Bear Market

Firestorms & Currency Twisters

August 31, 2012 by · Leave a Comment 

By Jim Willie CB, Golden Jackass

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Begin with a preface of a meaningful event that could change the entire US landscape, a redux of what happened four years ago. Consider the next Wall Street financial firm failure. It is in progress. It is not avoidable. It will have numerous ramifications. It will open the door to account thefts, burial of documents, ransack of undesired leveraged positions, the concealment of wrecked derivatives, and a path toward the merger of surviving (selected core) firms. It will urge an extreme defensive posture. Back in 2008, both Bear Stearns and Lehman Brothers fell. The former because they had too much gold exposure with anti-US$ hedges. The latter because they led in mortgage exposure. Both failures were greatly exploited. My favorite item was the reload given to JPMorgan on a quiet Saturday morning (convened at 6am no less) at the Bankruptcy court of Manhattan. The shadowy syndicate titan was handed $138 billion to handle the private accounts from the fallen banks. Instead, the funds represented a reload for JPMorgan to continue their gold suppression game. Of course, they have been defending American freedom with vigor, preserving the integrity of the US banking system, and assuring the way of life in the nation, while leeching $billions from the public trough. Since their grant, the unassailable JPM has seen fit to gobble private accounts at both MFGlobal and PFG-Best, with regulatory blessing as the courts sprinkled fascist holy water.

In the background across the globe, numerous currency storm centers have arisen under the noses of every major central bank and their elaborate connected paper factories. The sovereign bond foundation is full of cracks and rotten planks, upon which the entire global currency system rests. The only people who could have imagined such a grand mess in 2006 and 2007 were the Sound Money crowd, the advocates of gold-backed money, and the opponents to debt foundational systems. But then again, we are the ones, without a clue, who maintain a myopic view of the world, and see a conspiracy under every rock. Rather, we are the insightful, the alert, the rational clear thinking bunch, the guardians against hidden confiscation through inflation, and the intrepid defenders of life savings. We identify the corruption and thus are discredited. Gold will return to its rightful place as the core of monetary systems and trade systems, all in time. The system is imploding at a more rapid pace with each passing month.

Morgan Stanley Implosion

The insider conversation, often called chatter when it becomes deafening in tone, is that Morgan Stanley faces imminent failure and ruin. Almost two weeks ago, the Jackass provided a tip to Bill Murphy of GATA to post on his popular LeMetropole Cafe that Morgan Stanley fund managers and high ranking employees were preparing for the firm’s implosion. A subscriber to the Hat Trick Letter has a good friend whose father works as a fund manager and provided the story. It was not detailed, and bore no follow-up after my request. The older employees are selling all of their stock, some legacy stock from one or two decades ago. Many workers are making contingency plans for their next positions in another firm. When Lehman Brothers was killed, thousands of employees had to find new jobs, some without success. In the last week, the shock waves are being heard from internal Wall Street sources in an unequivocal manner. The implosion is in progress, like the collapse of several platforms and structural cables. The inside is caving in, and the ranking members recognize it, even talk about it openly. Much discussion swirls about a transition to antiquated software that is greatly disturbing the trading desks, causing tremendous problems at precisely the wrong time. A redux of the Knight disaster could be in progress.

Some like Rick Wiles of TruNews report that MS is heading for the sacrificial altar. Such an event would imply an expected benefit hoped for and beseeched. My view is in parallel but more of a harmful implosion that cannot be prevented, one that the Wall Street titans will face grand challenges to control, and one they will not be able to exploit in the hidden corners where they operate. MS is going to the slaughterhouse, not the altar. Its implosion will result from lost control, and the reversion to antiquated systems will only hasten their demise. Wall Street will wish to exploit the failure, like stealing funds, like destroying documents, like concealing derivative positions, like receiving government slush funds for slimy patch projects, their usual Modus Operandi. In criminal parlance, they will create a black hole into which things vanish. They will attempt to add to the confusion, which might itself backfire and deliver more lethal challenges to the entire USDollar & USTreasury complex. This time, the spotlights will shine more brightly to reveal the activity in the shadows and crevices.

The part that many analysts might miss is that Morgan Stanley has perhaps over 300 thousand private stock brokerage accounts, with over 17,500 brokers. In the past two decades, MS merged with Dean Witter and Smith Barney to become the premier stock house with the most private accounts of any US-based stock brokerage firm. The Morgan Stanley failure might feature the first theft of private stock accounts. The critical jump might occur in account thefts from futures brokerage to stock brokerage, which began in November 2011 with MFGlobal, then appeared in July with Peregrine Financial Group (PFG-Best). All private accounts from MFG and PFG have been pilfered, with a blessing of the theft by the courts, seen in the Sentinel Mgmt Group ruling. The federal Appellate court’s August ruling (click here) sets precedent for future private segregated account thefts, which were once considered sacred and untouchable. No more in the United States, not in the unfolding of criminality that stretches from USGovt offices to top corporate offices, with blessings sprinkled by the courts. The jump would be a major extension of the Fascist Business Model that nobody talks about. The major financial firms can rely upon this appellate court ruling as precedent, so as to protect their legal right to re-hypothecate client funds in their high risk leveraged positions and loans. It sure would be nice to use my neighbor’s house and car to firm up my casino weekends. Stay tuned to the ongoing Morgan Stanley implosion, which could force the vanishing act of 50 to 100 thousand private stock accounts. The firm is the largest stock brokerage firm in the land. The dreadful impact will be nasty and might awaken the US masses. MFGlobal and PFG-Best surely did not.

Imagine the hue and cry from the poorly informed and poorly focused sheeple masses who have been quick to use the conspiracy labels, when their stock accounts vaporize in re-hypothecation made legal. The zillions of IRA and 401k accounts could also become collateral damage. This has been a Jackass warning for several months, largely unheeded. If one is to search for a hidden impact from the Morgan Stanley implosion, look no further than their large gaggle of dangerous and highly deceptive Interest Rate Swap contract book. They appear in the ledger item of interest rate derivatives in the usually ignored Office of Comptroller to the Currency report issued periodically. In early 2011, Morgan Stanley stuck out like a huge iridescent purple thumb with their $8 trillion in new interest rate derivatives, believed to be 90% Interest Rate Swap contracts. You see, that is precisely when the false flight to safe haven was engineered. The USTreasury was in danger of rising, seen in January 2011 as the TNX went from 3.3% to 3.75% on a touch. Enter the powerful IRSwaps run by the dark control room at trusty Morgan Stanley, and poof, the flight to safety was fabricated from artificial demand of USTBonds with no basis in tangible investment flows. The application of $8 trillion in Interest Rate Swap contracts pushed the 10-year UST yield from over 3.5% to 2.0% flat in the space of a mere five months. The sheep followed the Wall Street lead without knowledge of the IRSwap heavy lifting. The USGovt could not afford a bout with bond market reality in a relentless move over 4.0% on the all-important sovereign bond for the nation looking more and more Third World that has corrupted the global reserve currency beyond recognition while the annual $1.3 to $1.5 trillion deficits must be financed, alongside the endless 1984-like war costs.

Hundreds of questions will come, but the big questions to pose regarding the ongoing implosion of Morgan Stanley are:

  1. How many private stock accounts will go missing?
  2. Will the interest rate swap game be exposed?
  3. Will movement of stolen world trade assets surface?
  4. Which European banks would fold in sympathy?

