"The fact that they're now driving the [gold] price down suggests to me that the situation is getting more desparate." Paul Craig Roberts, Former Assistant Secretary of the Treasury, 6/11/12
"What this continued Fed activism will do is to continue altering the functioning of markets, contaminate price discovery and distort capital
allocation. Already, the viability of several segments – from money markets to insurance and from pension provision to suppliers of daily market liquidity, all of whom provide financial services to companies and individuals – has been undermined. The Fed has also conditioned many market participants to believe in policy put for both equities and bonds. And other government agencies are relieved to have the policy spotlight remain away from their damaging inactivity...In the process, look for greater distortions that will take years to resolve." - Mohamed El-Erian, CEO of Pimco, the world's largest bond fund, in a Financial Times commentary following the Fed policy announcement on 6/20/12
Dear All,
Germany continues to play a highly effective game of financial chicken with the U.S. The Fed and the IMF (of which the U.S. is the major funder) will shoulder a major share of the burden of bailing out Europe. The U.S. has little choice. Through derivatives, its banks are joined at the hip with Europe's fate. The Fed is going to shortly unleash the most massive liquidity drop in history in spite of its current facade of restraint and due consideration. It is all affectation and pretense fooling nobody (other than virtually everyone on Wall Street, it seems). The Fed is trapped. The alternative is a deflationary death spiral and the complete collapse of the derivative laden banking system. That's it. Period. Over. Have a nice day.
Hi Jeff, I am enjoying your Goldmap blog and learn a lot from it. In your last issue, 5/30/12 Yersine Pestis Revisited, you mentioned that since your blog's inception, you have "emphasized the central dilemma of the financial system - OTC derivatives". I have a basic understanding of OTC derivatives, but I was wondering if you could expound on them in your blog, how they work and how they pose a danger to the entire world financial and economic systems, and how it might all come tumbling down i.e. what would precipitate the End of Times? I suspect your followers, such as blokes like me, would really appreciate a primer on the subject." - Mark
First, I refer you to this piece -- Derivatives for Dummies And Why The Politicians Refuse To Discuss Them -- for a quick tutorial. When you hear the term though understand that there are two types here of derivatives; cleared and non-cleared (the latter are referred to as over-the-counter). Cleared derivative products (such as "puts" and "calls" on the shares of publicly traded companies) are traded on exchanges and settled through clearinghouses. In order to do so all put/call "contracts" (the right to sell/purchase 100 shares at a specific price by a specific date) must be uniform. A call contract which for example provides the right to purchase 100 shares of Proctor & Gamble at $65. per share on or before August 18, 2012 is identical in all respects to every other such specific contract for the right to purchase that stock at that price by that date. This uniformity facilitates the trading and clearing of contracts in any multiple thereof and significantly -- clearinghouses require cash collateral posted by contract ounterparties at the time of trade settlement . Non-cleared OTC derivatives on the other hand, are "one-off" privately negotiated agreements between parties without any standardization and therefore no clearing capability. Collateralization requirements are privately negotiated and enforced. It is this variety of contract -- the non-clearable OTC derivative that now constitutes the achilles heel of the financial system.
Somebody on Wall Street figured out that trading principally off its reputation (and with little capital) a bank could operate an extremely profitable insurance business by entering into derivative agreements. The products would not be referred to as 'insurance' per se, since conventional risk insurance is a highly regulated industry requiring appropriate capital reserves. Financial risk insurance however, in the form of privately negotiated contracts, could be marketed free of regulation and most pointedly free of capital reserve requirements. Thus, a pseudo insurance industry was born that in contrast with regulated insurance required relatively little capital with which to operate.
Not to be lost here however is that the financial services industry is as well a highly regulated one. During the Clinton administration the industry's watchdogs were bought off, most notably through the influence of the powerful banking interest triumvirate of Lawrence Summers, Alan Greenspan and Robert Rubin who strenuously objected to efforts to regulate derivatives (PBS FRONTLINE: "The Warning").
Insuring customers against changes in interest rates, credit default and other risk became a monsterous business on Wall Street. With minimal capital deployment requirements and high premium returns, as one firm grew its derivative line of business and reported swelling profits, competitive pressures pushed others to do likewise. Notwithstanding the fact that these contracts and risks were becoming increasingly systemic, large bank CEO's loved both the profit generation and high returns on capital that the derivative business generated. Top managements willingly destroyed their own balance sheets for the current paper profits and cash bonuses they produced. Each likely took solace that the growing interconnected, systemic dangers actually provided cover for them individually. The moral hazard created by the TBTF doctrine was in play. Chuck Prince, failed Citibank CEO famously remarked "[A]s long as the music is playing you've got to get up and dance."
