Tail Events, Isolation, New Normal

by Jim Willie CB
January 26, 2012

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Jim Willie CB, editor of the “HAT TRICK LETTER”

Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

The year 2012 has started out in strange ways. While celestial forces augur for rare tail events, the assurance of man-made events that stretch far into the extreme tail of probability are not only very likely but will be of a type to reflect the change in the global balance of financial power. The Paradigm Shift mentioned over the course of the last two to three years is at work, having moved into a higher gear. The gold is moving from the West to the East, along with the power. We will not see the process reverse in our lifetime. The sanctions set against Iran have been devised by a former global leader nation that is beset by insolvency, fraud, and lost integrity. The backfire has consolidated forces into a more fortified position against the USDollar. Trade increasingly is not being settled in US$ terms. The icons of the day are mere apologist public address systems attempting to rationalize and justify the deep insolvency and wrecked systems. The new normal is of a caravan file of broken cars and trucks sputtering down the road, using the false fuel of hyper monetary inflation and the offensive paint of phony financial accounting, the tell-tale sign being the ugly rancid smoke out of their tailpipes. The last insult is of the US Presidential election process, which is badly marred by obvious inconsistencies and anomalies. The vote count for the candidate that attracts the biggest crowds, attracts the biggest donations from corporations, and defies the financially teetering system does not match the final official tallies.

PREPARE FOR RARE DAMAGE OF TAIL EVENTS
In the probability world, a tail event is described as an occurrence far out in the small numbers of probability, extended on the tail of the curve of likelihood. In the quality control domain, the battle cry used to be Six Sigma, meaning the tolerated defect rate goal would be six standard errors, a rate in no way achievable. A quick check of the probability tables unmasks the lofty goal as one defect part off the assembly line in every 1.013 billion items. That is Six Sigma on the normal bell-shaped curve. However, in the world of phony finagled finance, such rare events are indeed occurring. The modern world has never seen such grotesque charred ramparts posing as financial structures, badly beset by the insolvency caused by the natural sequence of broken asset bubbles, aggravated by absent industry. In fact, the entire fiat currency system, where money is nothing but redefined debt, is an abomination destined for the ruin we see on such a tragic widespread level. The modern world has never seen such grotesque housing disasters, the dream of home ownership turned upside down, one quarter of American households owing more than the value of their homes. In fact, the entire housing dependence devised by Greenspan, where the USEconomy would lean not on industry but on rising home equity, serves as the calling card of central bank heresy. The heresy continues with the high priest ZIRP and bishop QE. Of course it ended in tears. The modern world has never seen such grotesque quicksand in sovereign debt for so many major nations. This goes far beyond Greece, Ireland, and Portugal, the symbols of small fry nations that few nations will make deep sacrifice for. In fact, as the sovereign debt spreads, it has become clear that Italy, Spain, France, and many other nations suffer from the sinking pressures that national securitized debt brings. As the sovereign debt loses value, the banking system sheds reserves valuation and goes insolvent, the credit engines stall, the economy falls into recession, the labor force loses jobs, the spending patterns falter, and the nation goes into a failure mode. See the Cauchy distribution in the graphic, which when the degrees of freedom grow unbounded, approaches the Gaussian normal.

Some important tail events of rare type are coming. Any attempts to control a Greek Govt Bond default will be fraught with high risk and deep peril. The equal necessity to control a default for Ireland and Portugal will be made obvious. The extension to Italian and Spanish Govt Bond losses in collateral damage will be obvious. The implications to Credit Default Swaps must also be handled, not possible in the same fraudulent manner as before with redefinitions and denied insurance awards. The contagion of vanished equity in the banking system will spread to London, New York, and Germany, in whose nations numerous banks will fail. It will be extremely difficult for the USDollar to ward off such powerful storm damage, and remain as the global reserve currency. Some distant maritime voices might regard my claims as premature and far-fetched, but their preoccupation with gold basis has left their voices mere reverberant richochets in the hinterland. The academic voices seem out of touch with trends, the loud laps on the rocks from waves of inflation hardly recognized for their damage from the remote seacoast. They seem unable to foresee the new found land that is forming in the East, divorced from the USDollar.

IRAN SANCTIONS BACKFIRE INTO ISOLATION
In the last two weekly articles, the backfire was described regarding Iran sanctions, the response from the emerging economies, and the harmful effects of foreign nations grappling with defense from the uncontrollable unbridled unending printing of phony money. The USGovt actions have galvanized a response, led not by Iran but by China. The raft of bilateral accords juiced by currency swap agreements has provided a significant buoyancy in the global trade framework, a highly complex system. It dictates the flow of USDollars in obvious ways, but it also dictates the formation of reserve banking systems in more subtle ways. In 2007, when Brazil and China announced a swap facility to bypass the USDollar in trade settlement, the Jackass took notice like a prairie dog raising his head with erect spine. In 2010, when Russia and China announced a swap facility to bypass the USDollar in trade settlement, the Jackass took notice again. The big trade winds were changing direction. The extreme importance of trade and banking interwoven should not be overlooked, as often done by the clueless cast of US economists. So when in the last month, Japan and China announced a swap facility to bypass the USDollar in trade settlement, the Jackass concluded that the end was near for the waterlogged American financial fortress. These are two primary Asian powerhouses, who with South Korea form the core strength of the entire East.

The USDollar might not be attacked on several front with harsh assaults so much as it will be relegated into irrelevance, as the USDollar will be ignored and left to defend itself in the open fields where wolves and dragons roam wild. Note the parallel to the COMEX, which as a market will also be relegated into irrelevance, as the precious metals will be traded elsewhere, in markets where private accounts are not stolen. Entire Compliance Departments have forbidden usage of the COMEX as of January, due to outlaws overrunning the floors. As the USEconomy is isolated, it will be compelled to bid up whatever foreign currency is required to purchase commodities and finished products. In reaction, the USDollar will fall in value.

In April 2010, a conference took place in the United Arab Emirates among a couple hundred billionaires, sheiks, and other royalty. They decided to embrace the Chinese Protectorate plan for the Persian Gulf, and to accept Russian oversight in the region. Without the Asian offset to the American aggression, no stability is remotely achievable. That event served as a clear signal that the sunset shadows for the USDollar were soon to encounter reality. The process would clearly require a couple years, but the writing was on the wall. Much critical structural work would be required to complete, as trade, banking, currency, and gold management has become far more complex and integrated for the array of professors to comprehend. Not sure such developments are detectable in the maritimes, especially in academic outhouses or local taverns. Furthermore, the actual Dollar Kill Switch had to be devised, with confirmed connection to the OPEC oil trade. My source has informed me that the switch is finally in place and ready. Recent events show the East walking toward the switch. The numerous defiant gestures by China, Iran, Russia, India, and Japan paint the billboard in big bold letters. The workaround of the USDollar is moving fast apace. A confirmation occurred just last week when the Saudis and Chinese announced a joint project for a refinery to be built on the Red Sea. The Saudis in effect were tipping their hat to the Chinese, and again were turning their backs on the Untied States. The signals are abundantly clear. What we are witnessing is the end of the Petro-Dollar in slow steps. The steps are unmistakable to those who study the interwoven nature of global finance. They are easily overlooked by those who operate within the dome of perceptions controlled by the American apparatus, and are locked in mental gibberish ensconced in gold basis. The crowning blow might have been announced this week, as India will pay for Iranian oil in gold bullion. The news invites many questions. Apparently, the Turkish intermediary will not be needed. Gold for oil sounds like a historical point in time.

Backfire extends to Europe, where the absence of Iranian oil supply will cause some extreme problems. The shortages are soon to be acute, word coming from a German source with great contacts in the middle of the mix. He wrote this morning, “The Persians are cutting off oil shipments to Europe, effective immediately, which will kill Greece, Italy, and the other Club Med deadbeats. The West with their sanctions led by the Americans screwed itself royally. The Asians and others are dis-engaging from the Western banks as fast as they can. Expect to see more wild fluctuations in the Gold and Silver prices continue. Until this week, the Gold forces did not know how weak the Anglos already are. They have hardly any firepower left.” Difficult decisions will be made toward the USGovt leadership. It is shaky. It is lacking integrity. The nation is smeared by the splatter of fraud. Its markets are propped by the heavy hand of daily interventions. Its economic data is laughed at as a fantasy. Its elite are given huge grants without global approval. Its central bank makes decisions unilaterally, without conferring with USGovt creditors. The foreign anger is ripe. The motive to seek alternatives is at high pitch. Big changes are in progress, pushed along ironically by the USGovt itself. If their spokesmen insists on the many major global trade participants to take sides, the crew in WashingtonDC might be in for a shock, colored by isolation. The real loser will eventually be the USDollar, whose Petro-Dollar defacto standard is being washed away by central bank liquidity and leadership arrogance. The US financial body resembles a pig adorned with lipstick with each passing day.

