Where We Are, Where We’re Heading (2010)

Market Ticker – Karl Denninger
View original article
December 31, 2009 05:35 AM

Let’s score the 2009 edition first:
The economy will NOT recover in 2009:  I’ll take this one, although some would argue I only deserve half (I said 8% unemployment U3, we actually got 10%.) 
Deflation, not inflation, will become evident well beyond housing.  Miss.  Valid if you look at energy, but the “well beyond” includes a meaningful subset of the various things people buy.  Nope.
Housing prices will continue to decline: Direct hit.
The Fed’s attempt to “pump liquidity” will be shown to be an abject failure: 1/2 a point.  Certainly if you look at stock prices, it’s a miss.  If you look at whether credit creation was stabilized and increased, its a horrifying score.  We did get the instability in the dollar, but no bond market crash.  I didn’t specify how, so I can’t take credit for that which I didn’t predict.
GDP will post a 12-month negative number, Depression print. Clean miss.
The stock market has not bottomed.  1/2 credit.  It had not bottomed but my SPX 500 @ 500 call was not achieved.  The 50% swing, however, got damn close.  Lots of money to be made if you’re quick and good, but an absolute minefield if you’re a long-term investor – spot on.
Precious metals will not be a safe haven: Clean miss.  Gold and silver have both performed well.
The Dollar will not collapse.  Correct.  It hasn’t.  It ended the year of 2008 at 82, it now trades at 78, down 5% or so. 
The pound or Euro – and perhaps both – will be where the FX dislocation initiates if it occurs.  Early, which means wrong.  Clean miss although the last month sure looks bad for the Euro.
The US Consumer goes from negative savings to positive:  Direct hit.
Commercial Real Estate will effectively collapse: Direct hit although the effect has been well-hidden.  Several Tickers have been written on this, including major banks walking off 50% underwater properties.  I can’t take full credit as the REIT explosion I expected didn’t happen, so I only get half a point.
Along with the above, expect 10% of retail stores to close.  I don’t have accurate numbers on this but it sure looks that way.
Several states will get in serious financial trouble and the default of one or more may occur.  Point.  While the default didn’t happen that wasn’t a condition of the test, and the list of states in trouble is long and getting longer.
Mortgages are not done:  No kidding.  Default/delinquency/foreclosure rates continue to skyrocket.  Point.
If you want to refinance you may get one brief shot with long rates around 4%.  You got two, but I don’t lose for multiple points of impact.  Both of those were good opportunities IF your property isn’t severely underwater (in which case there is no such thing as a good deal.)
Those who have said that the corporate bond market is being “unreasonable” will start to look like the jackasses that they are.  Maybe.  Actual defaults did in fact skyrocket but new issues are coming to market and subscribing – even for crap-grade paper.  I can’t take a point on this one as my expectation when I wrote it was that issue would go in the toilet.  Miss.
The calls for “more lending” will go exactly nowhere.  Bingo.
GM and Chrysler will go bankrupt.  Bingo.
Protectionism and currency manipulation: Miss, at least in the way I described it.
Commodities will appear to be headed for a new bull market (falsely): Hit.  Soy, Wheat, etc – all looked to be going parabolic in June.  Now, not so much.  “Beans in the teens” eh?  NOT!
Sovereign debt defaults will number at least three:  Clean miss.  Greece and a couple of others are on track but didn’t happen this year.  No points for “on track.”
China will have its first large-scale rumbling of civil unrest:  Clean miss.  I have to admire how they prevented it – more capacity building into an overcapacity world.  That won’t end well but for now they’ve stove it off.
Foreign uptake of Treasuries will be choked off – by necessity: Hit.  Almost missed that one, but China has stopped buying as the trade imbalance disappeared.  They have, as expected, turned resources inward.
The City will get it worse than we are:  Since the test was relative I get credit for it; they’re doing things like imposing 90% taxes on banker bonuses.
Things will get “revolting” in nations: Nope.  Riots and such in Greece don’t count – “revolting” meant what it said.
I count 14 “hits” (including half-points) out of 25, for a score of 56%.  That’s not so good, especially compared to last year.

Ok, so where did I go wrong?

That’s pretty simple: I dramatically underestimated the willingness and ability of “the criminal class” (that would be those in DC and on Wall Street) to lie, cheat, steal, paper over insolvency and get away with it – at least for a while.

Will this ultimately lead to an actual recovery?  No.  It mathematically can’t.  A short-term bounce in various metrics, yes, just like an insolvent person can spend on his credit cards until they get cut off and look like they’re improving.

The S&P 500 currently stands at roughly 1120.  Most “market callers” are expecting another 20% increase next year, which would put it at 1350, just 15% off the all-time high of 1576 and fairly close to where it finished 2007 – that is, as if 2008 and 2009 never happened.  Lunacy, says I, unless leverage can return to where it was in 2007.

Can it?


Let’s remember what happened in 2005 and 2006 that made those things possible.  Investment and commercial banks were stuffing various sorts of securitized paper with garbage loans they knew could not be paid, then selling them off to “investors” (who would later be shown to be bagholders.)  This allowed for an unprecedented expansion in consumer and financial system credit – and that, in turn, allowed the buying of “stuff”, whether it was companies playing LBO or you buying a house to flip with an OptionARM.

That was the legacy of the “expansion” in 2005 through 2007, and it is not coming back.

In short this time it really is different, and the proof is right here:

This is the first time since records began at The Fed that credit outstanding has decreased.  I have taken the liberty of breaking down the periods into 10 year chunks, which makes it easier to see:

Pay attention to this last graph, as it is the important one in terms of the 2003-2007 “recovery” – note that we went from ~32 trillion in outstanding debt to $53 trillion at the peak, an expansion of 66%. 

That’s how we “recovered” from the tech bust, and to believe that we will “recover” from this one you must either find a way to expand debt by a similar amount – that is, to nearly $90 trillion all-in – or figure out how you will get $35 trillion in spending in the US economy above and beyond what we’re doing now over the next three to four years.  In short, we cheated, and to believe we can do it again you must explain how we can cheat once more – and to that degree.