My European banker source indicates that as Morgan Stanley suffers the spectacle of failure, so will both Deutsche Bank in Germany and Crédit Agricole in France collapse. The three failures will bring about other failures, like in London, as the entire Western banking system will be brought to its knees. In short, this event could serve as a jump in thefts from segregated futures brokerage to stock brokerage accounts, causing more collapses and certain bank runs. Witness the full glory of the Fascist Business Model. Much discussion has come from corners like Steve Quayle, concerning the potential merger of all surviving Wall Street banks into JPMorgan and Goldman Sachs. That would mean Citigroup and Bank of America would fold under the new twin towers of financial tyranny, as the Jackass prefers to call them. So after eleven years since the well planned and highly coordinated collapse of the Twin Towers to conceal the grandest bank heist in US history, the emergence of the new Twin Towers with deep intricate financial root cellars is being hatched. It will fail.

Some very bright contacts have suggested that such a last ditch merger feat could not be pulled off in the current environment. Many reasons can be cited. The insolvency of the big US banks demands some consolidation if not liquidation. However, they are under siege. They are all under scrutiny for LIBOR price collusion and violations. They are all involved in court deals over bond market fraud. They are all involved in court deals over mortgage contract fraud. They might appear to evade the law in blatant manner if they attempted to merge. The LIBOR case effectively isolated the big US banks in a way not visible. In an environment where they do not talk to each other under legal counsel, they will hardly climb the enormous hill of merger talks. A hidden reason might lurk to explain why the big US banks cannot merge under the twin tower JPM/GS roof. They all struggle under the grand de-leverage process to contain the derivative monsters in their basements, which hold together vast systems with high pressure cable lines. Any merger attempt would result in mindboggling pressures, unavoidable failures, and incredible confusion during the transition in merger. No way! No how! Too late!

Central Banks Failure Obvious

A tour around the world leaves a person’s head spinning. The financial system spun out of control long ago. The central banks cannot control the mayhem in the currency market. The confirmation is that for over three full years, the official interest rate in the Untied States, Britain, Europe, and Japan has been near zero. This is unprecedented, and serves as a massive signal flare of systemic failure. The stimulus is nowhere except to speculate, surely not to conduct enduring capital buildout. USFed Chairman Bernanke has announced more open Quantitative Easing, which never stopped. Worse, the Jackass is of the opinion that nobody really knows what QE means anymore, except that it will save the financial markets, save our life savings, save pensions, and save the planet. All hail Prince Benjamin! The Operation Twist is being seen for the sham it is. The ugly fact of life for the USFed balance sheet is that the clumsy Chairman Ben has run out of short-term USTBills with which to offset the long-term USTBond purchases. The self-styled Twister has exhausted its fuel. To keep the game going, the secretly desperate USFed must resort to unsterilized pure hyper monetary inflation of the nasty variety. See the TFMetals Report on how the USFed is out of bullets, with no more USTBills in its arsenal. See the TFMetals Reports (click here).

The other major central banks are in extreme defensive postures. The announced cap on European sovereign bond yields on its face sounds absurd. No free market there, certainly not with any equilibrium basis. Lacking the advantage of a global reserve currency, the Euro bankers wish to impose by force the cancerous benefit of the USTBond safe haven phony bunker. The bond yield cap by Draghi should be seen as a massive signal flare of systemic failure to those with open eyes. The deed was done in the open, and follows suit with the cap on US yields done in hidden manner with the IRSwaps.

Hardly in view for the mainstream minions, the Japanese central bank has been a major buyer of USTBonds, in a new twist. The volume of the Bank of Japan purchases is essentially equal to the sales by China, so net zero Asian effect. That leaves the USFed alone on a net basis, as only buyer of US toxic toilet paper that quickly shows brown stains from bruised banker wounds and red stains from endless war battlefield wounds. The USFed is financing almost the entire USGovt debt, and the dumkopfs in the pits, in front of screens, and from household dens are wondering when the next QE will come. They are more gullible and dumber than any English words can be used to describe them. If the USFed financed 100% of the USGovt deficit via debt monetization, just exactly when might the American professionals and public notice? Probably never! Observe the movement up in the Japanese Yen. Its rise serves as further motive for them to invest in USTBonds, even if increasingly toxic with each passing month, even if supported by a vast derivative machinery that reveals itself slowly, even if the USGovt deficits remain fixed over $1.3 trillion. As footnote, the nation of Japan has more diaper sales for adults than babies. The sun is setting on Japan Inc.

Paper Solution Delusion

A strongly held Jackass belief goes contrary to many simplistic viewpoints by some smart people within the gold camp. My source has taught me well, but my comprehension is surely lacking in spots. Let it be known that many smart people do not comprehend this phenomenon. A few key colleagues have stated that the big Western banks could be fixed overnight by grand cash dispensation on a grand scale from the Printing Pre$$ by the USFed and Euro Central Bank. Not so, emphatically not so! The big broken banks of the US, London, and Europe cannot be fixed by printed money. They have vast and complex broken paper asset structural problems that cannot be repaired. It is like a poorly designed car with badly calibrated cylinder strokes, misaligned transmission drive shaft, an inadequate cooling system, and poorly designed torsion bars going into the shop. The best mechanics could not repair it, as they would suggest scrapping the entire mess. Such are the big banks. They possess wrong sided positions that have started a chain reaction of disasters. Their positions constantly trigger margin calls. Cash cannot fix their predicaments. Their margin credit extension is abnormal, outside the usual channels. They are stuck, unable to comply with arranged contracts from years ago under different rules. Their lattice work is broken and not repairable, not with cash.

The Eastern Coalition is busily applying the screws, confronting the deeply decayed margin inadequacy, and forcing relinquishment of gold bullion. The loss of gold loudly signifies that gold is money, and cash is not. The big banks have broken pieces that invite opponent attacks, like the JPMorgan position with sovereign bonds and their complex USTBond structure defending the artificial 0% rate by the Interest Rate Swaps. The big banks also have major unresolvable problems with allocated gold taken, that the owners want back, including extremely powerful people.

Put the two extreme extraordinary problems together and one can conclude that gold from Allocated Accounts was improperly used as collateral on leveraged trades gone bad! They face margin calls that are satisfied only by relinquishment of gold bullion. The smoking gun will slowly come into view to launch a new banker scandal. The scandal over Allocated Gold accounts will eclipse the MFGlobal case, and lead to the Gold price rising over $5000 per ounce. Over 40 thousand metric tons of gold have been improperly used, much in this manner, laced throughout the banking structures. No hyperbole here.

Printed money cannot and will not fix any of such problems. The big banks are ruined and realize finally they are lined up for a slaughterhouse. Their only remaining option is to cut deals with the new masters and their sheriff. In time they will not be able to locate sufficient volumes of gold bullion to make the margin calls go away. Since February 29th, they have forfeited over 6000 metric tons of gold. Eventually they will run out of gold from Swiss castles and Roman catacombs. Then the game is over and a new dangerous chapter begins.

USDollar Global Shun

The many moving parts of the isolation of the USDollar are in progress still. However, it has taken some dangerous turns, hardly noticed by the intrepid American Idol populace. The USDollar collapse will come from a foundation of trade settlement no longer conducted in US$ terms. The stench of hyper monetary inflation by collusion between governments and their central bank masters, combined with obscene gargantuan banker aid packages serve as the motive to continue the abandonment by global players. Before too many more months, a critical line will be crossed. More global trade will be conducted outside the US$ settlement sphere. The line will be crossed in non-oil transactions first, then in overall transactions. The American Dome dwellers are not prepared for this development. In every conversation done by the Jackass with ordinary US citizens over several years, not one has any concept of the USDollar and its exchange rate. It is an assumed entity without discussion or consideration. Such is a precarious position to conduct life and business under.