NEW NORMAL OF HYPER MONETARY INFLATION
It is hard to describe fully the lost ways of the US Federal Reserve. The phrase New Normal is a transparent attempt by financial icons in the private sector to put a face of legitimacy on a system bound in the USDollar and its heavy handed management, reinforced by a daisy chain of $trillion frauds. Such cannot be done. The term was coined by Mohamed El-Erian, from the PIMCO helm. Bond fraud followed by TARP Fund fraud, followed by Financial Accounting fraud, followed by Mortgage Contract fraud, followed by unauthorized multi-$trillion fraudulent grants by the USFed, followed by the grand sequence Quantitative Easing to wash value out of the USDollar, followed by the unilateral undercut to USGovt creditors, followed by more unilateral decisions to sanction Iran for nuclear weapon development that even Defense Secretary Leon Panetta admits is not a reality, well, does not make for global leadership. It makes for a travesty. Yesterday the USFed released more directives. So the USEconomy is stuck in a weak reverse gear. The accommodation will extend until year 2014. These guys are basic liars. Even Bill Gross of PIMCO takes shots at the central bank policy or ruin. The United States will suffer financial repression (in Gross’s words) if the Federal Reserve implements additional bond monetization as policy. The USFed will hold its benchmark interest rate at near 0% for at least the next three years, as a testament to central bank failure. No departure from the 0% rate can be done. The USGovt debt service requires it, demands it, and will default without it. The ZIRP and QE are worn as badges of failure and dishonor.

Remember the Green Shoots of USEconomic recovery in 2009? The Jackass dismissed it as nonsense. Remember the Exit Strategy later in 2009? The Jackass dismissed it as nonsense. Remember 0% was for just six to nine months, an emergency policy? The Jackass dismissed it as nonsense. Remember how Quantitative Easing was to be temporary in 2010? The Jackass dismissed it as nonsense. Remember how the 0% accommodation was to last until 2013, announced early this year? The Jackass dismissed it as nonsense. It is all the stuff of cows and bulls propelled from hind quarters, piling on the meadow in lumpen form. Tragically, the reality is more simple. The 0% rate (ZIRP) and the heavy hand of monetized bond purchase (QE) are permanent or else the system falls apart and collapses. Such an admission would send the USDollar, the Euro, and all major sovereign bonds to the woodshed for processing in a pit filled with excrement, where they will ultimately end up. The tragic fact from the world of economics, is that 0% and bond purchase kills capital, diminishes the economy, puts business asunder, ruins jobs, and causes federal deficits to grow. They are not stimulus, but rather financial formaldehyde.

GOLD & SILVER READY FINALLY TO RUN
For the last several weeks, a theme was mentioned numerous times, that the 1650 level would be defended. It would be defended not just vigorously, but almost to the death. Enormous naked short positions are in place between 1625 and 1650, put by the gold cartel. They might be in the process of being overrun. My sources inform that in November an important team was assembled, and funded to the hilt, with a mission to trample the gold cartel, to cause a failure in their attempts to deploy naked shorting in price suppression, to force them to cover their huge short positions in retreat, to oblige outsized drainage of the COMEX, to even induce them into draining the GLD exchange traded fund of its inventory from the backdoor. The team was from the East, and not necessarily only from China. They are determined. They are motivated. They are wealthy. They are angry. They want an end to Dollar Hegemony. They see the Untied States as both weak and corrupt in visible manner. The time is now. The Iran grappling hooks seem not to find the fleshy matter of the allied fortress walls. They have been tossed aside, while new alliances form in defiance.

The US & London tagteam seems not to properly assess their adversary. These bankers who parrot the English language (but hail from fascist roots) are not the beneficent lords that they used to be. They have become syndicate captains and leaders. The events of the last few years have demonstrated allegiance to the elite and contempt for the masses. The nationalized financial firms are kept under foot so that the fraud is not exposed. One would shudder to see the toxic paper mixed among bond fraud and outright counterfeit, housed safely under USGovt roof. See Fannie Mae and AIG. The mantra of Too Big to Fail is an epitaph, not a call to remedy. The chief stanchions of toxicity and fraud are Bank of America, which would fail without the money laundering lifeline. So it is rescued in generous offerings.

The USDollar ship of sea is adrift, soon a derelict vessel. The signs are clear. The sovereign debt system that serves as foundation is a rotting corpse. The East is working feverishly to build the alternative system. Look for barter to be its backbone. By the Ides of March, it should be more clear. Any controlled demolition of PIIGS debt and bond writedowns will make for quite the event to watch. The upcoming funding needs of Italy are an order of magnitude greater than the bond market or the Euro Central Bank can manage. The game breaker events are nigh. Just this week, India and Iran announced settlement of oil trade in gold bullion. The workaround seems unique and novel, but with historical precedent. Before the USGovt unilaterally broke the Bretton Woods Accord that established the Dollar Gold Standard, settlement in gold was the norm. The world might be soon coming full circle.

The US-based silver production in October 2011 was 30% below the same month in 2010. It went from 117 metric tons to 81.4 metric tons. In contrast, the American Eagle silver coin production is on a strong upward course since 2007. The current US silver demand is 117% of the current domestic production level, in deficit. The USMint will have to import silver. They can always shut down, or impose a vacation, or ship steel coins clad in silver. If it works for tungsten and gold, it might work for steel and silver. Be sure to know that like with gold, the newly assembled Eastern team is at work in the silver market. Their objective is to cause a failure in the cartel attempts to deploy naked shorting in price suppression, to force them to cover their huge short positions in retreat, to oblige outsized drainage of the COMEX, to even induce them into draining the SLV exchange traded fund of its inventory from the backdoor. The method is simple, coming from illicit (but not illegal) shorting of the shares.

CONTROLLED U.S. PRESIDENTIAL ELECTION
The clues are clear but only to the alert observers. In year 2000, for the first time a gross inconsistency showed itself as an anomaly. The exit polls in Florida and Ohio did not match the election results at the local level. For a full generation, the correlation had been over 90%, as it should be, since people exiting a voting center reveal their votes with consistency. This is the left hand and the right hand coinciding genetically with the same human standing before the clipboard recording the exit poll. The lapdog subservient US press reported the anomaly as people changing their minds, or not admitting to the clipboard their actual voting preference. Numerous statistical studies showed the anomalies in colored form, to expose Florida and Ohio for its voting system fraud. Yet another blatant fraud has infected the American landscape. This is a far cry from legions of dead people rallying to vote for Kennedy in Chicago during the 1960 election, with the forces marshalled by Mayor Daley. History has repeated, as 1000 dead people voted in the South Carolina primary in one city alone. My guess is the dead people voted for Gingrich. The season started in Iowa, where Ron Paul had a nice steady lead for the few weeks leading into the caucus. Then suddenly Santorum came out of nowhere to share the win with Romney. Paul finished a lowly third. The Santorum crowds were small except for his victory speech. Could it be that the outsourced vote count took 10% to 12% of the Paul vote and put it in the Santorum bin? Then in New Hampshire, where vote fraud is much more difficult due to hand counted ballots, a reality check came. Santorum finished way down the line. Move on to South Carolina, where again Ron Paul shared the lead position in the polls. But on the primary day, again Paul finished again a lowly third. We are told Gingrich won, and justified by having his home state so nearby. Yet Gingrich had to cancel a couple campaign stops due to lack of attendance. Ooops! Could it be that the outsourced vote count took 10% to 12% of the Paul vote and put it in the Gingrich bin?

In a recent article, the Jackass remarked that the US presidential election process was another controlled process subject to outsourcing. The patterns of software changing votes by Diebold loyalists have matured into bolder block changes without transparency, but such thoughts might be entirely errant. The blatant maneuvering of voting process fraud will be more clear by the November confrontation. My contacts back in the states include an Afro-American lady with a big base of black business contacts. They do not favor Obama anymore, wondering aloud who he is and what benefits ever came to the black community. Busloads of urban votes from the Acorn tree might not be able to conceal what comes in the fraudulent process. Heck, vote rigging is just one more Third World characteristic, hardly unexpected. My thought in December 2008 was that Obama would fill two important cabinet positions, the rest did not matter in my view. My forecast was for Goldman Sachs to occupy the Treasury Secretary post, and for Gates to continue as Secy Defense. Control of the USDollar and US Banks was too vital to put in the hands of somebody who required on the job training. Control of the military projects was also too vital to put in civilian hands, including the critical wealth generation out of Afghanistan, whose sticky product had clearing house function in the Iraq Export Bank in Baghdad (run by JPMorgan), with lines feeding Wall Street for their cut. Both forecasts turned true. The other cabinet appointments meant little. The Secretary of State has become an important attack dog, to be sure.

Good riddance to Geithner. Timmy the Tool is nothing but a mechanic, a diminutive figure from the Wall Street club, nothing in stature like his predecessor Paulson. If truth be told, the Chinese probably ordered him out of office, after far too many ridiculous meetings on Beijing soil. Timmy’s battle cry of currency manipulation had grown tiresome. The laughter given him by university students two years ago was too much to stomach, when he claimed the US financial structures were strong and sound. Let’s watch to see if the next Treasury Secretary is of Goldman Sachs pedigree. Its firm death grip on American bank rule has been evident since Rubin in 1994. Few seem to realize it is all downhill toward ruin since that fox took control of the American henhouse, jumping the pond from the London Gold desk of Goldman Sachs. The eggs are gone and the hens are sterile. All that is left is cartel droppings.

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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 www.GoldenJackass.com. For personal questions about subscriptions, contact him at JimWillieCB@aol.com

Black Swans From New Normal

by Jim Willie CB
June 22, 2011

home: Golden Jackass website
subscribe: Hat Trick Letter
Jim Willie CB, editor of the “HAT TRICK LETTER”

Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

Mohammed El-Erian is given credit for the phrase ‘The New Normal’ to mean an altered state of perceived instability within the normalcy realm, as in crisis being called normal, like endless crisis. As buddy Jim Mess in Europe says, just like trying to redefine what debt default is, it sounds like high octane prevarication. El-Erian is considered one of the good guys. He managed to slip away from Harvard University without much smear, where he served on the management team of the giant multi-$billion endowment fund. If truth be told, Harvard hatched the Enron monster from its Business School as a project, funded by Citigroup, where JPMorgan created all the off-shore companies to hide their dealings. Building #7 in Lower Manhattan contained the records until it fell from structural sympathy. Harvard successfully made money all the way on the Enron runup, but also successfully shorted Enron all the way down. So El-Erian is hardly squeaky clean. He does give a good interview though, does not deal much in varnished truths, and is an avid NYMets baseball fan. At PIMCO, he worked on the team to direct the biggest bond fund in the world to turn its back on the entire USTreasury Bond complex. In fact, their Total Return Fund, its flagship bond fund, is net short on USTreasurys as a group. That means they own a raft of Credit Default Swaps for USGovt debt default and an assortment of other vehicles like the TNX and TYX that track the 10-year and 30-year bond yield. They recognize an asset bubble when they see one, and even invest in Gold.