And by the way, for those keeping score – since our monetary system is debt-based declining credit outstanding is the definition of deflation in the monetary sense!

This is exactly what Bernanke said he could avoid.  He was wrong and there is no further room for argument on that point.

Further, I do not believe for a second that the Bernanke’s “pulling back” from the monetary playing field has a thing to do with the “stability” of the markets, especially housing.  Specifically, there is no evidence to be found that housing has stabilized or is improving – quite to the contrary.  Treasury’s “modification” programs have been a joke, with banks either not following through with their supposed responsibilities and borrowers unable to provide documentation of income and assets (because they didn’t have the documentation required at the time of the original loan, and still don’t!)  In short all these “programs” are simply an attempt to paper over the Ponzi in residential housing – with little actual success, but lots of smoke, mirrors and lies. 

Madoff got away with the same game for years – produce some false statements and keep soliciting for that new business.  All is well until the cash flow forces disclosure of the fact that you’re broke – then the ugly truth, that there is no money as it’s all gone – comes out.

Such is happening now.  Servicers have been passing through the interest payments on MBS but principal isn’t there to be repaid.  The journal entries are being ignored – for now – because none of this trash is actually trading.  It’s all being held at or near “par” (100 cents on the dollar) when in fact many of these securities will be lucky to recover anything at all.  Even the “credit supported” tranches are in trouble – nobody ever believed, especially in the “prime” space, that defaults could reach beyond 2 or 3% and recoveries be under 80 or so.  But they are.  Worse, the HELOCs and “silent seconds” are in fact worth zero where the house is worth less than the first note due to priority of claims – yet most of those are being carried at or near full value.

A big part of the reason for this deterioration is due to “misclassification” of loans.  That is, loans were claimed to be “prime” when they were not – they were either “ALT-A” or worse, Subprime in fact, but stuffed into MBS as “prime paper” and then resold onward.  Fannie and Freddie have been recently fingered as a major part of this, but unlike the author of the recent WSJ Opinion piece I believe this and scam went much further than the two GSEs – and there has yet to be any honest examination (say much less prosecution) for this conduct.

There’s a rather complex “prisoner’s dilemma” going on at the present time, with none of the banks wanting to liquidate either securities or inventory lest they trigger an avalanche.  Yet each is eying the door, fully-aware that the first one through will be the only one who gets through should anyone bolt.  One of the more-interesting identities for the man yelling “FIRE!” could be a lawsuit – or state prosecution – over the myriad misrepresentation in this space during the bubble years.

Last year (2009) there was almost no net debt issuance between corporates and Treasuries, adjusted for Quantitative Easing.  Indeed, it was only about $200 billion.  That this sort of extreme measure was required to prevent a bond market implosion is rather telling.  But what’s worse is what’s on the calendar for 2010 – nearly $2 trillion of net issue, duration-adjusted.  A huge part of this is Treasury debt, and there the news is even worse, as there’s a serious duration problem in this regard – nearly half (about 40%) has a maturity of one year or less.  This means that Treasury must roll over that debt – about $3 trillion worth – “or else.”

Ask the asset-backed commercial paper market and auction-rate securities folks what happened to them when their short-duration paper couldn’t be rolled on commercially-reasonable terms.  Then extrapolate that to what happens to Treasury if (or possibly when) they’re unable to roll $3 trillion plus issue another $2 trillion on top of it to fund the deficit.  Do you really think that $5 trillion and change of Treasury paper is going to be “all ok” sans “monetization” – or will “they” foment an intentionally-engineered stock market crash to scare people into Treasury debt?  I wish Timmy the best of luck with this – he’s going to need it.

Remember, the belief that foreigners will not be there to rescue us this time around is not speculation – it in fact is born out by the latest TIC data, which showed that China had bought a net zero in Treasury issue in October.  Nor did anyone else step to the plate.  In short foreign nations are chock full of their own issues and are either issuing debt themselves or need their capital internally.

The equity market loves “liquidity” no matter how it comes, whether the truth is embedded in reports or not.  Nasdaq 1999 anyone?  Those firms were not making money and never would but that didn’t stop their stocks from doubling, tripling, and in some cases skyrocketing to 10x their IPO prices. 

The key point is that most of them eventually collapsed and were worth zero, but if you were quick (or lucky) you made a lot of money.  Of course the other side of that ditty is that if you weren’t you lost everything.

There are many who claim that valuations are not “extended” or “bubble-like” and point to the disasters of Q3 and Q4 of 2008 as “drags” on the P/E ratio, claiming that one should ignore negative earnings.  This is kinda of like going to the casino and only counting the winning wagers when determining how well you’ve done.  It may look impressive when you brag to your friends but it won’t change the fact that you go home broke, and ignoring negative earnings is part and parcel of the same sort of disease.

The fact of the matter is that if you look to corporate and personal income taxes they have all but collapsed.  These are of course regressive and governments have been handing out various tax breaks to corporations so this may not be a fair indication of business and consumer activity.

However, sales taxes are, if anything, going up in percentage charged – not down – and yet they are also deep in the red in terms of collections by the states.  Since some “necessities” (specifically food in many states) are not taxed this is particular troublesome since this trend points directly toward a collapse in discretionary spending – exactly what we need to power the economy forward.  Then there’s China, which reported on the 27th that toy shipments to the US were down 15% year/over/year from 2008 – but we’re told that Christmas sales were down “only” 1%.  Riiiiight.

So much for  “economic recovery.”

Productivity has been on a tear – and no wonder.  Watching everyone around you get laid off has a way of providing a hell of an incentive to work harder, lest you follow your friends to the unemployment line.

These trends – letting employees go and demanding that your remaining workers do more for the same pay, does provide a lift to profits.  For a while.  But it also destroys the base of consumers you need to buy those products over time, and thus the lift that you enjoy from such downsizing and squeezes is short-lived.  The hangover from that speedball should be hitting in Q1 or Q2 of the coming year, and I expect it to be quite the doozy.