The Petro-Dollar is set to be abandoned, as the Saudi Royal family is deposed. Two and three years ago, my firm belief was that the Saudis would choose to switch chariots as the Eastern horses would be favored. The Saudis would see the Anglos are losing their grip on the global helm, suffering from insolvency and rot from corruption. Instead, it seems the Saudis are soon to endure a surprising backlash blow from the Arab Spring uprisings. Not well reported in the controlled panels of the Western press are the high level Syrian deaths. A real battle clearly features the tyrant Assad against his people, striving for freedom. Another battle is between HezBollah and the Saudi security teams. No details will be offered, since not much is known except some of the wretched unfolding of events. By many accounts, their Minister of Security Prince Bandar was just assassinated, perhaps two to three weeks ago. A photograph from mid-August was doctored to show Bandar Bush still alive, according to a source in the Persian Gulf. The apparent kill was revenge for the targeted hits done on the Assad regime. Things are all coming apart in Saudi Land, hardly called collateral damage. What incredible irony if the Petro-Dollar is collateral damage from the Syrian projects. What irony if the Arab Spring begun by the QE1 with blowback from rising food prices, encouraged by the US security agencies, delivers a blowback to knock the USDollar of its oil studded throne.

Many questions persist, beyond the scope of this newsletter. The ultimate cost could eventually be the Fall of the House of Saud after almost 60 years reign, and the deposed USDollar as global reserve currency. My best source of information in the region has for 18 months stressed the importance of Yemen for Saudi stability. Yemen is a furious hotbed, as is Djibouti and Ethiopia, where soldiers clash between the SuperPowers.

Trouble in Mining Camps

Certain events are highly disturbing, not at all connected. South African miners are on strike in scattered locations, such as across Latin America. It is not orchestrated, since a reaction to global economic decline. The miners want a bigger share of the pie, and resist the signs of exploitation even if it is not blatant. In some sites in South America, good fair deals are struck with reasonable royalty paid to governments. In other sites, the violence is in the open, with claims of dangerous worker conditions, water pollution, and worse. But in South Africa, once the global stellar leader in gold production, police and corporate security officials fired upon the crowd and killed dozens of workers during a demonstration. The hostile positions of miners versus the corporate firms are becoming stark and clear. The unfortunate outcome is that gold and silver mine output will surely go into worse decline. The Jackass forecast is that from the global mine output factor alone, the physical precious metal prices will rise, while the mining stock share prices will fall. Output risk joins jurisdiction risk and dilution risk for the mining companies. For every mining stock winner, expect 20 to 30 losers.

The Stun Gun & Sinking Sand

The USEconomy is suffering from three powerful effects, none obvious, but all deadly. They continue to plague the nation, to drag it down, and to assure a systemic failure. Many readers send critical notes about my view of a systemic failure, arguing that remedy is going to succeed, given enough time. They cannot foresee a USGovt debt default, even colleagues in discussion. Some expect a nasty price inflation bout like a rising blister. But the Jackass expectation is of an unwieldy US$/USTBond complex that falls apart from internal stresses that render management absolutely impossible. We have begun to see this effect, like in colossal applications of Interest Rate Swap contracts, like in growing announced JPMorgan losses, like in MFG and PFG account thefts, like in ruined corporate paper, like in draconian money market rules, like in shattered pension funds. These are the blisters and boils from the US$/USTBond complex gone amok. They are not reported as such. They are all reported as isolated treatable ailments. They are not perceived as systemic breakdown symptoms. They are very much effluent from the failure in progress.

1) Like from a stun gun across applied across the land, recognition of a failed system has entered the public consciousness. Three years of 0% stimulus, $trillions in rescue aid, countless federal home loan programs, ongoing bond monetizations, nationalized companies, and more have accomplished nothing. The corporate response has not been to invest and rebuild. The housing market remains in ruins, unaffected by the sub-4% mortgage rates and revived reckless federal home loan offerings (subprime again) with minimal down payments. No more home equity ATM machines to support the national consumerism mantras. Imagine in 2008 to be told that the US housing market would be unable to respond to 3.55% fixed 30-year mortgage rates. The experts might have claimed that such a development would indicate a ruined market. The states and cities are in fiscal ruins. The federal deficit is out of control. The wars will not be brought to an end. The public population finally is standing up and taking notice. They are frightened. Their futures are seen as bleak. College graduates face bankruptcy almost immediately. The smart among the population expect rising prices and growing shortages.

2) From the zero percent interest rate policy (ZIRP) over three full ugly long years, the entire USEconomy corporate landscape is sinking from higher costs and shrinking profits. Capital is failing to produce. Next will be imposed the cost of the national Health Care system, which has its ulterior motives to be sure. Some call it the Insurance TARP. After chip ID implants are enforced, the view might change. Aside from the amplified stress on the business sector, the entire cost structure continues to rise. Notwithstanding the attempts in the last year to smother final demand via economic decline, the costs remain resilient and rising. The most frightening tidbits from the field point to a 50% gasoline demand decline by volume in the last five years, and a 40% decline in California sales tax collected in just the last 12 months. The stubbornly high costs render profit margins as difficult to maintain. The response is to shut down unprofitable business segments, to retire equipment, and to liquidate components of the business. Such is the rancid bitter fruit of the 0% supposed stimulus, more like a two-ton millstone around the nation’s capital neck. US-based businesses are not expanding, except for care for the aged, for bankruptcy counseling, for estate liquidation, for divorce attorneys, and for auctioneers.

3) The attack on money market funds is moving apace, in a stealth capital control concept. Systemic risk is posed by a run on money market funds. Oddly, money market funds are no longer the staid boring type sitting on an inert shelf. They are suddenly not cash, by official declaration. The Powerz cannot afford to see that liquidity removed. An attack on the $2.7 trillion in money market funds has come in response. The money market funds serve as scarce capital, a liquidity source that holds together the insolvent banking system.Given how money market funds are the last pool of liquidity that holds together the entire Western banking system, it is under attack to stay put. New rules could force a maintenance of a minimum amount in each account. The new rule concept is called Minimum Balance at Risk (MBR) and is direct capital control applied domestically within the United States. The MBR would be a small fraction (like 5 percent) of each shareholder’s recent balances that could be redeemed but with a delay.

The item#1 is recoverable but not with any current Administration or USFed in leadership. It is urgently necessary to liquidate the big US banks, to liquidate the home inventory, and to encourage domestic industry to return to US shores. These three tenets are Jackass cornerstones for recovery. None is pursued actively, none! The enduring policy is to attempt to inflate the debts away, to inflate the bank balance sheets, and to re-inflate the collapsed assets that were so recklessly depended upon in past cycles. Even higher inflation will not solve systemic insolvency. Eventually the confidence in the entire bond system which backs the currency will implode, whose signals are being noticed. Nothing poisons a system more than ruin of money itself. It works like a contamination of the entire blood system for the body economic, which rots all organs and institutions.

The item#2 is not fixable, emphatically so, since a rise in interest rate kills the entire system, resulting in game over. The 0% ZIRP regime will remain in place as long as the current power structure remains in place. It is that simple. And while in power, the current 0% policy will assure continuing erosion in profit margins for business. The asset bubble games are over, the wreckage obvious to anyone with open eyes. We have been watching the housing & mortgage conjob, which led to the Lehman Brothers killjob, followed by the Bernanke Fed mess, all the while the USCongress missing on the job. The entire USEconomy is sinking into capital quicksand from rising costs. No return on capital, no cost of capital, no preservation of capital, while capital continues to be retired and die. The insane and utterly desperate response by the USFed is to kill demand. They will succeed. But in doing so, they will assure the systemic failure forecasted by the Jackass, to coincide with the USGovt debt default from chaos and unmanageable high winds.