The other person relevant to the article title is Nassim Taleb, who coined the term Black Swan. Generally it refers to the extreme oddity that passes through view, shows up on the radar, the extreme warning signal being dire, but is largely ignored by the masses, regarded as the exception or outlier event. THE BLACK SWAN HAS BECOME THE NATIONAL BIRD!! When a few black swans appear, the alert analysts pay heed and express their warnings. When an armada of black swans appear, the message is clear. A systemic failure is in progress, and the important foundations are crumbling. In 2009 and 2010, it was clear that numerous black swans were sighted and identified. In 2011, something highly unusual and extraordinary has occurred. The black swans can be organized into groups. They are numerous within each important economic and financial camp. The Armada of Black Swans, well organized into regiments, has become dominant enough to be considered the New Normal. During the global financial crisis (which has earned a widely used GFC acronym), tragically the state of crisis has become an engrained latticework on the reality mosaic. A quick review at a high level should cause alarm, except for the gradual pathogenesis that dictates the pace of systemic failure in progress. If the list below were presented as a Wall Street Journal forecast in 2006, the author would have been subjected to laughter, derision, and mockery. Yet here and now, the organized groups of black swans are visible everywhere one looks. Worse, they are carrying nuclear slingshots, and defecate highly toxic green blobs into the liquidity streams that we have grown so dependent upon.

QE TO INFINITY
Quantitative Easing will continue for obvious reasons. Many were outlined in the last two articles. The QE2 will continue seamlessly, extending beyond the June 30th deadline. It will change in complexion slightly to become QE3, with some added twists like to include some municipal bonds. Later the entire financial initiatives will morph into a Global QE, since all major central banks will face the same plight. They will all purchase USTreasury Bonds or face extinction, in order to support their own balance sheets. The credibility of the US Federal Reserve has undergone major damage. In the next year, it will be totally destroyed. The factor ignored by many analysts is that the USFed balance sheet has expanded recklessly, and insolvency is its unavoidable condition. If the US housing market does not revive, then the US banks will go deeper into insolvency, carrying perhaps two million homes on their books at some point in the future. The resulting effect on the USFed balance sheet is permanent ruin.

The USTreasury Bond default might possibly come, as warned by a great reliable inside source in 2008, from the USFed resignation as central bank for the USGovt. They are not subject to bank regulations, to reserves ratios, to collateral requirements on loans, or to anything for that matter. They managed the secret handouts of $12 trillion under the cover of TARP Fund dispensation. They rescued foreign banks even though that is not under their charter. They orchestrate the narcotics money laundering effectively, certainly not in their charter either. The USFed does have owners, and they cannot be pleased. The turnaround in the housing market never occurred. Its prospects look worse with each passing month. If the USGovt or the Elite operating as handlers for the captive USGovt decide to convert private property into collectivized syndicate ownership, and use their Fannie Mae device as agent for the process, then perhaps the USFed might serve as a facilitator to the vast Collectivism project. The United States Government might someday own the majority of homes in the nation, maybe even commercial buildings and shopping malls too. The disenfranchised can always go camping, as in the Favored Environmental Managerie Amorphous camps.

ARMADA OF BLACK SWANS
Consider the following black swan specimens, each of which is astounding, each alarming, each serving as one more added element to the ruined situation. The swan organization is admittedly rough, but the regiments are put in sensible order. Any small handful of these signals would qualify as forewarning a profound crisis. Not anymore, since crisis is the new normal. Not anymore, since black swans adorn the entire landscape. A healthy white swan gradually suffers from toxic exposure, quickly to turn black from a putrefaction process. Apologies for overlooking at least a dozen other important other black swans, as time and space did not permit the exhaustive catalogue process. Emphasis was given to the United States ponds and its migratory bird population.

USTREASURY BOND SWANS
USGovt debt ceiling standoff, with actual violations
Over 75% of USTreasurys auctioned bought by the USFed in debt monetization
Turnaround from primary bond dealers to POMO repurchase by the USFed is 3 weeks
Foreign banks form 12 of 21 primary bond dealers
PIMCO owns no USTreasury Bonds, even short
Global boycott of USTBond by creditors, some net sellers
Foreign creditors owns the majority of USGovt debt
A fixture of $1.5 trillion annual USGovt deficits
Greenspan and David Stockman warn of USGovt debt catastrophe
USMint officers admit Fort Knox has been shut down for 30 years, as in zero gold

USFED SWANS
QE permanence, otherwise called QE to Infinity, worked into standard policy
Bank of England urges more bond buying
Cost of money 0% for two full years, implication being destroyed capital
Chairman regards monetary hyper-inflation as being zero cost
Ron Paul pushes for a USFed audit, an end run to pay down USGovt debt
USFed owns more USTBonds than any other creditor
Competing Currency War has Euro weakness mean USDollar as all circle the toilet

USGOVT SWANS
USGovt could shut all operations but still be have a budget deficit
USGovt could confiscate all income but still have a budget deficit
USGovt must cover AIG payouts on Greek Govt debt default from CDSwaps
US Postal Service stops all payments into their pension system
New York Fed refuses to disclose the destination of $6.6 billion stolen from Iraqi Reconstruction Fund
Federal Worker Pension Funds and G-Funds confiscated (called borrowed)
USMint runs out of gold & silver metal to make coins
Endless war accepted as sacred, whose costs are crippling
Council on Foreign Relations enables a foreign nation to control US foreign policy
Breaches to USGovt communications via WikiLeaks

COMEX SWANS
GATA Gold Rush 2011 in London Savoy Hotel on August 4th will feature the COMEX whisteblower Andrew Maguire
Silver futures contracts settled almost exclusively in cash, often with 25% vig bonus
Gold & silver futures contracts often settled with GLD & SLV shares
Umpteen margin increases for gold & silver futures contracts, but reductions in USTBond futures contract margin requirements
Brent versus West Texas crude oil price has a $20 spread
Every time Bernanke assures US financial markets, gold & silver rise in price
Elimination of Over The Counter gold & silver contracts due in mid-July

BANK SWANS
Chronically insolvent USFed and EuroCB, balance sheets ruined
FASB accounting rules permit banks to grade their own test exams
Stress Test for banks had almost no stress, a sham
Dependence by Wall Street banks on naked shorting USTBonds and narco funds, the former called Failures to Deliver, the latter recognized by the United Nations
Shadow housing inventory held by banks over one million homes
Wall Street firms in court on the defensive, JPMorgan foreclosed soldiers
Wall Street firms banned in Europe on bond securitization and issuance
Strategic mortgage defaults by homeowners on the fast rise
Gold holdings by tyrant Arab rulers targeted by New York & London banks
War over Libya grabbed $90 billion in Qaddafi money by New York & London
PIGS sovereign debt default in Europe to have impact ripples that reach US banks
Standard & Poors reminds the players what constitutes a debt default
No liquidation of big US or London or European banks since Lehman Brothers
Much of dimwitted US population believes the propaganda that Gold is a bubble

USECONOMY SWANS
USEconomic indexes fall off the cliff, see Philly Fed, Empire State, ISMs
Rampant systemic insolvency in banks, homes, federal government
US housing resumes its powerful bear market
US land title system in the disintegration process, see MERS on mortgage titles
Unemployment at 20% across the Western world, economic misery index hit 30%
USGovt economic stimulus never contains stimulus
Main non-military innovation in the United States is bond fraud
Shrinking US trucker industry from $4 gasoline and diesel
China begins to export price inflation to the United States
Killing state worker union pensions as part of the state budget shortfalls
Gulf of Mexico off limits for oil drilling
1 in 7 Americans is on Food Stamps, whose debit cards are good JPMorgan business
media blackout on the Fort Calhoun near nuclear plant meltdown in Nebraska

FOOD & WEATHER SWANS
Food price inflation is staggering but denied
Floods across Midwest & Plains states to interrupt with planting & harvest
Australian floods have interfered with coal industry and agriculture
Fukushima and Northwest US infant mortality, with vulnerable milk next
Big volcanoes like in Chile and Iceland disrupt weather and air travel

EUROPEAN SWANS
German bankers at war with Euro Central Bank
Germans abandon the EuroCB, leaving it to Goldman Sachs, see Draghi
Spanish banking system has yet to write down squat on housing credit assets
Portugal, Italy, and Spain sure to follow Greece into a debt default
Belgium has had no government for a full year
Ireland prints more money per capita than the USFed
US & NATO to part ways

CHINESE SWANS
G-8 Meeting is pushed aside, as the Anglos deal with broad insolvency
G-20 Meeting takes center stage in a power play, led by China and the BRICs
China buys discounted PIGS sovereign debt, to redeem later in central bank gold
Chinese FX reserves exceed $3 trillion held in sovereign wealth funds
China owns most world major ports, as part of a strangulation process
China conducts the great Idaho experiment, toward re-industrialization of America