China, on the other hand, has outdone us.  Burdened with far too much capacity they are, of course, building even more!  That would be great except that there’s no chance they can absorb the output internally.  Not that they care in the short term, as their definition of “GDP” is different than ours – they count a product when it is produced, not sold.  Gee, why are there all these products lined up unused, from cars to washing machines to – gasp – literal empty CITIES of townhouses and apartments?  How far does that bubble inflate before it blows up?  Hell if I know – the Chinese are not exactly models of transparency so the degree of game-playing they can get away with before someone yells “FIRE!” and runs for the door is more difficult to discern than it is over here. 

In the last few days the Chinese Premier has said that he won’t “bow to pressure” to allow the yuan to appreciate.  This of course is code for a weak currency which China desperately wants for its export trade.  Then again, so does Japan, and so does anyone else who exports.  Competitive devaluation sounds quaint, but you’re seeing it, and it is likely to continue as an attempt to play “beggar thy neighbor” in the coming year – and beyond.  Playing with explosives these nations are (including our country!)

In the credit arena few lessons seem to have been learned.  CDOs, CDO^2s and other similar loose-pin grenades aren’t back – yet – but an awful lot of questionable deals are, including, believe it or not, a couple of PIK/Toggle issues.  Those, for the uninformed, are bonds that allow payment not in money but in more debt!  This sort of “debt pyramiding” is the epitome of stupidity when done by a person and a fairly reliable sign of impending default.  In the corporate world we call it “reaching for yield.”  Uh huh.

Many market commentators believe that last year and through March 09 was a “financial panic” similar to 1987, from which the market recovered quickly.  Really?  Go look up the page a bit at the credit chart for the 1980s.  Do you see any contraction in 1987 and 1988 – anywhere?  Nope.  None.  In fact, credit growth continued unabated even though the stock market crashed.  The same occurred in the 2000-2003 time frame (again, look above) during the Tech Implosion.  That’s the differentiating factor: This was not a market panic, it was and is a credit lock-up caused by outstanding debt exceeding servicing capacity for several years, where the premise became not paying debt through current income but rather a Ponzi-style pyramid that permitted refinancing and the appearance of solvency only so long as asset prices rose!

This is an event that last occurred in America in the 1920s and it occurred this time for the same reason it did the last time: lax or utterly absent regulation allowed people to foist off trash on people while claiming that it was “money good”, just as happened with Florida Swampland in the 1920s.  The entire premise of the so-called “financial innovation” then, as now, was fraud.

The simple fact of the matter is that greed often comes with stupidity and nearly always is shortly followed by disaster.  “Rescued” by governments the “princes of finance” learned nothing, were forced to disgorge nothing, and still walk free among us instead of being either jailed or worse, strung up from a lamp post. 

So far.

Whether the people of the various nations will put up with another trip down the bailout, Quantitative Easing or “stimulus” road is another matter entirely.  Tim Geithner and others have gone too far in their grandstanding, cheerleading and claims of “Armageddon Avoided” – or if you prefer, “Mission Accomplished.”  Such claims make for great sound bites but have a habit of slamming the door on future intervention, especially if the need for it appears shortly after the claimed “success.”  Remember well that 2010 contains a midterm election in November, and as things stand our new President has seen his approval rating drop faster than a condemned man does through the floor when the handle is pulled.

Then there’s the “HAMP”, or “mortgage modification” programs generically (there have been several.)  It was claimed that HAMP in particular would prevent 4 million foreclosures by the end of 2009.  It has actually resulted in about a half-million trial modifications, but fewer than 100,000 permanent changes.  This should not surprise – the reason people got in trouble in the first place as that they bought more house than they could reasonably afford on any rational mortgage plan, using schemes such as 1.5 or 2% negative amortization “OptionARMs.”  These were not actual mortgages in intent – they were predicated on ever-rising home “values” so that they could be rolled over in a couple of years and amounted to a perpetual below-market rent payment to a bank, collateralized via the speculative bet that prices would continue to rise.  When home prices stopped going up there was literally no way around the inevitable – foreclosure.

Government refuses to recognize this as all the trash paper is literally everywhere around the globe!  What’s worse is that the very same banks that were making these bets along with homeowners then extended HELOC and other second-priority lines behind the first, extending the trash brigade even further.

Never mind Geithner’s insanity, as displayed here:
GEITHNER: We were very careful from the beginning—but the qualifications get lost—to say that we are going to focus the bulk of the financial force on bringing interest rates and mortgage rates down to cushion the fall in housing prices and help stabilize home values, which will feed into people’s basic sense of financial stability.

The reason we got a bubble in the first place was due to excessively-low rates – that is, a cost of borrowing money that did not reflect the fundamental economic realities of repayment and duration risk.

Insanity defined: Doing the same thing over and over but expecting a different result.

There is much hot air blown about how businesses and consumers have “de-levered.”  Hogwash.  Again, back to the top graph – we’ve taken a whole $21 billion off the net credit exposure.  Oh sure, if you remove FedGov from the picture (and you arguably should) it’s more like $850 billion – but let’s be real here – we’re talking about a fifty-three trillion dollar debt. 

Even a trillion is less than a 2% reduction in net leverage!

That’s “de-leveraging”?  Like hell.

There is much, much more to go.  To get back to the leverage levels seen in 2000 – which themselves were overheated – we’d have to drop back some twenty five percent, or roughly $13 trillion dollars.

We’re less than 10% of the way there, and we were overheated in 2000.

What’s a more reasonable leverage level?  How about the “more reasonable” time period between 1951 and say, 1983?  175% of GDP?  That would require we cut the outstanding debt by close to half!

Will we see policies that accomplish that?  Not voluntarily!

On a more-macro (beyond one year) level, let’s look at this last-decade debt chart again:

In the beginning of 2000 the total systemic debt outstanding was approximately $25 trillion.  It is now about $53 trillion, or more than double where it was in 2000. Let’s look at where we were in various metrics at that time:
GDP was at $9.7 trillion.  It is now 40% higher, roughly.  (Gee, did we really produce all that with our hands, or did we borrow the money, spend it, and then count that as “GDP growth?”)