The item#3 does not pertain to remedy or fixable, but rather stands as a billboard signal of imminent banking system implosion. The impact will hit the most insolvent and most illiquid, such as Morgan Stanley, Deutsche Bank, and Credit Agricole. Expect another bank in London to fall, unsure which is most vulnerable. The domino aftermath will be the stuff that makes history books in unalterable prose. A progression of risk has hit mortgage bonds a few years ago, sovereign bonds in the last year, and finally money market accounts, which hold together the entire banking system as the last element of liquidity. The Exter Pyramid is at work. The end game is to hold gold, the last asset standing, the only survivor. The restricted money market funds are being corralled by the banking leaders, to make sure they do not exit and roam the fields in search of gold in better pasture. Observe the stealth action toward capital controls in a last ditch to avoid a flood into gold. So bank runs will just be slower in pace.

Numerous Currency Twisters

China might be making overt moves toward a convertible Yuan currency. The steady decline in their Current Account surplus could prompt a bold move to introduce a gold-backed currency a lot sooner than even the alert observers expect. The latest shocker story is that the Chinese Govt. is planning to accumulate another 6000 metric tons of gold in the near future, whose veracity is being questioned. Consider the recent acceleration in Chinese gold accumulation, either the basis core for a gold-backed Yuan alternative to the crippled toxic USDollar, or the basis core for a new global trade settlement system to be introduced very soon. The usually patient Beijing leaders are showing signs of no longer possessing patience. The gold imports from Hong Kong are not simply rising; they are exploding in unprecedented fashion. Something big is going on. The Chinese are diversifying away from USTBonds and into Gold. They are locking up African gold supply and other important industrial metals.

The Swiss Franc pegged to the Euro currency is a disaster waiting to happen. The water will overflow the imposed dam wall constructed of paper mache. A tidal wave of European money is seeking safety from the ruptured Euro currency and fast deterioration of the big Euro banks. The Euro will suffer a sudden breakdown just like the USDollar when reality strikes. In order to prevent the Franc from appreciating, the Euro is being bought in droves. In response, the Swiss National Bank (central bank) must buy Euros to prevent their Franc from appreciating from the capital flight. The Swiss central bank sales of the Euro to rebalance its reserves are reinforcing pressure on the broken unified currency. The Swiss central bank is setting itself up to become a bagholder of nightmarish proportions. As the Euro currency becomes a Southern European device to secure PIIGS on a leash, the pressure will build on the more viable currencies like the Swiss Franc. Eventually the peg will break and the Swissy will suddenly be priced 20% to 30% higher, with the Swiss banks the losers. They will be losers at the same time that the big Allocated Gold account class action lawsuits will be ordering awards to the victims. The wreckage and corruption of the Swiss banking system will serve as tomorrow’s headlines.

Ordinary Germans are already using Deutsche Marks again. They do not wish to anger the Euro Royalty in Brussels, so it is keep quiet. The nation’s populace was forced officially to trade in the currency for Euro bills and coins when the 2002 year began. At that time the DMark immediately ceased to be legal tender. However, that did not stop 13.2 billion in DMarks, worth EUR 6.75 billion (=US$8.3bn) from remaining tucked in mattresses, basement strongboxes, old books, coat pockets in closets, wall crevices, or in bank safety boxers. It has begun to re-enter the circulation, according to the Bundesbank. The cash volume is more than the EuroZone’s 16 other former currencies combined. From pharmacies to private shopkeepers, the DMark is honored. The Euro currency is on its last legs in Germany. As the European bond crisis rages on, as the big Euro banks teeter without end, as the bank runs pick up steam, the DMark is making a comeback, just like the Lira is in Italy.

The USDept Treasury is using its Exchange Stabilization Fund as a secretive $2.4 trillion mutual fund guarantee. In contrast, the Chinese are taking their $3.0 trillion in reserves to offer a trade settlement fund. They wish to establish a core fund to facilitate in trade, but in reality the gesture is intended to grease the next move toward non-US$ payments in trade settlement. The US pension funds see the USTBonds as dead money, since earning next to nothing in interest. Details about a secretive USGovt program to bail out money market mutual funds are finally coming to light. Acting without any explicit congressional authority, the USTreasury has extended guarantees in excess of $2.4 trillion for money market funds. In the 12 months following the infamous failure of Lehman Brothers, the huge official Reserve Primary Fund was depleted. The program ended in September 2009, having prevented a previous run by money market fund investors. Usually, the USDept Treasury has kept the identities of the funds secret that are pulled out for use in emergencies, as well as the total tab. Strange developments are holding the US financial structure together.

Be sure to know of three types of USDollars on the global tables and temple cauldrons. A) There are USDollars held inside the United States. They are the most vulnerable to writedowns. Until now, the process has been indirect via price inflation felt the hardest in rising costs. The flat wages tend to aggravate the situation at a time when home equity and pensions are fast doing a vanishing act. Any coordinated movement to write down the USTBonds in the future will result in a direct whack to US wealth, as the impact will be distributed widely within the 50 states. B) There are USDollars held outside the US borders. My best sources tell that this collection of accounted assets will be preserved in value. Interpret that to mean the externally held USDollars will enjoy a fair exchange rate in translation when the time comes for its long dreaded retirement. Despite being unforeseen by large blocks of the masses, the process will occur to their shock and amazement. The shock will be worse felt inside the US Dome since the treatment outside the US will be far more generous than inside. C) There is lastly the USDollars that arrive from trade settlement, from the letters of credit attached to contract satisfaction. Watch the trend grow for non-US$ payments. The new financial structure that will have a clear barter characteristic is waiting in the wings for the more recognized collapse of the current system. At that time, the USDollar credits from trade settlement will go away like water evaporating on a Saudi street.


Gold & Silver are awakening from a deep sleep after a year-long price consolidation. While the physical story leans toward growing demand and declining supply, all bullish for the precious metals prices, the paper story continues to reek of strongarms, naked shorting, propaganda, and other devious devices. Prepare for a grand divergence between the physical and paper Gold price, as described and warned in this newsletter for many months. Rumblings continue about JPMorgan being in far more trouble than simply CFTC position limits. They struggle under the gradual breakdown of their derivative machinery that extends far beyond the USTreasury Bond complex, to the currencies and gold market. Renewed hope from August has come for a resurgent price as seasonal factors join with other conditions whereby the bank cartel has weaker hands. Recall the gold cartel has been forced to relinquish over 6000 metric tons in the last six months. The real battleground is with the Gold price in Euro terms, which is pushing for a breakout. That makes sense, since the obvious breakdown is of the European sovereign bonds, the Euro currency, the European big banks, and the Euro Central Bank monetary policy. Notice how the Crude Oil price reveals significant hedging against the USDollar, stubbornly near the $100 per barrel mark despite a fierce global recession. The high cost structure will be maintained, with little relief from relaxation. Recovery will remain an illusion.

The Eastern Coalition has not gone away. They still pursue Gold. Perhaps their agents in acquisition are on European holiday. Soon it is back to the desks at work. Expect a price move toward $1800 very soon. Expect a Silver price move also, as it more clearly has broken out from the year-long consolidation, back over $30/oz. Moves in the two metals could come fast and furious. The Eastern world has consistently been big buyers, but now the Western world is seeking safe haven from the ruin in banks and bonds.


