps and Derivatives Association's (ISDA) assertion that the default is not really a default. While the sane world might understandably question how a deal in which creditors are only receiving 50 cents on the dollar is not a default, the ISDA (the determining authority on declarations of default for the purpose of triggering default insurance payments) has its own view on the matter. It may not come as a surprise to learn that the voting members of the ISDA's 'Determinations Committee' on default triggers are the very TBTF banks that are on the hook for them. If a Greek default were to be declared the ISDA's committee members would themselves become defaulters on credit insurance, causing untenable puking throughout the financial system. Alas, the ISDA stipulated that the 50% haircut was not a default but rather "voluntary" acceptance by the creditors, who were after all, "invited" to take these losses.
This pretending of course has its consequences. If credit default insurers do not pay when borrowers default, purchasers of the protection will question what precisely it is they are paying for. Without the ability to hedge their investment with CDS protection, market appetite for sovereign debt will wane unless purchasers receive compensation for the increase in perceived risk, driving up borrowing costs for governments. We do live in a world with consequences, a detail that politicians rarely seem to concern themselves with. WSJ: Default Insurance Market Takes Hit
If you believe that the U.S. Federal Reserve's mandate is to serve the interests of the American people consider how the Fed has just shafted them. Over the objections of the FDIC the Federal Reserve has consented to Bank of America transferring its derivative obligations to its retail banking unit. As reported by Bloomberg the transfers "are being requested by [derivative] counterparties." Apparantly a few folks on the receiving end of those obligations were a bit uneasy about the ability of BOA to make good on its promises under its absurd $53.2 trillion (as reported to the OCC as of June 30, 2011) notional derivative book, so the transfer was done to reassure the counterparties. The reassurance came in the form of the counterparties' access to hard collateral, namely the retail banking unit's $1.04 trillion in cash deposits (as of 9/30/11). Understandably the severely undercapitalized FDIC is rather miffed at the prospect of losing access to said cash should it be required to step in to protect depositors in the event of the bank's failure. In theory so should depositors, who are as well in actuality, BOA counterparties (although moral hazard being what it is -- the presence of deposit insurance limits miffing to only the larger depositors). This $1 trillion cash margin call by the bank's counterparties (and the aforementioned refusal by the ISDA to declare a Greek credit default this week) illustrates what has been emphasized here for years -- the banking system has an untenable derivative problem. For additional light on how this Fed blessed transfer is a violation by BOA management of its fiduciary duty to its banking unit, I highly recommend former banking regulator Bill Black's commentary.
Nassim Taleb as usual, nails it: Bloomberg: Nassim Taleb on Wall Street Protest, Banking
Here's something you may find interesting: This broadcast interview on the Financial News Network with Richard Russell, Tim Wood, Peter Eliades, and the late Kennedy Gammag aired over eight years ago, well before the housing crash and financial collapse. The four covered a good deal of ground including the inevitability of a bursting of the housing and credit bubbles, the threat of massive concentrated derivatives holdings at the major banks, the dollar's fate, the fictitious CPI data, eventual protests/social unrest and the emerging bull market in gold (gold closed on the Comex at $345.50 per oz. the day prior to the broadcast; silver closed at $4.52), The broadcast aired on June 28, 2003 and I recall listening to it at the time. There were few places to hear this type of opinion then. Discussing a housing bubble was heresy in 2003. The word 'derivative' had not yet made it into the financial media lexicon and gold and silver were still considered silly things to invest in. As you listen to this bear in mind that Alan Greenspan and other political and Wall Street leaders would later claim that very few people could have predicted the collapse.
Housing bubble/college bubble....The drivers are the same -- an overabundance of credit. The platitude that every child should attend college is as absurd as the government promoted idea that every American should own his own home. Flooding any market with cheap, government-backed credit or credit guarantees artificially pushes up prices. Reduce the ridiculous amount of higher education lending and watch how quickly college costs fall. Too many higher learning institutions are run for the benefit of administration and faculty which with revenues goosed directly and indirectly by government financing have little incentive to run their schools efficiently. The current cash burden of overpriced colleges falls largely on those families who pay the majority of the costs themselves, subsidizing students who pay very little out-of-pocket and in many cases should not be attending college. Later on the burden falls on the indebted borrowers who become saddled with debt that will not be justified by the earning value of their degrees. Total student loan debt at $950 billion has doubled in the past five years and now exceeds total U.S. credit card debt. Abundant with fraud and borrower proceeds diversion, the student loan market is facing the same fate as the sub-prime market.
Anatomy of a Seizure (posted 1/14/10) addressed the degree of fraudulent asset carrying values across the banking system that can be gleaned from the FDIC estimates of its costs to cover insured deposits upon its seizing an institution -- currently the only point at which the system "comes clean" as to true market valuation. Here's a recent example of how nothing has changed since then. Great Southern Bank, Springfield, Missouri, assumed all of the deposits of Sun Security Bank, Ellington, Missouri on October 7th, under agreement with the FDIC as receiver. As of June 30th Sun Security had reported $355.9 million in total assets against $290.4 million in total deposits (i.e. its deposits were covered by assets of $1.22 for each $1.00 on deposit.) The FDIC estimated its cost of closure to be $118.3 million (i.e. that the assets covering the bank's deposits were in actuality worth only 59 cents for each $1.00 on deposit). The FDIC is valuing Sun Security's assets at less than half the value the bank claimed. On average the FDIC continues to value seized bank assets at about one third less than their carrying values prior to closure.