Aggregate GDP over the 2000-2009 years was about $124 trillion; of that, about 20% (25 trillion) was increase in debt over the same period of time. Our so-called “growth” over these years was in fact a chimera in that more than half of it was not real – and that’s assuming ZERO interest expense now and forevermore.  Of course interest expense isn’t, in fact, zero……

The S&P began the year 2000 at 1469.  It now stands at 1126, and that’s before inflation adjustment.  The DOW was at 11,500, again, before inflation adjustment, and the Nasdaq 100 was at 3708 (it currently trades 1870.)  Again, all before inflation.  Take 30% off all of today’s numbers to adjust for devaluation of the currency’s purchasing power (that is, inflation) over the last decade and you’re roughly in the ballpark.  The bottom line: you have lost big – more than half if you were in the S&P 500, about 40% in the Dow and a crushing 70% if you were in the Nasdaq 100 over the last ten years.

There was no shelter to be found in Real Estate either.  Home prices are back to 2000 levels in many parts of the nation, but a huge number of homes are “underwater” on the profligacy of debt taken on my Americans: about 25% of all loans are underwater nationally and nearly half in Florida.  In 2000 that number was basically zero.

There was no net job creation but we went from 282 million to 307 million people in America.  That means 25 million people are unemployed simply due to population growth.  Ain’t that grand?

Median household (and per-capita) income has actually declined since 2000 adjusted for inflation.  Of course gasoline is more than twice as expensive ($1.26/gal in January of 2000), eggs are more expensive (double, roughly) and such.  Never mind medical insurance and health care – double-digit escalations every year have been the rule rather than the exception with medical insurance costs being up a literal 200% or more over the last ten years.
This little game of Ponzi (faking “GDP” by taking on more and more debt), by the way, is not new.  I present for your edification the following table:

This is the aggregate GDP (that is, all GDP produced) during each decade from 1960 onward, the “DTi” (or debt increment) during that decade – that is, the additional debt outstanding in all sectors during that decade, and the percentage of “GDP” that in fact was NOT from production, but rather was “created” due to raw borrowing.

Yes, before you ask, the 1960s decade is accurate – the entirety of “economic growth” in the 1960s was not production – it was debt.  It should now be clear to you why what happened in the 1970s with interest rates and inflation occurred!  Those events had exactly nothing to do with Nixon closing the Gold Window – rather, it was the expected and perfectly-predictable outcome of the 1960s debt orgy!

What we are facing down today is a fifty year Ponzi scheme.  Drill that into your head folks – for fifty years we have created false output gains, with the last 40 of those years having between 15-20% of each year’s supposed “GDP” not created by the work of people, but by BORROWING MORE MONEY which will have to be repaid with interest.

This is why we hit the wall in 2007.

To run an increase in GDP of about 5%, as so many “pundits” are claiming we will going forward, we would have to increase the total debt in the system to roughly $90 trillion dollars from the present $53 trillion over the next ten years.

That debt would, of course, need to be serviced.  And nobody in their right mind can possibly believe that government could take on another $37 trillion – when the current oustanding public debt is just seven trillion (that is, government would have to increase its debt by 500%!)

If you take nothing else away from this Year in Review Ticker, it should be that singular chart above and a decent understanding of what it means:
To come back into equilibrium, assuming we do not decrease debt in the system at all, we would have to shrink GDP by about 20%.  But shrinking GDP means that money available to pay down debt would also decrease which would generate even more defaults. 

This is how deflationary depressions happen – years, even decades of playing Ponzi by layering debt upon debt.  Bernanke and Geithner, along with President Obama, are well-aware of these facts which is why they are all pounding the table demanding that banks “loan more.” 

The problem with such a prescription is that the wise person won’t borrow, for he knows what’s coming.  The unwise has no collateral to pledge, and thus can’t borrow.

If the government forces (either by persuasion or legislation) lending to those who can’t pay they only extend the Ponzi and in doing so make the inevitable collapse WORSE.

We have made no progress economically in terms of the common weal of the average American but have added debt in dramatic amounts to paper over the deficiency.  That’s the bottom line on the 2000s, and despite all the crooning that “the economy is on the mend” one has to look at the reality of the common man on the street to see what’s coming around the bend for our economy and ask the following question:
How do we get positive economic growth when by every metric available the disposable personal income available to Americans has gone down, personal wealth has in fact decreased when one subtracts out debt (and you must; nobody in their right mind argues that if you go to the bank and take a cash advance for $20,000 on your credit card that you are “more wealthy” as a consequence of having done so!) and while employment at first blush looks “equal” to 2000 in fact there are 25 million more unemployed due to population growth – people who create drag on the economy due to entitlement spending rather than contributing to productive output?

So with all this said, here’s what I believe we’re looking at for 2010… ready or not, here it comes!
No, this is not a new Bull Market; the market will be lower on December 31st than it is on January 4th, quite possibly by a a hell of a lot.  We may not break the March 2009 lows – but I also don’t believe for a second we’re going back to 1576 on the SPX.  Not without the leverage – and we can’t get the leverage.  I believe we will end the year down from where we begin on January 1st.  McHugh calls it “Wave 3 Down”; I call it “aw crap.”  Either way “irrational exuberance” is back for now but cash flow always wins in the end.  I’ll be a “generational buyer” of stocks when dividend yields are over 5% and P/Es are in single digits.  We didn’t get there last year and yet those are the historical metrics that mark true Bear Market bottoms.  With that said, I would not be surprised if we hit 1220 on the SPX some time earlier in the year – but it is by no means a lock, contrary to what virtually everyone in the “pundit community” expects (most of which are looking for 1350 or more!)

The Long end of the Bond Curve is going to move higher on yields.  We have completed a long-term (multi-year) inverted Head and Shoulders pattern.  The probability of the targets set by that pattern being achieved is extremely high.  The target?  6.9% on the 30 year “long bond” – a rate that puts 30 year mortgage money at least to 7%.  This prediction assumes that we do not get a panic-style sell-off in the Stock Market – if we do get one (and I think it’s 50/50 on that) then I withdraw this prediction.

