"You know how screwed up Europe is when you have a German pope and an Italian central banker." -- Kyle Bass, 11/15/11 in a BBC interview
Dear All,
The New York Times yesterday began its reporting on the paranormal drop in the unemployment rate contained in Friday's BLS release by suggesting, possibly without intention that sleight-of-hand may be at play. "Somehow the American economy appears to be getting better, even as the rest of the world is looking worse" (Emphasis mine). The BLS reported 120,000 jobs added in November and a huge drop in the unemployment rate from 9.0% to 8.6%.
Let's begin by pointing out that the country needs to add 150,000 new jobs each month just to keep up with population growth. So without a reduction in the number of people seeking jobs, anything less than 150,000 new jobs added each month raises the unemployment rate. So what is to be made of an employment report that fell short of the requisite number of new jobs created for the unemployment rate to have remain unchanged, yet miraculously shows a sharply higher rate of employment? If you're among the alchemists at the Ministry of Propaganda Bureau of Labor Statistics you're familiar with a game known as Shrink the Denominator, in which a certain category of Americans barely able to make their Zoloft co-pays under their soon-to-be-expiring COBRA benefits are simply removed from the ranks of the unemployed and crane-lifted onto a growing heap of flesh the BLS calls "discouraged workers," which according to the way the BLS figures things, makes them non-unemployed. From this constantly swelling aggregation these non-working individuals shall -- statistically at least -- never return; forever unproductive and permanently disheartened. If in fact the size of the designated demoralized grows sufficiently, the rate of unemployment can be manipulated downward -- managed according to the speed of the crane operator (coupled of course with the 'birth-death' models concocted in the BLS' animation department).
Let us not be as presumptive as the BLS in assigning an emotional state to the former workers that are dropped on to this pile each month. We'll label them without the patronizing sentiment the Bureau of Labor Statistics ascribes. By the manner and motivation of the Bureau's assessmentt of these foks we'll call them, correctly and objectively --'discarded denominators.' Some would consider the progression of a human being from employed, to unemployed, to former devisor as cold-hearted indignity. To the government statisticians charged with creating happy numbers though, it is a blessing. Discarded denominators are among the fastest growing segments of Americans lacking W-2's.
European banking and market risks are now fully absorbed into the United States banking system through derivative agreements backstopping the Continent. These guarantees dwarf the financial capabilities of the largest U.S. banks that are on the hook for them and so it is that the Fed has effectively come to underwrite Europe. The dollar swap line announcement Wednesday was yet again, a thinly disguised bailout of European banks (at least one of which was about to fail) as capital flight in the European banking system had reached a critical juncture. The European and U.S. banking systems are systemically now one-in-the-same. The banks will continue to be propped up with rolling liquidity injections although it resolves nothing. Solvency issues cannot be cured with liquidity and once the fix wears off central banks will be back with more of the same, continuing to throw gasoline on a fire they cannot allow to burn out. Quantitative Easing will rule the world.
There is also the back-story. The role of the ISDA in the Greek 'non-default default was discussed here in the 10/29 post. Take note that the maneuvering continues in order to prevent a cascade of Greek credit default swaps from blowing up. This initial desperate short term gimmick to avoid an avalanche of default triggers on Greek swap contracts had immediate consequence. In the aftermath of the ISDA's refusal to permit default insurance on Greek debt to perform as required, yield spreads on all European debt promptly soared: NYTimes: Scare Tactics in Greece .
On December 19th one billion euros of Greek debt comes due, the first tranche of 8.8 billion maturing between then and Dec. 30th. It is hard to imagine:
a) Holdouts from the "voluntary" 50% haircut being paid par,
b) Holdouts from the voluntary haircut not being paid under their credit default insurance, and
c) Credit default insurance performing at all.
Anything is up for grabs. We live in interesting times.