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When I initially read your writings, they provoked a wide range of emotions in me from fear and anger to outright laughter. Initially some of your predictions ranged from the ridiculous to impossible. Yet time and again, over the past five years, I have watched with incredulity as they came true. Your analysis contains cogent analysis that benefits from a solid network of private contacts coupled with your scouring of the internet for information.”
(PaulM in Missouri)

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at For personal questions about subscriptions, contact him at

The Real Reverse Robin Hood: Ben Bernanke and his Merry Band of Thieves

August 31, 2012 by · Leave a Comment 

By Charles Hugh Smith, OFTWOMINDS

Away from the stifling media crush, staid Ben Bernanke is dashing Reverse Robin Hood, lackey pawn of the Neofeudalist Financial Lords who shamelessly steals from the poor to give to the parasitic super-rich.

Amidst electioneering chatter about a “reverse Robin Hood” who steals from the poor to give to the rich, it’s important to identify the real Reverse Robin Hood: Ben Bernanke and his Merry Band of Thieves, a.k.a. the Federal Reserve. It’s especially appropriate to reveal Ben as the real Reverse Robin Hood today, as the Chairman is as omnipresent in the media as Big Brother due to the Cargo-Cult confab in Jackson Hole, Wyoming.
Please answer the following questions before launching a rousing defense of the All-Powerful Fed and its chairman:
1. What is the nominal yield on your savings account, thanks to the Fed’s zero-interest rate policy (ZIRP)? (Answer: 0.25%)

2. What is the inflation-adjusted yield on your savings account? (Answer: – 2.25%)

3. What is the rate of interest the Fed charges banks for “free money”? (Answer: 0%)

4. What is the average interest rate for bank-issued credit cards? (Answer: 14.52%)

5. What is the interest rate for student loans? (Answer: 6.8%, and 7.9% or 8.5% for PLUS loans)

6. Does the Fed pay interest on the funds banks have borrowed from the Fed for 0% and then deposited with the Fed? (Answer: yes)

7. Exactly how has the average American worker benefited from the Fed’s policies?(Answer: interest on credit cards has declined from 19.9% to 14.52%, if the worker has outstanding credit, which few of the bottom 90% do.) Theoretically, workers could re-finance their homes at lower interest rates, but the vast majority are either underwater or no longer qualify. Ben and the Merry Thieves love pulling Catch 22.

8. How has the average parasitic Neofeudalist Financial Lord benefited from the Fed’s “rob the poor to give to the rich” policies? (Answer: Handsomely. The top 1%’s income and net worth has soared as Ben and his Merry Band of Thieves have stripmined interest income from the poor and pension funds and diverted it to the rich.)

9. Have the Fed’s Reverse Robin Hood policies narrowed income disparity in the U.S.?(Answer: no–income disparity has widened further as a result of Fed goosing of risk assets.)

10. How many of the nation’s 14.5 million unemployed have gotten jobs as a result of Fed policies who would not have gotten a job if the Fed had been abolished in 2009?(Answer: unknown, but the best guess is 17, including Bennie the part-time janitor, with a statistical error of + or – 17.)

11. How does Ben the Reverse Robin Hood justify his thievery? (Answer: he doesn’t. Officially sanctioned propaganda casts him in the role of selfless do-gooder, protecting saintly Neofeudalist Financial Lords from restless debt-serfs.)

Listen up, debt-serfs, you have it good here on the manor estate. You get three squares of greasy fast-food or heavily processed faux-food a day, and if Reverse Robin Hood and his Merry Band of Thieves is ripping you off it’s for a good reason: the predatory Neofeudalist Financial Lords need the money more than you do, as they have a lot of political bribes to pay: it’s an election year, and the bribes are getting increasingly costly. Poor things, we’re sure you understand. Now go back to work or watching entertainment (or “news,” heh) and leave the Lords alone.
An open plea to William Banzai: dear Master of the visual arts, could you please perform your magic and transform Ben Bernanke into the Reverse Robin Hood leading his Merry Band of Bankster Thieves? I would be most grateful if you could apply your powers to this imagery.

Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

If this recession strikes you as different from previous downturns, you might be interested in my book An Unconventional Guide to Investing in Troubled Times (print edition) orKindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One. The solution in one word: Localism. 

Thank you, Robert M.($5/month), for your superbly generous subscription to this site– I am greatly honored by your support and readership.

Go to my main site at
for the full posts and archives.

More articles from Charles Hugh Smith….

The Pin-Up Stock of the Iron Ore Boom

August 31, 2012 by · Leave a Comment 

The Daily Reckoning

Get ready for a rally in the iron ore price.

That’s the simple conclusion we come to after looking at the headlines of the past few days. It seems just about everyone (except Fortescue Chairman Nev Power) now thinks prices could head even lower. They’ve fallen 11 days in a row. The spot price now trades below $90.

This wave of bearishness means you can probably expect to see a counter-trend rally, for a few days at least. But it’s a rally we would happily sell.

Fortescue, because its life depends on it, thinks iron ore prices will head back to US$120 a tonne in a couple of months. Apart from hope, the reasoning behind that analysis is that China will come to the rescue with more spending measures which will boost demand for steel and therefore iron ore.

It’s a delusional theory.

If there is anything that China is happy with right now, it’s a falling iron ore price. Why would you think they’ll do anything that supports a return to levels that make their steel mills even more unprofitable than they already are?

Every boom has its pin-up stock. The brash, high growth, highly leveraged player who is going to do better than all the rest. That is Fortescue. Then, the bust sets about taking it down.

But not before providing periodic injections of hope. With iron ore prices having fallen about 20% in the past two weeks, the least you can expect from Australia’s favourite bulk commodity is a little bounce.

That’s it from us on the iron ore front. We’re over talking and writing about it and we’re sure you’re over hearing about it. Let us finish by saying we don’t expect a sustainable bounce back in iron ore prices from these levels. With hundreds of millions of tonnes of the stuff to come on line in the next few years, supply will keep iron ore prices down.

Yes, Australia will still export the stuff, but it won’t contribute the revenue, national income, taxes etc that it has for the past few years. In 2003, iron ore sold for around US$20 per tonne. It bubbled up to US$180 per tonne in 2011. From that perspective, the current price of US$90 per tonne, although causing anguish in Canberra and the Pilbara, looks about right.


Greg Canavan
for The Daily Reckoning Australia

From the Archives…

The Gold Sub-Standard and the Inflation Cake
24-08-2012 – Greg Canavan

BHP and Rio: Just Following the Followers
23-08-2012 – Greg Canavan

How Media Regulation is Just a Clamp Down on Freedom of Speech
22-08-2012 – Dan Denning

Monarchs, the Masses and Democratic Mayhem
21-08-2012 – Bill Bonner

Why China’s Crack-Economy Needs a New Fix
20-08-2012 – Dan Denning

Similar Posts:

More articles from The Daily Reckoning….

Why Unions Have it the Wrong Way Around

August 31, 2012 by · Leave a Comment 

The Daily Reckoning

In the past few days industrial relations has set up its own big top. And it’s quite a show…

The Sydney Morning Herald reports that,

‘Construction on new homes and units has slumped to its lowest level in a decade, prompting fresh calls from Australia’s housing industry for governments to do more to support the struggling sector.

‘HIA chief economist Harley Dale said the sector was faring worse now than at the height of the global financial crisis.

‘”That situation is unhealthy and undesirable for Australian businesses and households, while federal and state governments are too slow in taking action,” he said. “Federal and state governments need to get out there and act on investment and reform initiatives to help revive the residential construction industry.”‘

Harley…dude…you’re not serious are you? What more do you want the government to do? They’ve meddled so much in housing they’ve just about run the industry into the ground.

At a time when the housing construction industry is in all sorts of problems, the unions have decided to go feral. These bozos have no idea what they’re doing, apart from playing small minded power games to justify their existence.

Australian labour is amongst the best paid in the world. The high cost of labour is one of the reasons why property is so expensive in this country. When a union makes demands for more of this or more of that it pushes up costs…costs that are ultimately borne by you; the tenant, the shopper, or the consumer of a service.