House prices will fall another ~20% – whether as a consequence of the rate back-up or utter destruction in the markets generally.  Sorry folks, the housing mess is not over.  The math on this is simple; a $200,000 principal loan at 4.75% for 30 years produces a P&I of $1039.18.  That same payment with a rate of 7% produces a principal financed of $157,107.95.  If, for whatever reason (engineered or not) the stock market collapses then you get your housing price crash anyway.

Banks will “give up” on holding their real estate as rates start to backup and will dump their foreclosure inventories.  Why?  Because the regulators may let them to play games with alleged “values” when people can get mortgages at 4%, but at 7% there’s just no way the numbers work and the fraud becomes too difficult to countenance.  There are rumors of major banks dumping hundreds of thousands of homes on the market next year – this is likely the backstory on “why.”

Credit will not ease for “ordinary people.”  All the exhortations about “lending more” have been going on now for more than two years yet have gone nowhere.  The jawboning will continue but the results will not come, simply because there is no more good collateral left against which to lend.  This will in turn lead to.

A massive second wave of small business bankruptcies will sweep the nation.  We’ve seen the first part of it.  The second will be worse – far worse.  With long rates backing up and the 30% credit card sweeping the land those who have relied on credit to operate in the small and mid-sized business world will get relentlessly squeezed.  Many will fall.

Unemployment will appear to be stabilizing – for a while – but that will prove illusory.  We finish 2010 over 10% – no material improvement.  If things get real bad we might see 12-14%.  Yes, U-3.  I won’t stick my neck out that far as a prediction but I believe ending the year at or above 10% is a lock.

The “revolting” call for last year was early – but not wrong.  There will be at least one major coup or other violent overthrow of a government in 2010 tied to economic instability – either directly or via a war it spawns.

The states will go to the government well for handouts, they will probably get them, but it won’t matter.  They’ll get some assistance at least, but in the grand scheme of things it doesn’t make any difference in a world where long rates are rising precipitously.  California and Arizona are in the biggest trouble, with Michigan, New Jersey and New York right behind.  The public employee unions will have a kitten but again, it won’t matter – that which isn’t there isn’t there, whether you want it to be or not.

A “double dip” will be recognized by the end of the year.  Between taxes and rising rates – or an intentionally-detonated stock market to stop the long end of the bond curve going bananas – you can bet on it.

China will lose control of their property and plant bubble – with horrible consequences.  They’re good at the game, but that which can’t go on forever won’t.  I bet it blows up before the end of the year.  If so, Australia’s property market better watch out – they’re levitating on the strength of China’s commodity demand and pricing there is California-style. 

The Canadian Real Estate Market will show signs of cracking – especially in places like Vancouver.  They may have another year before it all goes to hell, but the time approaches.  Beware.

The Fed’s games will “leak” and credibility will be shaken severely.  There’s too much pressure.  Something will give, somewhere.  Washington DC is too hostile a place for the “hold hands and head for the cliff together” game to work with an election coming up……

The Democrats lose big in the House.  Time is probably too short for a viable third party to emerge for the midterm elections, and I don’t expect the Democrats to lose House control.  However, I do expect them to lose their filibuster-proof majority in the Senate, and to lose enough seats in The House to trash their “steamroller” approach to legislation.  This might be bullish for the markets late in the year and into 2011 – maybe (divided government is generally good for the markets.)

Congress continues to try to spend its way out of the recession – and runs head on into rising rates.  Watch the TBAC reports.  Those will be your “tell” along with the TIC data.

One or more of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) either defaults technically or is forced into austerity by the ECB.  Further, Eastern Europe becomes dangerous destabilized.  There is a real possibility of outright hostilities in that part of the world next year.  Let’s hope not.  The ECB has a nasty problem on their hands; I have said for quite some time that the Euro is likely to trade at PAR down the road.  This year is probably not the year for it, but the cracks in the dam that ultimately could destroy the European Union should become very apparent in 2010.

Contrary to virtually EVERY “investment pundit” on the street today return OF capital will once again assert itself as the primary consideration.  Sentiment indicators as of 12/31, along with 52-week highs, all are at levels that have been associated with tops on a historical basis.  Treasury has to issue $2.5 trillion this year, while we all cheered when they issued $1.5 trillion last year – and got away with it.  China has housing trading at 80x average incomes, Australia and parts of Canada have housing markets at 10x or more average incomes and the banksters and “investors” alike appear to have learned nothing, with “reaching for yield” coming back in force.  Ponzi ponzi ponzi!  Add to this geopolitical event risk and things get interesting.  That which can’t continue forever won’t – we merely argue over timing, not outcome.  I’ll lay the marker on one or more of these timers reaching zero in 2010.
Note: Subject to minor edits/revisions and perhaps an addition or two until the end of January 1st, as usual.

Fannie Mae Debt Merger Monetization

by Jim Willie CB

December 30, 2009

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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.

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.

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.

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.

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.

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

Daily Dispatch: What’s Up With Employment? – Dec 29, 2009

December 29, 2009 | www.CaseyResearch.com What’s Up With Employment?

Dear Reader,

I had planned on writing a Daily Dispatch both today and tomorrow, before shutting down again for the New Year holiday.

For personal and business reasons, however, I’m going to be brief today and give the Dispatch a holiday for the rest of the week.

Because so many of you have written, for which I am deeply appreciative, and because I have news, I have a follow on to yesterday’s story about the mysterious disappearance of Myles Robinson in the Swiss town of Wengen. Unfortunately, it is not good news – his body has been found in a neighboring village, miles from where he was last seen. While the details are still sketchy, it is unimaginable and nearly impossible that he would have decided on the spur of the moment to set out on a trek across the snowy alps in the middle of night, dressed in his casual going out clothes. The mystery continues at the same time that the tragedy deepens.

The Daily Mail is providing the best coverage of the story so far. Here’s a link for those interested.