In for a penny, in for a pound...The OTC derivatives debacle has no practical resolution and keeps growing. The latest Bank for International Settlements report indicates that there are now $700 trillion in notional private derivative contracts outstanding -- an increase of 18% or $107 trillion in 6 months. We are talking gargantuan numbers here so perspective is in order. The notional value of OTC derivatives written in just the last 6 months is 7 times greater than annual U.S. GDP. It is utter madness and can only be explained by an exponentially deteriorating financial system and the impunity with which contracts are written. The six TBTF banks that account for virtually all (96%) of the total derivatives outstanding can never be called to perform, for they are insuring nothing less than the entirety of life as presently constituted on the planet. Their collective lack of capital is problematic however only for the Federal Reserve, which will allow neither the global financial system nor these banks to collapse.
The Fed takes care of its bank wards nicely -- facilitating the banks' need to appear profitable by permitting their retention of the entirety of derivative fee (insurance premium) income, while the Fed wholly absorbs the corresponding risk. Were it not for the missing step of premium transfer to the party actually incurring the risk, it might otherwise qualify as the largest reinsurance operation in history. All the regulatory chatter about transparency and moving OTC derivatives to clearinghouses is well and good but existing OTC derivative contracts are bespoke and therefore cannot be clearing-housed.
As is the case in the U.S., European banks are overstating the value of assets to such a degree that selling them for what they're actually worth would force massive write-downs and the acknowledgement that they have negative capital. Take note of their attempted solution -- a European version of TARP -- sell the garbage to taxpayers at inflated prices in order to mask the real value: Business Insider: European Banks Frantically Trying To Dump $7 Trillion Of Crap Assets -- But No One Will Buy Them.
Gerald Celente's account at MF Global was among the tens of thousands of accounts looted by former U.S. senator and Goldman Sachs head, Jon Corzine: "I got a call on Monday, and they said I needed to have a margin call. And I said, what are you talking about, I’ve got a ton of money in my account. They responded, oh no you don’t, that money’s with a trustee now.” Gerald Celente: 'They took my money out of my account' MF Global's collapse should have you scrambling to assess the safety of the entities at which you maintain securities accounts. Better yet, have the transfer agent of the companies in which you own securities directly register them in your name, particularly if you're not an active trader. MF Global illustrates that when a firm has financial problems customer assets are up for grabs. The SEC and CFTC have demonstrated that they are thoroughly useless in protecting the public. They only protect the industry: WSJ: Purgatory for MF Global Customers
"Certainly going with a Morgan Stanley, Merrill Lynch or a Goldman Sachs is a far better alternative than going with a firm you've never heard of." Under the theory that the firms cited are too big to fail, perhaps so. However the securities attorney dispensing this advice should note that all these firms have their own trading operations, as did MF Global and Lehman Brothers. More prudent advice might be to avoid any firm that has a proprietary trading or mortgage banking unit unless you're convinced it enjoys TBTF status. Be reminded though that quite a few clients presumed Lehman Brothers to be TBTF: NYTimes: In Commodities World, Safe and Secure Sometimes Isn’t
You will recognize Mr. Gensler as the same Goldman Sachs alumnus who is protecting fellow bankers in a 4 year CFTC investigation of silver price manipulation that he refuses to end: WSJ: Mr. Corzine and His Regulators
"Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), has a lot of explaining to do...if they do nothing else CFTC regulators have to make sure that nobody is digging into the customer cookie jar...In previous beltway shifts [Messrs. Corzine and Gensler] had helped to write the 2002 Sarbanes-Oxley law that was also supposed to help protect investors....Mr. Gensler for his part, has a response to the cronyism charge. Since the firm went bankrupt he has announced that he will recuse himself from issues affecting MF Global., Now?"