These high costs are now manifesting in weaker construction demand, which ultimately means less work for builders and their labourers.

And at precisely this time, unions flex their muscles under the pretence of safety issues.

Having grown up in Wollongong, we’ve known a few unionists in our time. For many of them, safety issues are the least of their concerns. Hatred and distrust of management and the ‘capitalist’ is at the heart of the matter.

Unionists have a Marxist outlook. They have a delusional belief that labour is the creator of wealth. Labour no doubt contributes to the creation of wealth but it does not spark the fire. For that you need ingenuity and capital.

Once ingenuity and capital come together in the right mix, they provide an opportunity for labour to join the party.

Unionists have it the wrong way around. That’s why they have to use intimidation and violence to make their point. And with the Labor government’s changes to industrial relations law strengthening the union movement (because unions are major contributors to the Party) intimidation and violence is growing.

It reminds us of something our old mate Freddy Hayek wrote more than 60 years ago:

‘They (unions) have become the only important instance in which governments signally fail in their prime function – the prevention of coercion and violence.’

We don’t know what the stats are but anecdotally we know of many union members who would prefer not to be. Union leaders use coercion to get them to join. And if they don’t, they are ostracised and pushed out of the ‘club’.

Any club that uses coercion to boost membership is a pretty ordinary club in our opinion. In fact, it’s ‘un-Australian’. Yet these thugs wrap themselves in the flag when making their demands.

It really is a case of clowns (especially) to the left of me and jokers to the right (did you see the Republican convention in the US?). There are bozo horns everywhere.

But that’s no way to finish up for the week. How about some humour? Check out the brilliant Flight of the Conchords (a Kiwi comedy duo) charity chat with kids.


Greg Canavan
for The Daily Reckoning Australia

From the Archives…

The Gold Sub-Standard and the Inflation Cake
24-08-2012 – Greg Canavan

BHP and Rio: Just Following the Followers
23-08-2012 – Greg Canavan

How Media Regulation is Just a Clamp Down on Freedom of Speech
22-08-2012 – Dan Denning

Monarchs, the Masses and Democratic Mayhem
21-08-2012 – Bill Bonner

Why China’s Crack-Economy Needs a New Fix
20-08-2012 – Dan Denning

Similar Posts:

More articles from The Daily Reckoning….

US Politics: A Plague On Both Your Houses!

August 31, 2012 by · Leave a Comment 

The Daily Reckoning

Go Isaac, Go! Blow ye winds…Crack ye thunder…

Oh ye gods…send a hail of rain…send a wall of wind… send a tide of water that washes the Republicans out of the Florida swamps…

And drives the Democrats out of the hill country in the Carolinas…

There was little action in the markets again yesterday.

Everyone is waiting. They want to know what will happen when the Fed gets together. Will there be an open-ended commitment to QE – as much as you want, when you want it – or will there be nothing at all?

While we are waiting… we will turn our attention from economics to US politics, which is to say, from fraud to outright theft. There’s an election campaign underway.

It was Ambrose Bierce, in his Devil’s Dictionary, who called an election “an advance auction of stolen goods.” Well, in the 2012 campaign… prices are rising. Bloomberg:

Donors Invest Millions in Romney for Billions in Returns

Wealthy donors and corporations are more heavily invested in this presidential election than at any time since the 1972 Watergate scandal led to stricter campaign-finance laws.

A series of court decisions and regulatory changes in 2010 unraveled federal limits on donations, paving the way for a return of the big players. They are pooling their money in nonprofits, which keep contributor names secret, and super-political action committees, which amassed $350 million through the end of July.

Bloomberg suggests that Sheldon Adelson, the Koch Bros., and others are ‘investing’ in presidential hopefuls with the expectation of a fat return on their investment if their man wins.

Well… frankly… we’re shocked… SHOCKED!

Does Bloomberg really mean to say that people would actually stoop to using the political process to get what they want for themselves? That they would actually try to figure out which candidate would be better for their own interests… and then invest their time and money trying to get that fellow into office?

Hey, Bloomberg… get over it. The rich do it. The poor do it. Even folks in Lahore do it.

People always seem to do what comes naturally. Can’t stop ’em. Why try?

And the more there is at stake in an auction, naturally, the higher prices will go. Ideally, the only things up for grabs in an election will be a few privileged parking places and the colour of the flag.

Then, people can bribe each other, cajole and lie as much as they want. Who cares? But when 41% of the US economy is at play, you gotta expect that people are going to pull out all the stops to have the winning bid.

And nowhere is the bidding more fast and more furious than in ‘security’ spending. Why? That’s where the juice is.

“Ike was Right!” writes our friend “Tom Paine”.

It’s an old story: the few take advantage of the many. In the name of making the world better or safer, elites capture the government and end up killing the goose that lays the golden egg.

The United States is no exception.

Dwight Eisenhower, who had spent his entire life in the military… and then, in government… issued a warning: Upon leaving the presidency, he said farewell. And watch out for the ‘military industry complex,’ he added.

Eisenhower knew that the combination of profit motive and power motive is hard to stop.

At the opening of WWII, the US had nothing to fear from its own security industry. Where the Nazis devoted 23% of GDP to their war industries in 1939, the US spent only 2%. Its army was smaller than Romania’s.

But WWII was good for the US military. In a matter of weeks, the orders came to US manufacturers… and the weapons began rolling off assembly lines. Even before it entered the war itself, American industry was producing more tanks, planes, guns and ammunition than anyone.

Roosevelt, coming to the aid of the British, pledged to manufacture 50,000 airplanes in a single year – which seemed almost delusional at the time.

US supplies – made in US factories by US workers – were indispensable.

After the war, the soldiers came home and the factories switched to making washing machines and automobiles. War debt declined as the economy grew. The military industrial complex never gave up its grip on power and money, however. Korea, the Cold War, and Vietnam provided cover for continued high levels of ‘security’ spending.

And then, with the bombing of the World Trade towers in 2001, the industry was able to greatly improve its position. Fully loaded, the cost of ‘security’ is now about $1.2 trillion. That includes wars, Homeland Security, fortified embassies, military aid… and all the other things that help keep the US Empire in business.

Much of the domestic manufacturing base that helped win WWII has been exported to China and other countries, but the US still produces its own weapons.

Today, 40% of US manufacturing is destined for the security industry. Raytheon, General Dynamics, Lockheed – many of America’s leading manufacturers now depend almost exclusively on orders from the Pentagon.

They supplement their income by selling guns and combat gear to foreigners. The US may have lost the lead in autos, electronics, and energy, but it is number one in selling weapons.

‘Security’ spending – which has little to do with real security – now accounts for about one out of every three dollars spent by the US government and about 8% of the entire US GDP. It is the single biggest auction of stolen goods in the world.

No wonder it attracts so many bidders.


Bill Bonner
for The Daily Reckoning Australia

From the Archives…

The Gold Sub-Standard and the Inflation Cake
24-08-2012 – Greg Canavan

BHP and Rio: Just Following the Followers
23-08-2012 – Greg Canavan

How Media Regulation is Just a Clamp Down on Freedom of Speech
22-08-2012 – Dan Denning

Monarchs, the Masses and Democratic Mayhem
21-08-2012 – Bill Bonner

Why China’s Crack-Economy Needs a New Fix
20-08-2012 – Dan Denning

Similar Posts:

More articles from The Daily Reckoning….