Those who knew Myles will never forget him. And I personally won’t forget the message of his young death; cherish your loved ones, and live life to the fullest. Because truly, you just never know…

I’m now going to turn things over for a moment to Bud Conrad, who has been working ridiculously long hours on his 2010 forecasts for the upcoming edition of The Casey Report. The January edition, which will be released next week, also includes a Special Casey Report on Expatriation, featuring Doug Casey’s reflections from a life spent as a citizen of the world; Terry Coxon on expatriating your money; a collection of expat interviews from Uruguay, Portugal, Mexico and Argentina; and much more.
Thanks to a three-month,100% money-back-guaranteed trial, you can receive the next edition and the special report with no risk. Details here.

Employment Charts
By Bud Conrad

Unemployment is expected to rise into 2011 as population grows and few new jobs are created. Population growth requires 100k+ new jobs each month just to keep the unemployment rate unchanged. The calculations for the chart below suggest that new jobs do not start appearing in quantity until 2012.

Of course, the more unemployed, the bigger the unemployment payments:

Likewise, tax revenues decline due to the fall-off in wages paid to the employed.

The combination of rising unemployment, larger unemployment payments and falling tax revenues makes the already disastrous deficit worse. For the sake of its own budget, as well as the political consequences, the government wants to get people back to work and so this will be a rising focus of the administration.

David again, still on the topic of unemployment, there is this from our own Jake Weber…

Back in July, we first showed this chart of the states that have essentially bankrupted their unemployment insurance systems, and are now forced into borrowing from the Federal Unemployment Trust Account. Since then, the number of states relying on Federal money, in order to keep sending out weekly checks, has grown from 18 to 26. And the total amount borrowed has zoomed over 100% * from $12.0 billion to $25.1 billion.

This exponential growth trend is clearly not sustainable. We suspect that 2010 will see many state tax rate hikes on employers and employees, in order to fund their respective unemployment schemes. This will only further burden business’s ability to operate profitably, and reduce the take-home pay of already stretched consumers.

With 18 researchers now on staff at Casey Research, we continually monitor all the data and trends that impact your investments. Whether it’s energy or mining, tech stocks or commodities, bonds, interest rates, or currencies, the Casey team will keep you up to date and in the know. And, for a limited time, you can have the entire Casey Research team working for you for life, by becoming a Casey’s Club member. Find out how now.
Happy New Year!

And that is it for this abbreviated edition of Casey’s Daily Dispatch and for 2009.
It’s traditional at this time of year to reflect on the year gone by, a tradition I will mostly resist. In sum, it has been a good year, full of new challenges, new friends and new perspectives on life. What more can a person ask for?

As for the year ahead, if I was a betting man, I’d place a big bet that it is going to be a very interesting year, indeed. I look forward to sharing it with you.

Until 2010 then, thanks for reading and for being a Casey Research subscriber.

David Galland
Managing Director
Casey Research

Daily Dispatch: Health Care Hairball – Dec 21, 2009

December 21, 2009 | www.CaseyResearch.com Health Care Hairball

Dear Reader,

I hope this missive finds you in fine fettle, not suffering overly from the onslaught of holiday food and drink.

While I’m not exactly a social butterfly and with some groups hereabouts, my views make me something of a social outcast thanks to my far more charming wife, we do get invited to several parties around this time of year. Which, of course, I use to take an informal survey on the state of the economy.

This year my informal survey of the party circuit presents something of a mixed bag, though almost none of my business acquaintances provide an unabashedly enthusiastic report. Instead, the reviews tend to be couched in comparative terms with the recent depths. As in, “Well, things are bit better.” Or, “We’re seeing some pick-up.” But, no question, it’s not quite the disaster it was.

Which is what one would expect, given the unprecedented infusion of money into the economy over the last couple of years.

The new year looms large in its importance to everyone I spoke to. Because everyone recognizes that in 2010, the jury will almost certainly return its verdict on whether the global economy can strengthen its tenuous grip on recovery, or lose that grip and tumble back into the abyss.

That the jury is still very much out was confirmed to me when a serious money manager friend of mine revealed that he is almost entirely in cash and has next to no idea what to do with that cash.

Bonds? Not hardly. Not with the near certainty that interest rates are heading higher, under almost any conceivable scenario. If the monetary inflation begins to bear fruit in the form of rising prices, rates are going higher in a hurry. Likewise, if the economy stumbles, the combination of rising default risk and a further layering-on by the government of yet more stimulus, with an increasing share of same outright monetized, that will also send bond yields higher and prices lower.

So, bonds are pretty much a lose-lose proposition at this point. Given that this is a huge market on the order of $80 trillion globally, about twice the size of the equity markets a bad year for bonds is a bad year indeed.

Stocks? Unlike bonds, which tend to move in concert based on the interest rate environment, it is usually a mistake to look at stocks in the aggregate. That’s because if you look hard enough, you can usually find a compelling value, or a sector that is unloved and due for an upward rotation. That said, as you can see from the chart here, based on trailing 12 months earnings through 3rd Quarter 2009, the P/E ratio of the S&P 500 at 74.68 (using current price) is not cheap.

Even so, shoveling hundreds of billions of freshly minted dollars into the economy in 2010, as is the clear intention of Team Obama, could help the broader market hold its own over the course of the year ahead. Of course, you have to expect sharp sell-offs as Mr. Market periodically glances about and, like a giant ground hog, notes that it’s not yet safe to come out of his hole because of the large shadow of economic hurt hanging overhead.

So, the watchwords for the year ahead have to be “caution” and “careful selection.”
Commodities? I think you know how we come down on this asset class. The industrial commodities had a tremendous run-up in 2009 and are likely to run into turbulence should a second leg down for the global economy materialize in 2010. Our view on the precious metals is far more sanguine, for much the same reason we are negative on bonds.

Namely, should a real recovery materialize, it will unleash the price inflation we see as inevitable; once banks, businesses, and people come to feel they have enough cash, they’ll begin lending and spending again in earnest. Conversely, another whack up the side of the head of the economy will have governments scrambling to apply thick plasters to where it hurts plasters made up of yet more fiat money. The market will see these actions as further evidence that the government is sticking to its current inflationary course, damn the torpedoes and damn the inflation.