HIDDEN SWANS
Swiss faces hundreds of $million lawsuits, for refusal to deliver Allocated gold
Saudi Arabia cuts new deal for Persian Gulf security protection, see Petro-Dollar
Citigroup has high hidden exposure to Greek Govt debt default
Chinese vengeance over reneged USGovt gold & silver lease, as part of the Most Favored Nation granted status, has motivated its extreme pursuit of precious metals
Containers hold $300 to $500 billion in EuroNotes at Greek port warehouses
Internet strides light years ahead of USGovt regulatory hounds at syndicate offices
Chemtrails, storm steering, lingering droughts, fallout falling, haarps a playing

GOLD & SILVER BREAKOUT IN ALL CURRENCIES
The great spring 2011 precious metals consolidation is coming to an end. In no way is the Quantitative Easing program coming to an end, otherwise known as hyper monetary inflation. Printed money is being abused to cover bank insolvency and to redeem toxic bank assets. The central banks are taking down the QE billboards. They will continue with their debt monetization in order to manage the financial system collapse in an orderly manner. As David Malpass adroitly said on Bloomberg Financial News, the debt monetization known as quantitative easing will quietly become an integral but hidden part of the USFed monetary policy. The central bank must find a way to cover the $200 billion in monthly USTreasury auctions, to roll over the obligated primary bond dealer inventory, and to lap up the mountain of toxic mortgage bonds that prevent an all-out cave-in of the bank balance sheets. The reality is that nothing has been fixed, nor attempted in solution. The grotesque insolvency of banks, households, and government is the marquee message. Without continued monetization, the system would collapse rapidly and disorderly. However, with continued monetization, with a QE chapter by another name or conducted behind the same curtains, the system will collapse in a gradual and orderly manner. The USFed has no more credibility. The announcement on Wednesday that the New York Fed refused to provide details on stolen Iraqi Reconstruction Funds is the latest blatant syndicate action that screams criminality. Witness the early stage of another uniformly applied global Gold bull market breakout.

The Gold price has hit record highs in the British Pound Sterling, where their banks are insolvent, their economy is in reverse, price inflation is ramping up, and their currency is facing grandiose debasement. The SterlingGold price smells monetary ruin. The global breakout is manifested first in the most broken non-American locations, since the spring ambush orchestrated in the COMEX has put huge pressure on foreign currencies. The Competing Currency War still leads the desperate USFed officials to slam foreign currencies and to place financial press attention on their declines.

The EuroGold price smells monetary ruin. The attention has been squarely on the Greek battle to avoid debt default. Every news story about the USEconomy faltering is following immediately by a story of Greek bailout impasse or Athens challenge to ingest suicidal austerity pills or riots on the Athens streets. The differentiation of EuroBonds with greatly varying bond yields has permitted the Euro to trade on speculative merit. The Greek default threat surely pushes down the Euro. But the prospect of a higher Euro Central Bank interest rate leaves speculators to buy the Euro, since proper pricing mechanisms are in place on the sovereign bond yields. The European investors are clearly flocking to Swiss banks on the paper investment side, but their pursuit of Gold is enormous. The Euro Monetary Union is running on fumes. The pain in Spain is hardly on the wane. The Gold price will rise and break out soon enough.

The YenGold price smells monetary ruin. The situation in Japan is terrible, complicated, and tragic. The advent of trade deficits will aggravate the outsized cumulative debt burden on the nation. The paradox is starting to show itself. Their trade deficits will force the national insurance firms and banks, even the Bank of Japan, to sell existing US$-based assets in a political compromise. They do not want to monetize more debts. They do not want to create worse federal budget deficits. They will compromise by selling foreign assets to finance the reconstruction and dislocation costs. The paradox will manifest itself with a rising Yen currency in the face of worsening deficits in every conceivable crevice. As their nation slides into the sea, both literally and with red ink, and the salt on the wounds coming in the form of price inflation, the Gold price will rise and break out soon enough.

Last to break out will be Gold in US$ terms. The Gold price smells monetary ruin on home turf, not to be deceived by any USFed head fakes. Perhaps a sudden awakening to the obvious continuation of QE2 and merge into QE3 could enable a Gold breakout in double quick fashion, ahead of other currencies. Much more stability is seen in the Gold price rise in US$ terms, as the destruction is more stable, the monetary ruin more understood, the federal budget debate more openly futile, and the national insolvency more publicized. The early May high of 1563 will easily be surpassed, all in time. The impetus might be QE163 or a liberated USGovt deficit from a raised debt limit or a failed USTreasury auction or a big US bank failure or a spike in mortgage rates or a plummet in housing prices or a longer parade than the current stream of miserable USEconomic data. The Gold price rose toward $1550 following the vacant FOMC meeting on Wednesday, where the main purpose was to put us to sleep.

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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 www.GoldenJackass.com. For personal questions about subscriptions, contact him at JimWillieCB@aol.com

Fannie Mae Debt Merger Monetization

by Jim Willie CB

December 30, 2009

home: Golden Jackass website
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Jim Willie CB, editor of the “HAT TRICK LETTER”

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

The background noise has been considerable. The USCongress, the august body that often passes legislation without reading it, evaluates a new initiative to reinstitute the Glass Steagall Act. Pass it, don’t read it! Great idea! In the wisdom from post-Depression seven decades ago, the same Congress imposed firewall separation among the commercial banks, the brokerage houses, and the insurance firms in order to prevent systemic financial sector failure. That is precisely what happened in the last two years, without proper recognition or diagnosis, except by this and some analysts. Insolvent systems do not spring back to life with grandiose infusions of phony money and complete covers for fraud. They remain insolvent. The bank woes will suffer massive relapse this year, from fresh commercial mortgage losses, from prime Option ARMortgage foreclosures, and from continuing overload of toxic losses from gargantuan residential property held on their books that they stubbornly refuse to put up for sale. If the US housing market shows any remote signs of price stability, it is due to a few hundred thousand foreclosed homes held by banks, floating on their ruined balance sheets, held back from dispatch to real estate brokers in auction. Keep price stable by erecting a banker dam on properties. It must release, but it might head straight into the Fannie Mae toxic pit.

Another popular bizarre balance sheet item is the bank reserves held for interest yield within the safe confines of the US Federal Reserve. The USFed itself might desperately need such funds to ward off its own deep insolvency in the hundreds of billion$. They did after all, ramp up toward 50% their ratio of USAgency Mortgage Bonds, most of which are worth far less than the stated value on their cratered books. The ugly truth on this matter is that US big banks face additional huge losses, so the reserves held at the USFed should be regarded as Loan Loss Reserves, hardly robust assets. They are still insolvent. These big banks are so dead, that the only partners they attract are other vampires. Non-performing loans have soared to a record 5%, shown below. Now factor in that US banks carry over $7000 billion in commercial loans. The resultant $350 billion of non-performing loans on the books of banks is disclosed, but what is not disclosed is their additional toxic assets off balance sheet and other various credit derivatives like Interest Rate Swaps. These huge supposed bank reserves are not going anywhere, surely not the USEconomy. The big banks are still wrecked.

Quietly the USCongress has been working on new legislation to reform the financial system regulatory structure. It reads like a TARP to the sixth power. The House of Representatives has passed its version, the House Resolution 4173. The US Senate must next tackle the issue. The House version calls for up to $4 trillion in big bank aid if and when another banking system breakdown occurs. Despite all calls to reverse rescue for financial firms too big to fail, this bill does exactly the opposite. My pattern of analysis, successful for five years, has been to hear the words, to expect precisely the opposite in the action taken, and to regard the words as pure deception to calm the opposition and lull it into a moribund state. The people are easily fooled, and rarely comprehend new legislation once forged into law. Hear the words, anticipate the opposite. That tactical approach was honed in my work by observing Greenspan. Without any hint of doubt, the USCongress is a trained lackey for Wall Street and the bankers. The nation has lost control to bankers long ago. The end game is a shattering reality.

BLANK CHECK TO FANNIE & FREDDIE
Turn to the Eye-Popper this past week, an event that should have caused incredibly deep alarm, disgust, dismay, disconcertment, and consternation. Instead, the US financial markets have been so anaesthetized by nationalizations, big bank welfare, major fraud cases, outsized executive bonuses for failed bankers, prattle about recovery by political and bank leaders, and mindless federal programs that cost multiples more than benefits. So the news of an unlimited line of funds, not at all a credit line, comes to the viewing audience. This is a BLACK HOLE of unlimited diameter. One should be immediately suspicious, before reading any details. Fannie Mae & Freddie Mac (F&F) have been the source of at least $2000 billion (yes, $2 trillion) in missing funds from the Papa Bush and Clinton Administrations. Politicians love the Fat Fannie Freddie Duo, since it has served as a slush fund source for two decades. These missing, stolen, counterfeited, absconded funds are documented by the auditors to the USDept Housing & Urban Development. The follow-up stopped in its tracks, as officials in the USDept Treasury halted investigations, informing auditors that the funds are designed to fund black bag projects, including the Working Group for Financial Markets. This is all well documented, and not in dispute any longer. My theory from September 2008 onward has been that Fannie & Freddie were put under conservatorship within the USGovt in order to prevent investigations of fraud, to prevent discovery of Wall Street bond counterfeit, to prevent lawsuits on improper securitization of mortgage income streams (usage of single income with multiple bonds), and to prevent mortgage rates from rising as foreign creditors dumped mortgage bonds. The joke on Wall Street these days has been that Fannie Mae is a great firm to leave, since despite allegations of criminal activity, nothing happens on the legal side, and besides, the exit bonuses are in the multi-million$. Ex-CEO Franklin Raines, friend to all politicians, earned $62 million upon exit amidst controversy and shades of fraud.