A single accusation of rape made by a hotel maid against Dominique Strauss-Kahn resulted in a flamboyant arrest on an airliner, a handcuffed perp-walk and outright media frenzy. Jon Corzine, a former Goldman Sachs head, politician and thief (redundant) raped the accounts of tens of thousands of his customers to the tune of -- at last estimate -- $1.2 billion. Why was Bernard Madoff's theft any more egregious? Why isn't the media hounding this guy? They never seem to miss a Lindsay Lohan court appearance. Bloomberg: MF’s Missing Money Makes You Wonder About Goldman: Jonathan Weil
Old habits die hard...Goldman Sachs is the largest insider trading operation in the history of financial markets. His tenure as U.S. Treasury Secretary upon retiring from that firm did not however preclude Henry Paulson's continued participation in the sport: Bloomberg: How Paulson Gave Hedge Funds Advance Word
The powerful are no longer being sent to prison for their crimes -- the rule of law has broken down. We have become a nation of men, not laws. Former bank regulator William Black: Banking System Rotten to the Core
"In the Savings and Loans crisis, which was 1/70th the size of this crisis, our agency made over 10,000 criminal referrals and that resulted in the conviction on felony grounds of over 1,000 elites in what were designated as major cases...In this crisis, the same agency that I worked with that made over 10,000 criminal referrals in a tinier crisis made zero criminal referrals."
His is a voice in the wilderness but libertarian Nigel Farage is a rare example of courage in a politician. He pulls no punches and speaks the blunt truth to his constituents, never pandering or playing to the lowest common denominator: Nigel Farage: "We are now living in a German dominated Europe."
Return free risk...This is rich. Here we have two competing ETF promoters debating which of their products is less crappy. Wall Street markets these fractional reserve frauds as 'convenient' vehicles through which to invest in a particular asset or sector, the only manifestation of which is the ease with which fees and stock-lending profits are conveniently extracted from the pockets of investors, who bear unnecessary risks. In the tradition of other such innovative Wall Street schemes ostensibly intended to make investing more convenient (think collateralized mortgage obligations) ETF's are vehicles for Wall Street abuse. Why any investor would own one is beyond me: Bloomberg: BlackRock’s Fink Attacks Societe Generale in Row Over ETF Risks
If you buy a Lyxor product, you’re an unsecured creditor of SocGen,” Fink, who heads the world’s largest asset manager, said at a conference held in New York by Bank of America Corp.’s Merrill Lynch unit. Providers of synthetic ETFs should “tell the investor what they actually are. You’re getting a swap. You’re counterparty to the issuer.”Physical ETFs “expose their holders to undisclosed levels of counterparty risk to typically undisclosed counterparties,” Nizam Hamid, deputy head of Lyxor ETFs, said in an e-mailed response to Fink’s comments. “The unregulated use of securities lending has resulted in meaningful losses in the past.”
Lexapro Alert... The following is quite instructive. There are 736 members of the European Parliament (MEP's) from 27 European Union countries. Each MEP receives the equivalent of roughly $230,000 in annual compensation, some of it tax exempt. This expose' comes not from the BBC or a mainstream media outlet (the media sources least likely to confront those in power) but from an alternative Czech media site. Here MEP's are shown running like rats when cameras catch them showing up to collect their daily "allowances" and then leaving without doing any work. If you think that there is something particularly unusual about the ethics or character of this group, think again. There are after all 27 different countries represented in this legislative body. This is government in action. The circumstances of their corruption may vary, but politicians are the same everywhere including in the United States, particularly the ones that come from investment banks. MEP's caught on camera lining their pockets
About that Arab Spring (be careful what you wish for)...A secular dictatorship (supported by the U.S.) was overthrown by revolutionaries (supported by the U.S.) and is being replaced by a democratically elected religious orthodoxy in which reactionary Islamic puritans will wield large influence. Lashings and stoning will now be officially condoned and women will be treated as per the will of the majority. The people have spoken...Long live democracy!...Ladies, cover yourselves:
"But a big surprise was the strong showing of ultraconservative Islamists, called Salafis, many of whom see most popular entertainment as sinful and reject women’s participation in voting or public life."
The trend...
* Reuters: S.Korea buys more gold in Nov in cbank gold spree The central bank bought 15 metric tons in November alone.