So, precious metals still seem a win-win to us.

A year from now, when we look back at 2010, we’ll find any number of adjectives to describe the year, but I sincerely doubt “uninteresting” will be one. Keep your head down and your powder dry.

Hello, Health Care Goodbye, Dollar

One of my cocktail chats was with an older woman who is a staunch supporter of the current president. For good reasons, I am forbidden to broach politics at these affairs but I am able to pipe up if someone kicks the ball in my direction, which this individual did by saying, “I’m almost afraid to ask, but what do you think about the job that President Obama is doing?”

Rather than launch into a dissertation, I turned the question around and asked her how she thought the big O was doing.

“Oh, he’s doing fine.”

“And what has he accomplished?” I asked.

“A lot,” she said, “health care, for example.”

“Interesting,” I opined, “because what I see is that all we are going to get is a mish-mash of new taxes and regulations designed to avoid stepping on the toes of any important lobbying groups. Which is to say, just a big, slimy hairball of new bureaucracy that doesn’t really benefit anyone.”

“Well, yes,” she admitted, “it does seem a little convoluted.”

“You know,” I added, because I believe it to be the case, “but if my fellow Americans in this great democracy have decided that they want free health care for all, which I disagree with, then they should have it. But the government should have then cast an eye around the world for the best of the worst universal coverage plans and set about implementing that hopefully with some American improvements. Instead, they did the classic political hyena feast with everyone tearing at the legislation, snarling when any other politicians approached the meat of a favored political donor, with the net result being a gruesome carcass that will do nothing but stink up the place.”

Or words to that effect, though I hope I didn’t mix my metaphors quite so badly.
Even my companion in the casual cocktail chat had to agree with me that the new health insurance plan now speeding its way into law leaves much to be desired but she could have just been humoring me, given that she was edging away to a safe distance even as she concurred.

That plan, however, is now expected to cost a smooth $1 trillion over 10 years, adding another $100 billion a year in government spending.

If I had the time, I could pick apart the economics behind the plan, but as American Thinker has already done so, I will link off to their analysis.

I would share one worthy quote, though, as to how the government is trying to rationalize the spending.You get “deficit reduction” by cutting Medicare and raising taxes by more than $1 trillion: Medicare and other program cuts of $483 billion, and an extra $521 billion in new taxes and fees.
Here’s the article.

But as our own Bud Conrad points out rather skeptically, I thought the odds of the government actually getting around to cutting Medicare and other programs by $483 billion are pretty slim. Therefore, it’s almost a sure thing that the financial outcome of this new mega-legislation will be far, far worse than the government says it will be.

Time for Some Clarification?

Ever since the U.S. government invaded Panama and whisked that sovereign country’s president off to a Florida jail cell, I have had a nagging sense of bewilderment at what seems to be a certain growing disconnect in matters of international affairs.

Examining the evidence, it seems as though the world has rolled over for the U.S. Empire and is now capitulating to pretty much every demand out of Washington, no matter how egregious.

Per the case of Panama’s Noriega, how would we here in the U.S. react should a platoon of crack Iraqi paratroopers storm the Texas compound of George Bush Jr. and take him into custody for destroying their country an act that is demonstrably far worse than any real or imagined crime committed by Noriega against the U.S. prior to his incarceration?

The repertoire of U.S. actions, which in recent years has included launching full-scale “preemptive” strikes, as was the case in Iraq, and drone attacks in other countries, begs the question of what role it is that the U.S. is now playing on the global stage? Are we now the de facto global government, able to act at will whenever and wherever we choose? Are the laws that limit the actions of other countries not applicable here?
Some recent actions that have caught my attention.
Drug terrorists in Ghana. It was reported last week that three men from the African nation of Mali were busted in Ghana for conspiring to sell drugs in Europe. But it turns out that the arrests were made in a sting operation run by the U.S. Drug Enforcement Administration (DEA), and that the men were then stuck on a plane and shipped to New York for trial. Apparently, the DEA decided that the men might have an affiliation with Al Qaeda, and that along with a threat and/or payoff to the right people in Ghana it was necessary to extradite the men to the U.S. for trial. Read the article from the LA Times and see if you can find any credible rationale for us sticking our noses into Ghana to arrest men from Mali for planning on selling drugs in Europe, with zero U.S. connection that I can discern.
Open up, Mr. Karzai, it’s the FBI. A story that caught my attention over the weekend involves an old blood feud between relatives of Afghan President Harmid Karzai, a feud that resulted in the recent shooting death of Waheed Karzai, an 18-year-old nephew. The press reports discuss casually that the FBI is on the case, as if it is entirely normal and to be expected. Have you noticed how the FBI has been involved in a lot of this sort of thing around the world? In fact, there’s hardly a serious international incident these days that doesn’t cause the FBI to grab for their suitcase handles. Including, apparently, a murder in Afghanistan. Why? It must be noted that murderers in Baltimore or Chicago enjoy no such attention from the G-Men. So, what are we doing? What is the precedent? Again, I’m just asking, because I really don’t understand what our government is doing. Here’s the story.
The $536 million Credit Suisse fine. I also thought it was interesting that the U.S. government found that Credit Suisse violated international sanctions against doing business with Iran, and unilaterally used its muscle to wrest a $536 million fine out of the bank. And that, further, about half of the monster fine is to go to the U.S. federal government, with the balance split between New York City and New York State. Maybe you understand why the U.S. alone gets the fine, and why half is dedicated to New York, because I can make no sense of it. (And, by the way, the prosecutors are so satisfied with the result that they are now apparently limbering up to apply the same treatment to a whole slate of other international financial institutions.) Meanwhile, there’s no noticeable protest from the Swiss government about the hard treatment one of its leading banks is getting. Here’s the story.
Geneva Convention? I seem to recollect that when Country A invades Country B, and the soldiers of Country B fight back and are captured, they are covered by certain international laws, most famously the Geneva Convention. Yet, such niceties seem to have been thrown out the window by the Bush administration. Oddly, Team Obama has continued to advocate much the same policies. While there are many examples one could point to quizzically, the case of Mohamed Jawad, an Afghan teenager who was captured and charged with tossing a grenade at a U.S. jeep during the war, will make the point. On being captured, he was tortured, wrapped up, and sent off to Guantanamo, where he has been cooling his heels since 2002.
Do as we say, or else. The U.S. Congress recently passed HR 4213, a bill that includes the following provision:

“Reporting on certain foreign accounts: Requires foreign financial institutions, foreign trusts, and foreign corporations to obtain and provide information from each of their account holders to determine if any account is American-owned. Foreign financial institutions would also be required to comply with verification procedures and to report any U.S. accounts maintained by the institution on an annual basis.