So next, the blank check is written for Fannie & Freddie, and one should suspect that the funds will flow freely. Any expectation of major home loan balance reduction for the benefit of the people might be misplaced. We shall see! Maybe it will come! The USDept Treasury announced last Thursday the removal of the $400 billion financial cap on the money line provided to keep the companies afloat. To date, US taxpayers have parted with $110 billion to the fat duo. All estimates submitted by the USGovt about loss magnitude have been laughable. My forecast over a year ago was for at least $2 trillion and possibly $3 trillion in losses ultimately, over 10 times what officials stated. My figure is looking better every passing week. Denials persist that the original $400 billion limit was nowhere approached. So why extend the line of funding to unlimited? The reasons are two-fold in my view. First, grandiose grotesque gargantuan losses are coming, since liquidation of bad home loans has been halted. A huge dam of toxic loans is on the Fannie & Freddie books. As Rich Santelli of CNBC said on Tuesday, “This move permits Fannie Mae to load on all kinds of additional pigslop onto their balance sheet, and to do so without end.” He followed with some denigrating remarks about the wisdom of fiscal leadership. Second, the blank check will permit continued coverup of the mortgage bond fraud, along with rafts of broken credit derivative contracts. The coverup requires much additional papering over. The size of the Interest Rate Swap book on the F&F books must be greater than the global economy, maybe by a multiple.

Next is large scale mortgage portfolio liquidations, mortgage portfolio writedowns, and possibly some actual loan balance reductions finally. Massive losses will be revealed by Fannie & Freddie, but the public and financial sector will applaud the cleansing process. An astonishing volume of backlog home loan constipation might be relieved by means of this official enema in the planning stage. Housing prices are certain to drop if F&F refuse to permit their managed home portfolio to grow without limit. If F&F dump homes on the housing market, the prices will drop another 15% to 20% easily. The alternative is more what my forecast has in store, a truly staggering shocking alarming home rental business by the USGovt as landlord. The Fat F&F Duo can mitigate the negative political reaction by reducing home loans in a substantial way and to a meaningful degree, which would help to stop the foreclosure parade and the reversal of the Ownership Society nightmare.

MOTIVE FOR THE USGOVT HOME OWNERSHIP
Fannie Mae and Freddie Mac provide vital liquidity to the mortgage industry by purchasing home loans from lenders and selling them to investors. Most investors lose heavily, but the bond brokers make out very well indeed. Together, F&F own or guarantee almost 31 million home loans worth about $5.5 trillion, almost half of all mortgages. Without USGovt aid, the firms would have gone bust long ago, leaving millions of people unable to obtain a mortgage. The biggest headwind facing the housing recovery has been the rise in foreclosures as unemployment remains high and the hidden bank inventory of foreclosed properties swells each month. The Obama Admin dare not disclose its long-term plans for the two agencies under conservatorship.

Pardon me during outbursts of laughter at the mere word ‘conservatorship’ since nationalization was under that thin veil all along, as in all along. The formal steps were missing, but no longer. The Toxic F&F Duo will never return to their former power and influence, not to mention integrity, if they have had any for 20 years. The Obama Admin might do best to conceal its plans of federal residential property ownership, since it might read like a Communist Manifesto. In summer 2005, my forecast for Fannie Home Rentals has come true, with nary a peep of objection. Rentals are seen as a great solution. The F&F shareholders should face total ruin with share price at zero. Instead, Fannie Home Rentals should provide a massive revenue stream useful in justifying a stock share price. At the same time, the financial sector will likely applaud all initiatives that result in removing home supply from selling inventories. The federal landlord plan actually will permit some home price stability. Let’s not even touch on executive bonuses and compensation packages for the current managers of these financial sewage treatment plants.

My personal conjecture is that Fannie Mae is burning through money 5 times faster than the topline figures show. The USGovt will next be funding the Great Black Hole in a more visible fashion, if that is a positive development. One might even conclude that the blank check is not price inflationary, since it goes right into the toilet. This is Weimar Defecation. It will affect the USDollar and USTreasury global integrity. Worse, we are at the forefront of a blossoming of the USGovt emerging as a significant national landlord. What we have is the onset of precisely the opposite of the Ownership Society put forth by ex-President Bush II. What irony! Or was it the plan? Just like the Greenspan Project to undermine the US financial grid? One should harbor great suspicion that the USGovt has been collecting mortgages on a grand basis, as has been the USFed. My full expectation is that the USFed will dump their entire mortgage bond assets on the USGovt at the appropriate timely moment, despite any lack of value, and receive nearly full book value. The taxpayers inherit the sewage. Furthermore, gigantic tranches of home loans from the residential sector are likely to come from the commercial banks, heading directly to the Fannie & Freddie balance sheets. This flood will accelerate the disenfranchisement of the proletariat, as home foreclosures continue unabated, and the USGovt entrenches its property ownership. Those who fail to see the trend toward a communist state with military dictatorial powers are at best sleep and at worst blind.

Numerous theories have been floating in the media and in internet journals, where the most responsible journalism exists, by far, bar none. Former HUD auditor Catherine A Fitts shared her opinion that the banks are going to take huge writedowns on the commercial side. To make room on their balance sheets to handle the commercial mess, the residential portfolios are going to be shifted to Fannie & Freddie in a manner that will protect the major banks. The F&F balance sheets are where residential mortgages will go to die, she expects. The market cannot handle the home sale flow from liquidations. And besides, the Federal Housing Admin and Ginnie Mae are too small and too logistically strained to move such volume so quickly. The sewage treatment plant is well equipped. All roads lead to F&F Processing Plant. The USGovt auditors will proclaim profits from Fannie Home Rentals, but hide the enormous losses.

Dan Amoss of the Strategic Short Report shares his opinion on a trend. He said, “The market will eventually adopt the view that Fannie Mae and Freddie Mac have been nationalized. Last week’s elimination of limits on Treasury’s capital infusion into Fannie and Freddie is a defacto nationalization. In other words, there is no longer much chance of a re-privatization, but instead we will see a gradual transformation of these Frankensteins into new branches of government. They will implement the official government agenda for housing, without much regard for prudent lending. This will have huge consequences for the Treasury market. While the federal government will stick to its Enron-style accounting, and not officially consolidate Fannie/Freddie assets and liabilities onto the government balance sheet, the smarter foreign creditors will. These creditors will start viewing Fannie/Freddie liabilities as equal to Treasuries in terms of default risk. But this does not mean that spreads on Fannie/Freddie liabilities will tighten down to Treasuries. Rather, it will substantially increase the long-term default risk of Treasuries, and Treasury buyers will demand higher rates to compensate for this risk.” Amoss anticipates the principal mortgage provider in the future is indirectly going to be the USGovt. Amoss also states that the USTreasury debt is to be mixed with the USAgency Mortgage debt in perception, no longer distinguishable since the former funds the latter. THE RISK OF USTREASURY DEFAULT HAS LEAPED HIGHER!! Since Fannie & Freddie are deeply insolvent, the new USGovt debt ratio also leaped higher.

On the entire motive theme, ponder the following. The USTreasury Bonds are at risk of higher bond yields. They will likely not shoot up rapidly, since the JPMorgan machinery is still in operation, namely the Interest Rate Swaps. Check the Office of Comptroller to the Currency for basic evidence. A reversion to the mean, a reversal of the lopsided positions, a return to normalcy would clearly involve over a $1 trillion loss to the JPMorgan monster. The IRSwap contracts are firmly in place, ramped up, heavily fortified by Printing Pre$$ activity without scrutiny or bounds, never properly audited since done by venerable JPMorgan. While we all decry the rise of credit derivatives, few complain about low interest rates in today’s age of speculation. Artificially low cost of money has fueled two decades of asset bubbles and the ruin of the US industrial base. My view is that the USFed is desperate to end their 0% rate, since they realize it caused the housing & mortgage bubbles in 2003-2007. But the USFed has returned to the scene of the crime with entrenched 0% rates, stuck for over a year. The USFed definitely does NOT want long rates to rise. They are scared witless of rising mortgage rates, since they would kill the housing market altogether, or at least put it under a massive wet blanket for an indefinite time. The IRSwap detonation could happen at either end, on the short rate or long rate, much like a stick of dynamite with a fuse at each end. Risk is acute if the USFed were to hike the FedFunds rate, since they would directly set off IRSwap explosions. The USGovt borrowing costs would triple also.

RISK RISK RISK, MONETIZATION & INTEGRITY
Harken back just a few weeks, when the USDept Treasury and USFed announced on a repeated basis the end of Quantitative Easing. Their words were laughable, intended to deceive, and were whole portions of propaganda. INSTEAD, THEY DID THE EXACT OPPOSITE, AND MADE THE FORMAL ANNOUNCEMENT BETWEEN THE CHRISTMAS AND NEW YEAR HOLDIDAYS. The move to permit unlimited Fannie & Freddie funding is an end-around maneuver to prevent long-term interest rates from rising, or at least to insulate the mortgage finance arena from higher long-term interest rates. IT COMES AT A COST, OF SYSTEMIC RISK, OF PERCEIVED DEFAULT RISK, OF USGOVT DEBT FOUNDATION RISK. The year 2010 might be characterized by a rise in the entire USTreasury bond yield spectrum, from short-term to mid-term to long-term. It is not just a bad thing, a risk filled development. It is a risk of game over! The monetization threat and deep monetary inflation to fund USTreasurys (indirectly Fannie & Freddie debt) are important parts of the vicious cycle displayed in the December 16th article entitled “Full Circle of Govt Debt Default” (CLICK HERE). The full circle (see the chart) starts and ends with the USDollar and the USTreasurys, from debts, monetization, and monetary inflation gone haywire. The toxic chickens come home to roost!!