* This is quite something. Zimbabwe had the worst hyper-inflation in recent world history. In 2009, in order to end the country's monetary anarchy it abandoned its own currency in favor of the U.S. dollar. The head of the country's central bank who was a principal player in the utter destruction of the Zimbabwe dollar is today expressing reservations about his country's link to the U.S. dollar, suggesting that the Chinese yuan may be a better choice. A reforming banana republic is pontificating about the future of the U.S. dollar: "At the moment the US dollar is going down the tube owing to the Euro-zone debt crisis and as a country, we are also going down the tube because we do not have control of that currency." Zimbabwe may move off dollar to yuan
* Bloomberg: Gold shipment arrives in Venezuela as Chavez begins to remove reserves from European, US banks Nelson Merentes, the president of Venezuela's central bank describes gold's attributes and function quite differently than does the Chairman of the U.S. Federal Reserve, Ben Bernanke, who insisted in congressional testimony that gold is not money....11/26 UPI -- "Our gold is being stored in the vaults...It has historic value. It has symbolic value [a]nd it has financial value...It's a guarantee...If there's some problem in the international markets, here it's going to be safe... The country's finances will be backed by autonomous wealth, so we are not subject to pressure from anyone." Such is the state of affairs that a Marxist government is more forthright than the United States in articulating the truth about the oldest and purest international currency.
I have three excellent interviews to recommend, the first being this BBC interview with Kyle Bass, wherein an old chestnut is revived; 'Capitalism without bankruptcy is like Christianity without hell.'
Chris Martenson's made this presentation at the Madrid gold and silver conference, He discussed the human tendency to extrapolate data in a myopic manner, resulting in the failure to recognize major changes to historical patterns. Martenson primarily discusses the sea change that is about to hit the world from the shift in the dynamics of oil discovery, although as you will learn later in the broadcast, he has 75 percent of his personal assets invested in gold and silver.
Steve Keen is an independent thinking economics professor very much worth paying attention to. His innovative thinking may strike some as radical. He was interviewed by the BBC "[The protesters] should be occupying the economics departments of universities...You don't get into as disastrous as situation as we are in now without extremely bad thinking."
Gold and silver...
Does this look remotely like a bubble to you?
Uh-oh... "We expect gold prices to continue to climb in 2011 given the current low level of US real interest rates."
As you endure the air pockets, refer to this chart for a perspective of what previous turbulence over a decade has meant to gold's long term trend ...
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John Embry offers his analysis of the price action the last few months. As you would expect, spot on: Collapse of gold and silver points to skullduggery
I have little to add to John's piece. Predicting how things will play out is as much about human nature and examining history as it is about analyzing current affairs. As complicated as the problems may be, the end-game is really not so obscure. Politicians and central bankers are motivated by self interest. Figure out what they believe is best for them, and rely less on media analysis and daily market price action to guide you -- you'll be thrown off course, particularly in the face of manipulated markets and banal financial pundit commentary. Your nasal instincts are far more valuable.
We are being led by political and banking sociopaths who have no interest in ending a system that continues to benefit them. The dizzying parade of collapses, government insolvencies, bailouts, and scandals can easily numb you, but pay attention. These scandals never occur in isolation. There is too much complacency over the MF Global collapse. $billions in customer funds were looted from a major clearing firm that has collapsed (an unprecedented event in itself) and exchanges are refusing to cover the victims. The firm was run by a man who is a former U.S. senator, former state governor, former head of the most powerful U.S. bank and the largest Wall Street fundraiser for the President of the United States. If there was ever a moment to recognize that there is a rot far deeper than you might have imagined then this was it.
Be careful where you keep your assets. Take no comfort from legal restrictions and prospectuses which recite investor safeguards. As the MF Global collapse establishes, law serves no purpose if there is no enforcement. A run on Europe will continue despite the Fed led rescue this week, which merely bought a few days. Now what? The banks and markets require much more. There will be massive printing of currency throughout the world. There is stealth but unmistakable anxiety as well about U.S. financial institutions. Geopolitical risk continues to be a wild-card. Extricate yourself from the banking system as much as possible by converting paper assets to physical gold and silver and taking possession of the metal.
All the best,
Jeff