Over the past two decades TBTF banks used what would in effect become the Fed's balance sheet to generate obscene operational profits, fees and bonuses for itself. Today the nine largest banks hold a total of $228.72 trillion (triple the size of the entire world economy) in derivatives -- insured and layered upon one another in a dubious pile of obligations which they cannot meet.
Fathom this: The most recent quarterly report on bank derivative activity by the U.S. Office of the Comptroller of the Currency reports that Goldman Sachs, with total capital of $19.8 billion holds $42.8 trillion in notional derivatives contracts on its books. Under absurd FASB guidelines banks are permitted to report their total credit exposure thereunder at whatever number they damn please using a formula that they are free to make up to suit their needs. Goldman reports its "Total Credit Exposure from All Contracts" as being $148 billion. Even this implausibly low figure, at a mere .0005 of its aggregate notional contract values -- exceeds Goldman's total capital of $19.8 billion by 750%. These reported total Credit Exposures are pure fiction and it is why this systemic sinkhole cannot be tested, Requiring performance, or more to the point -- standing by and allowing the cards to fall creates another AIG/Lehman moment for the Fed. For this reason the Fed will not allow it to "all come tumbling down" because the entire financial system would come down with it, including the function of the Marriner Eccles Building in Washington (The Fed's headquarters).
For further insight I suggest this recent piece by Jim Willie on how interest rate swaps have the Fed held hostage: U.S. Treasury Bond Teetering Tower Of Babel, Fed Stuck At 0% Forever
Gregg Hunter has provided a superb interview with Paul Craig Roberts, former Asst. Treasury Secretary in the Reagan administration. It is not customary to hear former top government officials speak this candidly. Roberts touches on several taboo subjects such as derivatives, the gold price suppression and the media/government "propaganda industry." These are strong words coming from a former high level Washington insider. Roberts is dead on in referring to the European crisis as not only a great diversion, but a political excuse for the economic disaster that will get much worse domestically.
"People need to know what's going on. The crisis that the United States is in is worse than the European crisis or the Greek crisis...Washington keeps attention focused on Europe. It serves as a diversion of attention -- of focus"
"The [gold] prices are suppressed by short selling. [The price] should be going through the roof."
The real "tempest in a teapot" of the past few months was the hubbub over Walmart's having paid off local Mexican officials in their quest to open stores. On a far grander scale and of magnitudes greater in impact, imagine the $millions in bribes the large banks showered on politicians in Greece and other European countries (Let's not forget Goldman Sachs' role in fabricating Greece's financial health* at the time it was seeking entry into the Euro). The Walmart story is kid stuff but that's where the financial press chooses to go, as opposed to where serious payoff money is. The New York Times' Gretchen Morgenson refused to go there in an article this month describing the deleterious interest rate swaps that Wall Street peddled to states and municipalities. Given the enormously lucrative fees and earnings from the derivative products the banks sold and the attendant costs for the public that is now stuck with them, it is simply not credible to believe that bribery of government officials didn't facilitate a substantial portion of sovereign placements, and as Matt Taibbi reports -- it was certainly rampant at the municipal level: RollingStone: The Scam Wall Street Learned From the Mafia.
In fairness, It should be pointed out here that Wall Street is not the Mafia. There are differences. Here are the 3 principal distinctions between the two groups:
1) The cut of their suits
2) Mafioso are more likely to engage in physical violence
3) The Mafia has a more honorable code of conduct. It is more straightforward about its intent and transparent with respect to its interests
The Orwell Files...
When you hear the term "green job" it likely conjures an image such as a technician in a field monitoring the dispersion of windmill generated energy. The Bureau of Labor Statistics has a slightly more expansive view of that definition: DailyCaller: Labor Dept. counts oil lobbyists, garbage men, bus drivers as ‘green jobs’ Note the high percentage of "indirect jobs" that constituted this particular green- giveaway program.