The credit markets must prepare for one of two undesirable outcomes. Either interest rates rise markedly in order to fund the USGovt federal deficits or else Printing Pre$$ output of phony money must escalate without bounds. Next comes debt explosion or Weimar inflation. The federal deficits must be securitized, in other words, converted into bonds and funded. The process so far has involved an incredible amount of hidden monetization. It is slowly being discovered, but not reported by the sleepy lapdog intrepid press & media. My articles have detailed some of the primary bond dealer monetization in Permanent Open Market actions, and some of the foreign central bank monetization of mortgage bonds to fund USTreasury bids. The year 2010 will feature monetization of USGovt debt and of mortgage losses out in the open to a much greater degree. The effect will be to place the USGovt debt viability at grave risk. It will be interesting to watch the debt ratings agencies (Standard & Poors, Moodys, Fitch) squirm. They are under tremendous pressure not to repeat their lackadaisical behavior in the past. They are downgrading European nation sovereign debt. They are denying openly the justification to downgrade both United Kingdom Govt and United States Govt debt. Their denials are damning in themselves, since why mention the lack of justification for such downgrade unless they should be downgraded by any reasonable measure. The USGovt short-term funding requirements are almost as great as their active monetization, the clear expedient. The USEconomy tolerates huge Ponzi Schemes from the inside, like Madoff, like Fannie & Freddie, like AIG, like Wall Street itself. Rather the USEconomy has become one huge Ponzi. Its expansion on the margin is uncontrollable, just like its appetite for new funds is uncontrollable. The blank check to Fannie & Freddie is testimony to the need to fund the Ponzi Scheme, but it is phony money entering a vast and widening Black Hole.

USDOLLAR BOUNCE
Last autumn 2008, one year ago, the USDollar embarked on what my analysis called a Dollar Death Dance. The bounce from the November depths last month at 74.5 to the hardly rarified air near 79 has been sudden. The rise in rebound has been built upon several factors. The Dubai debt mess has exposed European and London banks for further losses, leading to an exit from both the Euro and British Pound currencies. The US banks are more adept at hiding their losses, extended their toxic loans, pretending they will find eventual value. The Dubai shock has made vividly clear the heightened risk of a European Union fracture, a threat to the Euro currency, and a need for Germany to cut off the Southern Europe impaired limbs, debt and all. One must wonder with sinister thoughts if the Dubai debt was permitted to default, or orchestrated to default, precisely at the most promising season for gold, into the year end strength. It short-circuited the strong gold season. But one thing is for sure about seasonality issues. They have been widely destroyed in recent years in numerous asset classes. The late winter and spring for gold should be strong again, as the USDollar will expose its toxic fundamentals. The only thing making the ugly pig with lipstick look good is the unfavorable comparison to broken European national debt structures, which do not have the benefit of the Printing Pre$$ Privilege or the vast criminal sydicates supported by it.

The Competing Currency Wars have heated up again from comparisons rather than open hostility to protect exports. Money departs the Euro harbors and enters the toxic USDollar pits, where the stench of Printing Pre$$ overdrive operation fills the air, where the shame of unlimited Fannie & Freddie black hole directed funds tarnishes the USDollar image, and where the unprosecuted Wall Street bond fraud festers like an open sore. This sudden US$ rebound has left the G-20 Meeting declarations a recent bad memory. The emerging nations had shown steady disrespect for the so-called developed nations, the deep debtors who long ago lost their industrial base. They transformed industry to debt, a miracle of modern central banking!! There is nothing like some debt liquidation to show how the USDollar still has remnants of a safe haven. Its security has only remnants, torn shreds adorned by stars and stripes once given respect. Let’s not even touch the endless wars, the clandestine military business in narcotics, the private contractor fraud in the war effort, the missing $50 billion in Iraqi Reconstruction Funds that nobody is looking for. These activities smear and harm the US image in powerful ways, often without US awareness from inside the US Dome of Perception.

Just what is the force to sustain the USDollar rebound? More European member nation debt woes. More credit derivative liquidation and payouts. The US$ rebound runs on noxious fumes. This is the Dollar Death Dance, part II. The long-term trend will remain down. The immediate activity could feature more of the same. The short covering of the Dollar Carry Trade has been clear. It will have to muster enough funds, courage, and wisdom to put that carry trade into second gear. It is inevitable. It is justified. It will be profitable. It certainly will be dangerous, since the USDollar is still the global reserve currency. That status is threatened though. Clearly, the USDollar rebound, a move of a mere 6% in the last few weeks, is the only factor pushing down the gold price. One can see that the gold price decline has run its course. The overbought condition has worked itself off. The risk of a move to 1060-1080 is apparent. However, the moving averages are rising. The stochastix are ready to cross over in a positive way. Last but not least, the fundamentals for the USGovt finances and the USDollar in particular could not be more acutely horrible, miserable, outrageously negative, and represent a palpable threat of a sovereign debt default down the road. At least we will see a monetary crisis centered upon the USDollar. That would pressure the eventual default.

The USDollar rebound and the reflexive gold correction have been rapid and thus are unstable. They are both nurtured by European and London weakness, rather than US strength. The long-term trend is solid and up for gold. With all the hubbub and gnashing of teeth, the gold price is still above its October highest level. My favorite question of US$ Bulls is “What has been fixed?” The answer is nothing. Much money has been spent, and huge deficits have been racked up, but to what end? No remedy, no reform, no structural imbalances corrected, no deficit reduction, no military expense curtailment, no end to banker welfare, no successful modification to home loans, no end to home foreclosures, no end to job cuts, no end to supply chain disruption, no end to the USGovt and USFed acting as primary lenders, not just lenders of last resort. The USDollar is running on fumes, and the end to its bounce is near. The gold bull will run again. Three to four steps up, one step back.

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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 www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com

Full Circle of Government Debt Default

by Jim Willie CB
December 16, 2009

home: Golden Jackass website
subscribe: Hat Trick Letter
Jim Willie CB, editor of the “HAT TRICK LETTER”

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

The continuation of the bank dominoes took 14 months, but it occurred. The initial destructive impact craters were carved in the United States and England. To be sure, major damage was done to assets in Spain and Greece and other smaller nations in the last year, but their banks had remained insulated. The discredit and death of the central bank franchise system showed first clear evidence in September 2008 on Wall Street. The unique mysterious aspect of banking systems is how they cannot be rebuilt once they turn insolvent. They rot in place, a process accelerated by rotten ethical values, euphemistically called moral hazard. To be sure, much so-called money flows through the dead rotten parts, but nothing becomes resuscitated except balance sheets. And besides, those balance sheets only look better due to accounting rules changes that deviate from mark to market (reality). The distortions magnify and turn cancerous. See the outsized mortgage bonds with no value at all. See the foreclosed homes withheld from the market for sale in bloated bank inventory. See the big bank balance sheets with large entries of idle money sitting in the US Federal Reserve. The dirtiest American secret in the banking world is not monetization of bonds. It is that US banks are deeply insolvent and would have suffered a worse fate in the last year if not for extortion from TARP funds as well as rescue funds coming from syndicate contraband accounts. See the Raw Story article and reference to the United Nations Office on Drugs & Crime (CLICK HERE).

INITIAL BANG
Focus on the bank impact craters, not the assets within those bank portfolios tied to bonds and properties. The US housing market turned down, and the mortgage finance bubble burst. The primary victims were Lehman Brothers, Fannie Mae, and AIG, which all died. Fannie and AIG remain in the Intensive Care located south of the Black Hole down yonder under the USGovt tent. To say they have not died is pure denial at best and stupidity at worst, since they continue to generate grandiose losses, as most rotting dead bodies do. The process is called advanced cadaver decomposition, accelerated by the wondrous financial engineering acid reflux. The tales of destruction in dead banks from the initial bang extended to the AngloSphere as Northern Rock, Royal Bank of Scotland, and HBOS effectively died. It remains to be seen if the venerable Lloyds is an empty shell prone and a cave-in also. Nevermind the details of the many death spirals. Focus on the dominoes and their sequential steps in magnificent wreckage. Marvel at the total lack of recognition by the official spokesmen for financial reality at the USDept Treasury, Wall Street analysts, London analysts, and European analysts. They never comment on sovereign debt insurance or default. Both are covered in the December Hat Trick Letter.

One must inquire why the blindness. The main reasons are many, but two stick out from the aerial view. The bank leaders and their supporting cast are attempting to accomplish the impossible. They strive to revive a dead entity, drained of structural integrity, lacking in motivation to function in capital formation, devoid of vibrant liquidity flow, and directly attached to the syndicate strongholds where the drain continues. They live and operate within their Dome of Fiat Perception, whose major layer is the Dome of American Perception. Unfortunately, those working within the American fence posts suffer the greatest blindness, the tragic effect of engrained arrogance after years of incredibly broad bully tactics and criminal abuse. For those sleepy brain-dead in denial of criminal abuse, a challenge. Just identify where the prosecutions are for multi-trillion dollar bond fraud in global export of toxic mortgage bonds and their derivative brethren, perpetrated by protected Wall Street firms! If one cannot identify, please sit down and be quiet, since clearly integrity was perhaps checked in at the corporate gate in exchange for a paycheck. Wall Street prefers to call the fraud mere errors of judgment. And a murder spree at a shopping mall is an firearms accident! A closer examination can detect continuity in the Treasury Secy post, and in the Securities & Exchange Commission, both still showing Wall Street pedigree. They strive to keep the lid on Wall Street legal matters, and do a great job.