Note the rapid acceleration in the past 90 days:
Concise and to the point...
~ Ron Paul's recent Wall Street Journal OP/Ed: Blame the Fed for the Financial Crisis
~ I often refer to the Libertarian Party as 'the only pure pro-choice party' (believing for example in the right of a woman to choose to abort a fetus as well as her right to choose to ride a bicycle without a helmet). In this two minute video Harvard professor Jeffrey Miron quite neatly sums up the essence of what it means to be a libertarian.
~ Thomas Jefferson's words in 1802: "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property - until their children wake-up homeless on the continent their fathers conquered."
~ And...
The trend...
Reuters: Russia central bank says will acquire "huge volumes" of gold for reserves
Reuters: China's gold frenzy triggers birth of small bourses
The Occupy Wall Street movement is a shot across the bow marking the beginning of social unrest in the U.S. It is the real deal insofar as the American masses beginning to reach their necessary breaking point and a move toward populism. I am glad for this. OWS however is smelling increasingly of wider class warfare rather than the targeted search and destroy mission of shining light upon a concentrated and ruthless group within Wall Street that has so viciously screwed the country. The OWS movement might try focusing on the reinstatement of the rule of law as it pertains to elite white collar criminals, a point driven home in this DemocracyNow interview with law professor William Black. The OWS cited "99% vs. 1%" is off-base. In reality -- it's 99.999% vs. .001%, the latter measurement representing the elitists and parasites that crashed the banks and GSA's, pocketed billions, faced no criminal prosecutions and are still feasting on the bailed-out carcasses they destroyed. There is also the matter of the hedge fund industry having bought off Congress resulting in an exemption from taxation of their earnings as "income" and instead subjecting it to taxation at the low 15% capital gains rate.
I suspect that none of this will ultimately matter because the coming horrendous debasement of the U.S. dollar will prove to be the single unifying factor to bring about tangible change. At that point social unrest will hit critical mass as competing ideologies widely lose confidence in government altogether. Throughout history -- other than in the rare cases where it has stepped in to protect the individual liberty and property of protectees who welcomed its presence -- government has only inflicted harm. The pending destruction of the American currency and living standard will necessarily drive this point home.
The chairman of the House Transportation and Infrastructure Committee, which oversees the Transportation Security Administration (TSA), has besmirched the reputation of the Marx Brothers in comments he made regarding a classified report detailing the inept TSA's failure rate: "[Representative John L.] Mica suggested that the TSA’s performance report would read 'sort of like the record of the Marx Brothers'."
The Keystone Cops might have been the more appropriate reference. The Marx Brothers were comedic geniuses. To compare these accomplished and skilled craftsmen to moronic government twits with no demonstrable skills and bad hygiene is insulting to the memory and tradition of vaudeville: House Transportation Chairman: Report on TSA failures "would absolutely knock your socks off'"
See the zany brothers in 'A Day at the Airport'
The TSA, which has not once in its history prevented nefarious activity from occurring on a commercial airliner (Trust me, you would have heard.) has commenced a new program in which travelers will be forced to succumb to verbal interrogation by these former Wendy's tray collectors security professionals. The TSA calls it a "Chat-down" and you can view their questioning techniques and observation skills here.
On to gold...
The Financial Times asks the question "Is there a shadowy plot behind gold?" Gillian Tett is a highly respected financial journalist. There was a time not so long ago that mainstream media refused to run such stories or mention GATA.
Gold bubble-heads take note...There are numerous metrics by which to estimate the fair market value of gold. Among the simplest -- a computation of aggregate central bank foreign exchange holdings divided by their reported gold reserves -- is reflected in the following historical chart which James Turk included in commentary this week. You'll note that although gold began its current bull market in 2001, its valuation has remained flat under this metric due to the massive buildup of paper currency over the decade.
Artificially low interest rates and monetary policies are pushing liquidity into the equity markets and commodities, which will force food and other living expenses higher. As the reality of how entirely beyond repair the financial system is takes hold, the biggest beneficiaries will be silver and gold. The imperative of further global quantitative easing ensures building inflationary pressures.
As the Fed debases the U.S. dollar it will become increasingly important to measure the value of your assets in gold rather than in dollars. Stock market investors will be prone to taking relief from the higher nominal indexes resulting from the excess of new global currency sloshing around, but it will prove illusory as investors' living standards drop at a faster rate than the increases in their portfolios. They might take note that the Dow Jones Industrial Average, which closed out the millennium on December 31, 1999 at 11,497 is today trading at 1,994, marked in gold.
Gold must be the anchor of your capital and at the center of your thinking.
My best,
Jeff