Despite being entirely broke, the state of California is pushing ahead with its SF/LA rail link. Governor Jerry Brown plans on spending what will surely exceed $100 billion on this high speed gravy train that the majority of California voters actually now oppose, given the state's $15 billion 2012 operating deficit and the fact that the service will be only minimally used. Promoted as a beneficiary of the carbon tax, the boondoggle will nevertheless achieve its real goal; awarding lucrative contracts to the governor's cronies and financial supporters and creating a lasting monument to his ego: Bloomberg: California High-Speed Rail Losing Support, Poll Shows
Prohibition returns...New York City has received the latest edict from The Personal Behavior Police. Mayor Mike Bloomberg is proposing restricting the sale of sodas and a distressing number of citizens seem to think its a swell idea. Americans appear to remember none of the lessons from the 13 year period preceding the repeal of the U.S. Constitution's 18th Amendment, during which ironically, they enjoyed more personal liberty than they do today. Boobus thinks the issue is about soda when in fact it is about the proper role of the state. A common defense of this blatant overreach is that under our system of healthcare a collective interest exists to reduce the costs associated with poor health choices, thus compelling the state's interest in monitoring lifestyles. Put aside the perverted dynamic that arises when government intrudes in the private marketplace and then seeks to expand its power by rationalizing a need to remedy the distortions its intrusions caused in the first place; what should be evident is that this logic knows no bounds. Why stop with sodas? It is for example well established that women who regularly wear high heeled shoes are prone to develop bone-spurs later in life. Wouldn't the state have a vested interest in controlling female footwear choices? What about psychiatric costs? Certain types of (perfectly legal) behavior are also associated with increases in particular psychosis.
Meanwhile, The Language Police is cracking down on people with afflictions. Black people may freely refer to themselves as niggers but when a person suffering from muscular dystrophy refers to herself as being crippled, the line has apparently been crossed.
The arsonist returns...It is simply astonishing to hear this man make these statements as though he were not the principal architect of the credit collapse through among other strategies, the setting of false, non-market interest rates: "I am a long-standing, small-government, free-market economist of long standing and have never veered from that [and favoring tax hikes] is a reflection of how scared I am about how the debt problem has emerged and its order of magnitude." The CNBC sycophants in his presence never so much as raised an eyebrow and were in fact -- reverential. Greenspan was a failed economic forecaster who had lost all his clients when he was appointed Fed chief. He has never been anything but a conniving political miscreant who modeled his career on Chauncey Gardiner.
Graduation day...
Here's a high school commencement speech actually worth listening to. Having snored through my share of such speeches littered with florid platitudes and utterly false messages, it was refreshing to hear a speaker tells kids the truth. His message? -- "You're not special." Wellesley High Commencement Address
Michael Burry foresaw and profited handsomely from the sub-prime crisis. He delivered the 2012 UCLA Economics Commencement address. Listen to what he has to say, particularly about how appreciative politicians, Ben Bernanke and various government agencies were of his attempting to enlighten the country as to what was about to happen to housing prices.
Green drivel'...
TorontoSun: Godfather of global warning lowers boom on climate change
Carbon footprint be damned, apparently: Obama flies special barber in every 2 weeks
Worth the read and view...
Compassion – Killer of Society?
I was fortunate to have seen Kumare at last year's NYC Documentary Film Festival. It is now opening nationally and I encourage you to run to see it. The film has much to say. It is hilarious, sad and extremely touching.
The trend....
Reuters: Brazil-China to Sign $30 Billion Currency Swap Agreement Soon
Gold Deposits Of USD 1 Billion To Be Collected By Turkish Bank
Reuters: Kazakhstan to put 20% of its foreign currency into gold
ArabianMoney: Fear of dollar collapse will make China biggest gold buyer
On to gold...
CNBC/Asia this week interviewed GATA's Secretary/Treasurer, Chris Powell. CNBC's U.S. counterpart continues to blacklist GATA.
The financial media can't seem to make up its mind whether gold is a safe-haven or not. On days its price rises its due to "flight to safety." On days it declines its due to abandonment of "risk assets." Let me clue you in on a secret: Long before there were newspapers and pundits there was gold - the reliable refuse from political and economic distress. If gold had a sense of humor it would giggle at these sheep who presume to interpret the secular meaning of the daily price movements of a monetary asset with a 5,000 year history of providing a good night's rest. Long before there was Ambien there was gold.
The pundits may be forgiven for not understanding the price suppression and being confused by the volatile price action. On the other hand, by understanding the price manipulation you have the advantage of participating in the tremendous gold re-pricing that is coming. Use your eyes and ears and draw your own conclusions. Turn off financial TV and search the internet for sources of real information and worthy opinion. Subscribe to Shadowstats. Read the Wall Street Journal for fun -- not for information.
Finally, relax, be patient and let the inevitable play out.
My very best,
Jeff
___________________________________________________ * Prior to the Euro's introduction in 2002, the current President of the European Central Bank, Mario Draghi was appointed Vice-Chairman of Goldman Sachs International, stationed in London. Note the ECB's response this week to a Freedom of Information Act suit requesting the release of internal ECB papers pertaining to the preparation of Greece's balance sheet through the use of swaps to mask its deficit and borrowings: Bloomberg: ECB Tells Court Releasing Greek Swap Files Would Inflame Markets