DELAYED SECONG BANG
Finally, the harsh reality from the weight of gravity and the passage of time resulted in a second bang. One can always question the motivation of the Dubai World default, and the fact that it occurred when the USDollar was badly oversold. One can question the wisdom to attempt to force Abu Dhabi to cover the bad debts or assumptions that it would cover the bad debts. One can point to a hidden motive to ruin Iranian assets and trade routes, since they own 30% of Dubai properties and benefit from restricted product shipment through Dubai corporations. Regardless, the aerial view is most important. The biggest victims are the London and European banks heavily exposed to Dubai debt. The Powerz prefer to call it a rally on the USDollar from seeking the safety and security. But to the rotten ramparts of the US financial core? HARDLY!! Instead what happened was that the British Pound and Euro currency fell during an expected retreat after a realization of upcoming declared losses. The US has fortified a false front from accounting marked to fantasy that produced a stock rally and recent culmination in the most fraudulent Non-Farm Payroll report in modern history.

The November Jobs Report was dismantled in several pages of the Hat Trick Letter Macro Economic Report just posted, a grand convenient fiction. The easy dismissal has escaped the mainstream lapdog US press. It included Birth-Death Model fictional adjustments (gigantic for past revisions), constant unstable seasonal adjustments, to begin with. Dismissal included weak TrimTabs data, flagging USGovt tax revenue data, a surprise downturn in ISM service sector data, and still prevalent Challenger Gray & Christmas large site job cuts to make a mockery of the ballyhooed report. So the USDollar rally occurred, give them credit, since they needed it to avoid major losses upon the US$ DX futures option expiration. The Powerz got their onions squeezed in a vise and short hairs clipped on the gold futures options expiration three weeks ago, but they avoided a second massacre on the DX expiration last week. Now the US$ has stalled at the downtrend line.

The second bang was not so important in providing a lift in the Dead Man Walking Dollar, as it was in signaling a resumption in the dominoes. The central bank system has its next shock in store. The downgrades to government debt for Greece, Spain, and Portugal given last week by ratings agencies signal upcoming debt related earthquakes. In the United States, the game is known innocuously as Extend & Pretend. The Europeans are gifted in the same chicanery. The entire banking system in Spain has kept housing inventory, whether from foreclosures or ruined projects, at still elevated prices, stubbornly refusing to mark them down the necessary 30% or 50%. As a result, Spain has a wide gap between bid and offer, and a huge inventory sitting idle, a stalemate that leads to sinkholes.

THE NEXT BIG BANG
The second bang from Dubai is the most important destabilizing debt event in 14 months, but minimized in the United States. The US press hardly even mentions the downgrades across European on sovereign debt. The US press actually boasts that the financial markets are handling the Dubai situation very well, and might be past it already. What incredible denial, but much expected. The second bang signals the beginning of sovereign debt defaults, several of them, and the reshaping of Europe, both with the European Union and the Euro currency. The movement toward a Parliamentary European Union might soon be dead on arrival. The split of the Euro currency is soon to become a reality, a forecast made months before the Persian Gulf debt default forecast. The prudent action is to put the Lisbon Treaty on hold while member nations default on sovereign debt.

Spain’s Govt default will soon default. The reality of proper accounting for property writedowns and the corresponding bank debt losses will have a calamitous effect. Over 20% unemployment and the powerful recession in progress will ensure a Spanish Govt debt default. But the immediate fireworks are seen in Greece, where the Premier Papandreou has shown defiance. He will not permit the nation to undergo the mindless reckless coerced IMF restrictions and guidelines, with the workers of Greece suffering. The past record of such IMF strictures results in permanent crippling of nations, with too many precedents to fill a single page. Something very unusual comes to Greece in response to official defiance, something unprecedented yet powerful and unpleasant. Riots will return to Athens, with much greater force and intensity, and spread across Europe. But the spillover of emotions will lead to much bigger events. The momentum of Spanish and Greek defaults will kill the European Monetary Union, and thus the EU itself. The re-emergence of the Deutsche Mark is assured, except it will be called a variant of the Euro. The codenames to date are the Core Euro or the Nordic Euro. It will become the official currency of Germany and certain stronger Central Europe nations with a trade surplus. If France manages to be included in the Core, it will be a miracle and pure gift. The Germans will need squires to carry their bags, an expedient perhaps. Effects from the currency on trade export will leave France reeling but Germany struggling.

AFTERSHOCK BANGS
Once the cracks in Europe are broken wide open, the minor European nations will fall like flies trapped in a hot summer window. The Baltic States are weak and will no longer be carried. But the bigger and more visible tragedies will be seen in Eastern Europe. A curious malformation was constructed in recent years. The Eastern European nations attempted a reconstruction, with new industrial development. However, they went too far on the mortgage side, emulating Europe, England, and the United States. In doing so, they mixed in a deadly potion on the mortgage finance formula. The nations of Hungary, Poland, and Czech Republic used cheap Swiss funds in the mortgage funding, and will probably all default on sovereign debt. The base Swiss interest rate of 1.5% pumped money into Eastern European homes. Their local currencies each fell around 40% to 60%, making for a total disaster for Swiss bankers. Translated mortgage losses are in the 70% to 80% range. In fact Swiss bankers are struggling to achieve their equilibrium after deep damage in three aspects: toxic US bonds, devastating Eastern European mortgages, and threats to private bank accounts. The aftershock bangs to the Baltic States and Eastern Europe will set up a powerful additional event that will be seen as a climax.

CLIMAX TO EUROPEAN BANGS
At least one major European nation will suffer the ignominy of a sovereign default. By this time, Spain and Greece will have been wrecked, along with Portugal, possibly Italy also, and maybe even Ireland. The prime victims to close the process of sovereign debt default will include France and the United Kingdom. Considered untouchable, these nations will succumb to the wretched financial foundations that befall them. France unfortunately has too many similarities to Spain, which debtors cannot overlook any longer. The United Kingdom unfortunately has too many similarities to the United States, which debtors cannot overlook since the UK cannot print money like the Americans to buy more time, or draw upon clandestine sources of funds. The UK will run out of time. With the French and British defaults, the game goes ballistic and enters the TWILIGHT ZONE.

RUN ON THE USDOLLAR
Some might look at a dangerous run on the USDollar and a severe decline being the primary requirement for a rise in the gold price. It is true that for a long time the most heavily correlated factor for gold rising has been the US$ falling. A negative correlation has been vividly clear. More importantly though, a transition has begun in the last few months. The most important factor for gold has become, and will continue to be the falling value of the major currencies, all the major currencies, not only the USDollar. One must exclude the Japanese Yen in such an argument, since its 0% interest rate has rendered the Bank of Japan a neutered central bank. Watch the BOJ now, as it actually defends against profound damage from a rising Yen currency in the unprecedented process of an unwind to the grandest carry trade ever connected to financial engineering machinery. In fact, a handoff from the Yen Carry Trade to the Dollar Carry Trade is exactly what the USFed and USDept Treasury wish to interrupt. Never in history has a carry trade been installed to drain the vitality of the global reserve currency, to force and retain a near 0% interest rate, and to enable a continued falling value in the US$.

The most important factor for Gold, worth repeating, has become, and will continue to be the falling value of the major currencies. The entire gaggle of currencies is in deep trouble from government sponsored debasement. The entire gaggle of central banks is in deep trouble from discredit to their franchise system. Gold will rise in a powerful manner from the debasement of the major currencies, in particular the USDollar, the Euro, and the British Pound. The process of currency destruction will involve rotations. The events of the last month have shown that severe losses by London and European banks, from Dubai debt default, bring about an indirect lift in the USDollar. It occurred from a selloff of the British Pound and Euro currency, whose banks are lined up for new profound losses. The Powerz portrayed the Dubai events as a flight to security in the USDollar. If so, why is the long-term USTreasury Bond yield rising? The concept of retreating to a currency, the US$, with trillion$ federal deficits, an insolvent banking system, and an economy struggling under the weight of 25% homeowners insolvent on their home loans, IS TOTALLY LUDICROUS. Soon the counter concept of retreating from a currency into Gold will be better understood.

The next confusing events will probably bring about a decline in the Euro currency from imminent and actual default in at least two European Union member nation government debt securities. That is at least two European national sovereign debt defaults. The Euro should decline from such severe events, amidst uncertainty, at least initially. Later, when the European Monetary Union fractures with a shattering deafening blow, the new central core of the Euro currency will be revealed. When that historic event occurs, essentially the revival of the Deutsche Mark, the USDollar will resume its decline in a powerful manner. Gold will then rise in response powerfully in US$ terms. During the monetary earthquake with European government defaults, the gold price will rise powerfully in Euro terms. After the introduction of the new Core Euro currency, the gold price in Core Euro terms will stabilize, with a handoff given to the gold rally in US$ terms. Such will be the nature of the rotation phenomenon. Mainstream analysts will make errors all along the way to promote the false notion of flight to US$ safety and security, when none exists. A flight out of paper fiat currency is the key, and flight into Gold is the major mega-trend that has begun to occur and will continue to occur. Those naysayers might want to examine the gold accumulation by the major savers of the world, who happen to be the major creditors to the USGovt and thereby the major supporters to the USDollar, namely China. They plan to increase their gold holdings six-fold in the next several years. Central banks in aggregate have turned to accumulation in the last several months.