Algos Set New Speed Reading Record: 4549 Words In 20 Milliseconds

August 31, 2012 by · Leave a Comment 

Zero Hedge

The market is indeed a discounting mechanism it appears. In a mere 20 milliseconds, the world’s ‘traders’ had managed to read Bernanke’s 4549-word script, interpret it (as bearish in this case – which apparently is wrong now?) and start to sell down the major equity indices. As Nanex points out, not only was the reaction lightning fast (actually faster than lightning) but it occurred in their newly created ‘fantaseconds’ as trades were timestamped ‘before’ the bids and offers were even seen in the data-feed. How long until the machines can interpret Bernanke’s ‘pre-QErimes’ and really front-run reality?


Nanex ~ 31-Aug-2012 ~ Bernanke Speaks Fantaseconds

When the Bernanke speaks, the fantaseconds flow. See if you can spot them.

Charts below show the bid/ask spread (shaded) and trades (dots) color coded by exchange. Not all exchanges are shown for clarity.

1. Nasdaq (black) and NY-Arca (red).

2. Nasdaq.


3. NY-Arca.


4. Nasdaq, NY-Arca and BATS.



Source: Nanex

More articles from Zero Hedge….

When One Hilsenrath Is Just Not Enough, Here’s Another: "Bernanke Signals Readiness To Do More"

August 31, 2012 by · Leave a Comment 

Zero Hedge

In the immortal words of the Jackson 5: “I’ll Be There” seems to be the meme du jour – which appears to us to be the same message that Bernanke (and his proxy Hilsenrath) have been on for a few years now. However, in case you hadn’t had enough sycophantic central-bank-fellating ‘hope’, the WSJ’s front-man just reiterated for one and all that Ben’s our man. In our subtle opinion, it seems however that perhaps Bernanke was a little disingenuous with his talk of ‘policy tool effectiveness’ – as clearly his efforts have not had the desired economic effect so far (or he would not need to reiterate the ability to do more of the same).

Jon Hilsenrath, WSJ: Bernanke Signals Readiness to Do More

Federal Reserve Chairman Ben Bernanke offered a robust defense of the effectiveness of the central bank’s easy-money policies in his Friday speech at the Fed conference in Jackson Hole, Wyo., and left little doubt that he is looking toward doing more to give the economy a lift at the Fed’s next policy meeting in September.

On The Economy [ZH – clearly helping the “it’s still dismal out there” meme – let’s hope it doesn’t get better anytime soon, or he will really have to show how bad we are]:

Some market participants have been wondering if a run of moderately better economic data of late has changed the Fed’s thinking about the economy. Mr. Bernanke left little doubt that he is still deeply dissatisfied with the outlook, describing the economic situation as “far from satisfactory.”

[It’s Cyclical Stupid]
Importantly, the Fed chairman also says that the job market’s weakness, to date at least, is the result of cyclical problems in the economy (that is, a lack of demand) and not structural problems (such as a mismatch between the skills people have and the skills employers are looking for.)

[which means we are justified in our ‘extreme’ actions]
The Fed feels it can help address cyclical problems, but not structural problems. In other words, this is a problem where the Fed feels it can help. Of course, he also includes his “no panacea” caveat; Mr. Bernanke would love fiscal policy makers to take actions to support the economy and address long-run deficits. But he doesn’t seem to see that as justification for inaction on his front.

[and the disingenuous comments begin… jobs, here’s your jobs – what are you all complaining about?]
COSTS AND BENEFITS: Mr. Bernanke has said repeatedly that the Fed’s decisions about how to use monetary policy depends on an analysis of the costs and benefits of different actions. His analysis, particularly of the Fed’s controversial bond-buying programs, heavily emphasizes the benefits and plays down the costs. Two rounds of bond buying have raised overall economic output by 3%, he said, and increased payroll employment by 2 million jobs, he said his staff has estimated.

“A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,”

[and finally – they have it all under control, so don’t worry]

“The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out further use of such policies if economic conditions warrant,”

More articles from Zero Hedge….

Ben’s J-Hole Speech: Goldman’s Take

August 31, 2012 by · Leave a Comment 

Zero Hedge

Ben’s prepared remarks went off embargo at 10:00 am Eastern. The text (just the body, excluding appendices) had 4,549 words, 254 commas and 173 periods. It took Goldman 40 minutes to read it, write a 579 word response, proofread, get it through compliance, and shoot it to all clients. Now that’s efficiency. The title? “Bernanke Makes Case for Effectiveness of Unconventional Easing” of course, even though the real shocker in the speech was that Bernanke for the first time as far as we recall admitted that the sentiment that QE is not working may result in a Catch 22 where every incremental and larger QE episode has diminishing returns (just as we have been warning for years). 

Here is the full Goldman’s pret-a-portersender response:

Bernanke Makes Case for Effectiveness of Unconventional Easing

Fed Chairman Bernanke’s Jackson Hole speech makes the case for unconventional monetary easing–in particular, balance sheet and communication policies–as an effective tool, even if the “hurdle is higher” for the use of such policies. In a dovish conclusion, he notes the poor state of the labor market as a “grave concern”.


1. Fed Chairman Bernanke’s keynote speech at the annual Jackson Hole conference reviewed monetary policy during the crisis, described the methods of action of balance sheet tools and communication (guidance) policies, and reviewed the potential costs of asset purchases. In conclusion, Bernanke emphasized that unconventional easing can be an effective tool of monetary policy and highlighted the still-weak state of the US labor market as a “grave concern”.

2. Bernanke began his speech with a discussion of policies during the crisis; while the details of what occurred here are well known, this section was noteworthy for a frank admission that given the “limited historical experience” with nontraditional monetary easing, policymakers “have been in the process of learning by doing”.

3. Bernanke discussed the ways in which balance sheet policies can affect the economy–focusing on the imperfect substitutability of assets and the consequent ability for reductions in the supply of a given asset to affect its price/yield; he also noted the signaling effect of such policies and the potential for them to aid the functioning of distressed markets. He cited research showing that asset purchases lower Treasury, MBS, and corporate bond yields, and noted “a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred”, though with the caveat that “It is likely that the crisis and the recession have attenuated some of the normal transmission channels of monetary policy relative to what is assumed in the models”. As for rate guidance, Bernanke defended the current forward guidance as “broadly consistent with prescriptions coming from a range of standard benchmarks” but went on to note its influence on market expectations and say that “a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods.”

4. Bernanke reviewed the potential costs of nontraditional policy in more detail than previously. For asset purchases, these included 1) possible impairment of market functioning, 2) public/market concern about the Fed’s “ability to exit smoothly from its accommodative policies”, 3) risks to financial stability as lower rates push investors to search for yield in riskier assets, 4) financial losses for the Fed on its securities holdings if rates rise sharply. He summed up by saying “the hurdle for using nontraditional policies should be higher” but that “we should not rule out the further use of such policies if economic conditions warrant.”

5. The speech concluded with the near-term outlook–held back in Bernanke’s view by a slow recovery in housing, government fiscal drag, and financial market stress (particularly because of the Euro area crisis). The final note was dovish, with Bernanke emphasizing that “we must not lose sight of the daunting economic challenges that confront our nation” and professing “grave concern” with the weak labor market and the potential structural damage that could result from persistently high unemployment.

More articles from Zero Hedge….

The Schizophrenic Market Update – Buy The Rumor, Sell The News, Then BTFD

August 31, 2012 by · Leave a Comment 

Zero Hedge

It’s been 20 minutes and in that time we have been entirely depressed as every risk-on asset dumped to the day’s lows or lower and now we are entirely euphoric – there is still hope – as Gold/Silver make new highs, stocks recover all their losses, Treasury yields continue to fall, and EURUSD does, well, we are not sure really… Meanwhile, European Sovereigns are all cracking wider…


Gold and Silver chaos…


S&P 500 futures rip-dip-‘n’-rip…


EURUSD Algo-mania…


meanwhile EGBs…


Charts: Bloomberg

More articles from Zero Hedge….