THE MAIN EVENT IS USTREASURY DEFAULT
No forecast invites more private anger, insults, dismissive comments, and generally negative email than my forecast made in autumn 2008 of a USTreasury Default. The climax of the string of global sovereign defaults will be the government debt default for the USGovt, in the USTreasurys. Events in the last year support the forecast. Federal deficits are rising dangerously, over a trillion$ annually. The Greenspan-Guidotti criterion for debt default has long ago been triggered, even assuming the USGovt OWNS ANY GOLD. It does not. Rather it owns clear ledger items called ‘Deep Storage Gold’ that is not deep in underground vaults, but deep in mountain ore deposits, not yet mined, kept very secretive. The short-term USGovt debt is over $2 trillion, closer to $3.5 trillion if immediate debt finance is counted, as in the next 12 months. The Stimulus Bill was a travesty, more wasted funds and opportunities. The TARP Fund was an $800 billion slush fund, clouded still in secrecy. The foreign wars are a sacred big money loser, with more deficits associated. The competent economists like former USFed Chairman Volcker warn that structural reform is non-existent in the USEconomy and financial sector. Volcker further warns that derivatives have done great harm, and contain no value, only a shift of financial rents. The Global Paradigm Shift is in full force since the spring months, led by the twin concepts of diversification out of US$-based reserves, and of the movement to establish an IMF basket currency as an alternative for international commerce and transaction settlement. The end of the US$ for crude oil sales has been written on the walls. The end to the US$ credit card with unlimited balance is soon to end.

Those people who act as naysayers, even to offer private criticism for the USTreasury Default forecast, seem never to grasp the above arguments, all of which have absolutely zero precedent. They did not foresee many important events, each of which were important Hat Trick Letter forecasts come true. 1) They did not foresee the insolvency of the US banking system. 2) They did not foresee the broader breakdown and wreckage in the mortgage finance industry beyond subprime. 3) They did not foresee the severe whacking to the British Pound. 4) They did not foresee the nationalization and insolvency of fraud ridden Fannie Mae. 5) They did not foresee the downturn and endless US housing bear market decline. 6) They did not foresee the heralded end of the Petro-Dollar, as in exclusive US$ usage for crude oil sales. 7) They did not foresee the Persian Gulf debt shock wave. In fact, they do not foresee anything except the sound of their own voices. THEY WILL NOT RECOGNIZE THE USTREASURY DEFAULT, MOST LIKELY TO COME AS A FORCED DEBT WRITEDOWN WITH DEEP CREDITOR LOSSES. We are in historically unprecedented times. Look for a new USDollar to be used inside the United States fence posts, since the USGovt does not control contracts conducted globally. The devaluation of the US$ will come full circle, and lead to an implosion internally.

TRIGGER EVENT, INSOLVENT USFED !!
The US Federal Reserve is under fire. Many in the USCongress wish to force audits of its balance sheet. Many in the USCongress wish to determine what it does with hundreds of billion$ in USGovt funds. Many citizens in the United States wish to understand its everyday operations and where its loyalty lies, let alone how it manages to fail at both its primary functions. Its defenders cannot come to grips with how the US$ has fallen over 98% in value since its inception. Its defenders cannot come to grips with how the USEconomy is stifled by near 20% unemployment (when those without work are counted). Its defenders cannot justify, or even permit true statistics, regarding the powerful monetization of US$-based official bonds. We are witnessing the Weimar-ization of the USFed and the USTreasury Bond and the USDollar. Once again, American economists ignore history, choose to rewrite it, and ignore the path leading to increasingly damaging cycles. This cycle is systemic, not a business cycle, not a credit cycle, and it contains a cliff much bigger and deeper. The train wreck in progress will culminate in a USTreasury Default.

Put aside the growing debt of the USGovt for a moment. Put aside the growing balance sheet of the USFed for a moment. Put aside the dogmatic belief that the USFed can print money to alleviate financial problems for a moment. Put aside the shifting sands notion that the USDollar will remain the safe haven for a moment. Instead, consider two important notions, monetization and balance sheet. The USFed has been monetizing USAgency Mortgage Bonds in the US credit market, in fact a colossal amount held by foreign central banks. The USFed has been monetizing USTreasury Bonds both by the domestic primary bond dealers, taking their unsold inventory merely one week after auctions. The cash value from foreign mortgage bonds serves as a monetization tool for foreign USTreasury bidding at the same auctions.

Lastly, just look at the USFed balance sheet and its ratio makeup. The USFed is bond buyer of last resort. In expanding its balance sheet, newly acquired assets have terrible quality. The USFed might actually be insolvent here & now due to rising mortgage bond purchases. Half their balance sheet is mortgage bonds. If they are worth just 6% less in true value, the USFed is broke. My conclusion is that the USFed is $100’s of billions in the red. Nobody seems to care, believing they can just print money and eliminate their insolvency. It aint that simple.

The US Federal Reserve is killing itself by massive purchases of badly impaired assets, often the toxic assets almost no banks or investors want. Sure, it is also debasing the USDollar in doing so. The most dangerous assets under heavy accumulation are the mortgage backed securities issued by Fannie Mae and Freddie Mac. Demand for them is nonexistent. In the process the USFed has ruined its balance sheet. The ruin has occurred in just the last 12 months. Instead of acting in its historical role as the ‘lender of last resort’, the USFed has on its own expanded its mandate to become the ‘buyer of last resort.’ The end result is powerful, as they are a Substandard Junk Bond Warehouse. The destruction of the USFed balance sheet is apparent from the following chart with data, prepared by BusinessInsider.com. See the light blue Fed Agency Debt in the upper right, the cancer that grew upon their balance sheet. Their true value is an order of magnitude lower than book value maintained by the august body. This central bank is walking dead.

Two major billboards must be written and read. 1) The USFed is insolvent. 2) The USFed is dangerously over-leveraged. According to its latest report, the US Federal Reserve owns over $1 trillion of mortgage backed securities, equal to 45.6% of the entire portfolio. One year ago mortgage backed securities were under 1% of its total assets. Actually the number was 0.6%, to make a 76-fold increase in toxic mortgage bond assets on the USFed balance sheet. The credit market actually believes the USFed stepped in and helped the system. But in doing so, they killed themselves. Just like other major banks such as the Wall Street firms, the USFed is very highly leveraged. The USFed carries $2157 billion of debt on $52.8 billion of capital, producing a leverage ratio of 40.8 to 1 ratio. Think over-leveraged, insolvent, and dead, but not yet declared dead. They might actually resign their commission contract with the USCongress, and thereby force a USTreasury Default!!

Here is where the insolvency risk screams out in obvious manner. Its listed mortgage bonds are 19 times greater than its capital, equal to 5.3% in inverse. So therefore, if the true value of these toxic assets is actually 6% lower than their recorded book value, the US Federal Reserve capital is depleted, effectively rendering it insolvent. It stands to reason that if Fannie Mae is insolvent, if Freddie Mac is insolvent, and if monetization supports their bonds, while the market shuns them, then the true value of the mortgage backed securities with their brand is less than 94.7% of their book value. Therefore one might safely conclude that on a strict accounting basis, the USFed is effectively insolvent.My simple guess is that the USAgency Mortgage Bonds on the official USFed balance sheet are worth perhap 30% to 50% less than cited on their books. That would leave the USFed insolvent by 15% to 25%.

One might wonder of motive for the USFed to offer big banks an interest yield on assets held on account. The reason might be to shore up its broken toxic balance sheet and fight off their own insolvency. The USFed remains liquid because banks continue to provide it with funding. Few if any questions come regarding the US Federal Reserve liabilities. The USFed is insolvent, just like the USGovt, just like the Social Security Trust Fund, just like the FDIC, just like US banks, just like US homeowners, and just like US leadership!!!

THE LEGITIMATE & TRUE SAFE HAVEN
That valid haven has been gold & silver for thousands of years. It will continue to be the safe haven. The major global currencies are being horribly debased as major governments fight off insolvent banking systems. In doing so, they have set up conditions for a string of sovereign debt default incidents. They will occur like a string of dominoes arranged in a global circle. The process was begun in the US and UK with broken banking systems and extraordinary measures to deal with it, like bank aid packages, stimulus packages, and liquidity facilities out the ying yang. The naive crowd thought the process ended when the US, UK, and Europe responded with official government rescues and aid, complete with certain nationalizations of key banks and financial institutions. Dubai defaults demonstrate the process continues for credit market crises. No climax has come, but the future holds plenty.

During the rotational lifts and fades of the major currencies, the one constant has been and will continue to be gold & silver. Notice today Tuesday December 15th, the Euro currency is down 130 basis points to the 145.3 area, but gold is flat on the day and silver is flat on the day, almost no change in each. Other warning signs remain, as the crude oil is back over the $70 mark and the 10-year USTNote yield has reached 3.6% in a recent rise. The so-called USDollar rebound has occurred with a rising long-term USTreasury yield, a contradiction for any claim of a flight to safe haven. The only lift for any US$ counter-trend rally come from walking atop the broken structures of other major currencies. The grand rotation during defaults will lift the Gold & Silver prices tremendously. Watch the back door vulnerability. As central banks and sovereign debt securities undergo a powerful unprecedented siege, their defense of the Gold-Dollar balance beam will vanish. British and European weakness does not translate to USDollar strength, not with destroyed finances for the USGovt and an insolvent balance sheet for the USFed. It instead translates to strength in the Gold & Silver bastions for monetary integrity.

THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.
From subscribers and readers:
At least 30 recently on correct forecasts regarding the bailout parade, numerous nationalization deals such as for Fannie Mae and the grand Mortgage Rescue.

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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 www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com