Many Don’t Understand The Google/Apple/Microsoft Business Model Dynamic Nor How Dangerous This Apple Legal Win Can Be For Consum

August 31, 2012 by · Leave a Comment 

Zero Hedge

In continuing my rant on the Apple v. Samsung verdict, I wish to make clear once again that the vast majority of consumers of Google’s and Apple’s products are absolutely oblivious to the business model of Google, the business practices of Apple and the shadowy aggressive survival tactics of the behemoth that is Microsoft. If I am correct in this assertion then the potential ramifications of Apple actually defeating Samsung in the patent case decided last week is also lost on most. That is dangerous. Since it has been explained at least as good as I could have done already, let’s peruse one of my favorite legal sites, Groklaw, on why understanding Apple’s grand objectives in patent litigation matters:

To explain why I think it matters, I need to remind you of other things that have been going on, trying to exclude FOSS from the market. Because that really is what I think this is about.

Remember how Oracle tried to expand copyright law to cover the structure, sequence, and organization of Java APIs? It failed (subject to appeals). But it tried hard. Had it succeeded, it would have upended how any open source software could be built and used, and it would have excluded individual developers like Linus Torvalds in his student days creating Linux in his bedroom, because only those with money to pay royalties would be able to do any coding for the marketplace, if moves like that had succeeded. One of Michael A. Jacobs’ law students volunteered to help cover the trial for Groklaw, and she told me that this is what she had learned about the case in class. I take it that means it was its purpose. Do you want a world where only the present incumbents are allowed to create anything meaningful? How does that benefit you or me?

Remember when Microsoft did its patent deal with Nokia and then they both did patent deals with MOSAID, a nonpracticing entity that presumably will be using the patents those two lovebirds provided to sue Android vendors and who knows who else? Patents exclude. That is their purpose. Android is the target. Did you notice how Microsoft crowed in public about the Apple verdict, predicting it would be beneficial to Microsoft?

Remember back when Microsoft helped SCO afford lawyers in the very early days of the SCO saga? What was the goal there? To slap royalties on Linux and get rid of the GPL, so as to block Open Source’s free development model, and make it so expensive no one would want to use Linux on servers any more. Remember when SCO even offered to help Linux-using companies move not to SCO’s UNIX products but to Microsoft servers?

Now, it’s Apple and Microsoft on a jihad against Android and hence Google. That’s why you see attacks on Google in an endless stream in the media and even in regulatory bodies, where Microsoft friends who take Microsoft money complain about Google. Android is eating Apple’s and Microsoft’s lunch in the marketplace, because people love it and OEMs love it, so the proprietary world has apparentely decided o use the legal system give them a win there, since they can’t win fair and square in the marketplace. Actually, they could, but they’d rather not.

What are the weapons? IP law. They have copyright, they have patents, and now they have a new weapon of choice — trade dress and design patents — thanks to Apple. And that is why this case is so appalling, because Apple has now opened up a new area for litigation and exclusion. That’s what the L.A. Times noticed:

Nevertheless, it’s worth remembering that Apple made its name building successful, even iconic products based on ideas that other companies pioneered. The iPhone, for example, was a significantly better version of the smartphones Nokia introduced more than a decade earlier. Innovation is by its nature an iterative process, and good patent policy creates an incentive to innovate more. Bad policy just makes it easier for patent holders to extract royalties from anyone venturing within reach of their claims.

The risk is especially great in the area of patents on design, such as the ones that covered the look and feel of Apple’s iPhones. There’s a fine line between designs that are purely decorative (which, oddly enough, are the ones eligible for patents) and those that serve a function (which aren’t). For example, do rounded corners on a phone simply help set it apart, or do they make the device slip more easily in and out of a pocket? …

If Apple’s win slows the wonderfully frenetic pace of product development in mobile devices and leads companies to battle in courts instead of the marketplace, consumers will be the ultimate losers.

There’s no if about it. It certainly will have that effect. My point is, it’s all about the same thing — to make it impossible for Android to survive as it is, and now we will see litigation after litigation — Apple has already filed another lawsuit against Samsung — and the end result is to make Android cost more because of encrusting it with high royalty obligations, so it cuts into the vendors’ profits sufficiently that it will end up making it undesirable to use. That’s why, I believe, Apple offered licenses to Samsung on its first visit to discuss matters at such a high price. It would have cut Samsung’s profits so radically, it would no longer make much sense to use Android. I think they had to know Samsung couldn’t agree to that price. Apple itself is complaining about a much, much lower price for FRAND patents, after all, saying it can’t afford to build its products with that price added. Did Microsoft pay that high price?

But, I hear you say, that’s anticompetive behavior. Isn’t that patent misuse? Misuse of the courts? I think it is. But I’m not a lawyer. And antitrust law is complicated, and thanks to folks who think business should be unregulated, it’s a little bit toothless at the moment.

Time will tell how others view it, but I despise the strategy. The purpose of both copyright and patents is to encourage innovation and progress. The purpose of trade dress protection is to make sure consumers are not confused as to origin of goods and products. Design patents are supposed to protect only ornamental features, not functionality. None of it is supposed to be for the purpose of killing off newcomers to the market. Is it even Constitutional to use them that way? You tell me.

Remember too that Apple itself reaps benefits from Open Source software. It switched from its own software to OSX, which is BSD code. Why? Because it was better than what it had done itself. So it surely knows what FOSS can do. Now, it wants to make sure no one else can offer what it offers, even in such basic elements as rectangles with rounded corners and rows of brightly colored icons or ways to touch a tablet that are simply intuitive. Intuitive is just another word for obvious.

The reason Apple has gone scorched earth on the litigation front is because it is sorely losing the battle on the technology front and rapidly losing market share in an industry that’s currently growing like a weed. Why should Apple even care if the industry is growing like a weed? Well, for starters, once that growth slows, Apple’s growth slowdown will be amplified and levered several times. Think of growth using margin or gearing. If the market growth stagnates to near 0% growth, then Apple’s growth could drastically reverse and go negative!!! Apple had better knock the upcoming iPhone 5 out of the ballpark, because if they don’t Android will have captured nearly the entire smartphone market within a year. There will be no extra-normal profits stemming from network effects for iOS if there is no network! Just think about that. They are already at 64% global market share and growing faster than all of their competitors combined.

 Back the Gartner data…


Here’s one of the reasons why…

Many people are still totally oblivious to exactly what it is that Google does. Here’s a tutorial.

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives…

There are currently 7 Google reports available. Select the “Google Final Report” and click the “Download” button. You will receive a 63 page analysis that looks like this on the cover…

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

Unique, Indpendent and Accurate Apple Research

File Icon Apple Margin & Valuation Note

As excerpted: 

It is worth noting that the key assumptions that underline the above valuations – (1) iPhone continuing to witness stupendous growth *******  in 2012 and ****** 2013 over a larger base and (2) iPhone margins continue to remain healthy off stable prices and despite increase in material cost – should be keenly watched over the next couple of quarters. 

Then ask them bout the logical argument behind the concern with Apple and the extremely volatile price action of the last few weeks. As stated many times in the past, The BoomBustBlog argument and analysis is solid.

What else is there to the earnings announcement? Well we were absolutely correct in terms of the oncoming margin compression of the the product lines, something that was actually easy to see coming but many refused to admit. Of course, there will be those select few that say, “But wait, the company reported an INCREASE in margins while you said there will be a decrease!”. Yes, that’s true and both can exist simultaneously.




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