“Any foreign financial institution that did comply with the new verification and reporting standards would be subject to a 30 percent tax on income from U.S. financial assets held by the foreign institution.“

In other words, just because it can, the U.S. passed legislation demanding that every financial institution in the world spend time and money trying to ascertain if their account holders are from the U.S. and if so, they must break whatever their own national or corporate privacy regulations dictate by turning said account holders over to the U.S.
Taken in small doses, these and dozens of similar incidents represent interesting geopolitical oddities and, in the case of the Afghanis, an artifact from the nation’s strong reaction to 9/11. But viewed in the totality, these “our way or the highway” actions paint the picture of a changed role for the American Empire that, I believe, warrants some internal debate and clarification on just who we as a nation want to be.

It seems that the late-stage U.S. Empire is assuming all manner of new and far-reaching powers unto itself. When we can so casually toss the Geneva Convention aside and get away with it, or have prosecutors from individual states levying crushing fines on foreign corporations for defying international sanctions why, just about anything and everything is fair game. And given the dire financial straits of the empire, there is the very real risk that it could get much worse.

In time, however, this sort of thing is likely to beget a blowback and when that happens, it will constitute more than just the refusal of foreign banks to have anything to do with U.S. individuals. Foreigners will stop wanting to do business with American corporations, stop cooperating on security issues, and maybe even feed us back our trillions of dollars they now hold.


Over the weekend, I took the kids to see the new blockbuster, Avatar. Despite being somewhat fatigued due to the aforementioned appearances on the local party circuit, I stayed riveted to the screen for the entire movie.

(As some of you may recall, my movie rating system revolves around “slept a lot,” “slept a little,” “didn’t sleep at all”… this was definitely in the latter category.)

The film is graphically stunning, very well crafted and I even liked the story, despite the obligatory odes to unspoiled nature and man’s devastating effect on same. Or the fact that the bad guys are businessmen and miners at that. But the storyline doesn’t overwhelm the movie’s far more interesting science-fiction aspects, the cinematography, and the fast-paced but not over-the-top action sequences.

While the film is shot in 3-D, James Cameron, who wrote and directed it, didn’t make much use of the technology at least in the sense that things are constantly flying out of the screen at you. And while I have heard complaints that some people were made nauseous by the effect, there were only a couple of passing scenes in the beginning that had that brief effect on me. Even so, the pacing of the film is very tight, and so the 2 hours and 40 minutes go by quickly.

The movie is rated PG-13, but I think it’s safe for any kid over about 8 or 9… and anyone older than that should enjoy it.

You’re Invited

Before I sign off for the day, I wanted to mention that, for a limited time only, we are reopening memberships to Casey’s Club the unique membership organization that allows you to receive all of our paid Casey Research services, and more, for the rest of your life. And for a deeply discounted one-time initiative fee, and a low annual maintenance fee.

The last time we opened Casey’s Club for membership, the number one question we received was “What’s the catch? Why so cheap?” All the details are in the link just below but don’t put it off, as this offer ends in January.

Casey’s Club Membership Open

And that, dear readers, is that for today. As I do, I see the stock market is up pretty strongly, and gold and silver are weak again.

Sit tight and you’ll come out more than alright.

Until tomorrow, thanks for reading and for subscribing. Don’t miss out on Casey’s Club… it is, by far and away, our best offer. And of course you can apply any outstanding balance on your current subscriptions to your initiation fee. Details here.

David Galland
Managing Director
Casey Research

Full Circle of Government Debt Default

by Jim Willie CB
December 16, 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 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).

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.

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 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.

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.

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.

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.

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.

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!!!

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.

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

GOLD’s Inflation Adjusted high reaches $8000!

Yesterday I showed you the inflation adjusted gold chart for the last 40 years.. It clearly proves beyond any doubt that gold is trading nowhere near historic highs.

GOLD trading at record highs therefore bound to fall?

One of the main bear arguments you’ll hear is that gold is bound to fall since it is trading at record highs these days. Yes, gold is trading far above its 1980 peak of $850 but you don’t have to be Einstein in order to understand that today’s dollars don’t possess the same purchasing power as 1980 dollars. So if we take a peek at the inflation adjusted chart for gold the pictures changes dramatically and proves beyond any doubt that gold is nowhere trading near record highs these days. In order to do so it should be trading above $2300+..(according to official government inflation data!)

Now when you take into account the REAL inflation number instead of the bogus government inflation numbers then the pictures changes even more to the extreme. In order to reach inflation adjusted highs when using inflation statistics reported at Shadow Government Statistics – Home Page then gold should hit $7000+ ..

Now here’s the gold chart in 2009 dollars using the alternate CPI data published by John Williams at Shadowstats.com:

Anyone looking at this chart will have a hard time defending the view that gold is a bubble about to burst!

Again, last week’s drop in price of gold means nothing in the BIG picture.. Gold will trade at new inflation adjusted highs before this bull market is over ($10.000 by 2015, see also related article ‘Last Chance to buy gold below $1000?’ published on Sept 02, 2009)

Best regards,
Eric Hommelberg
The GoldDrivers Report /
The GoldDrivers Bullion Store

30 Reasons for the Second Great Depression

This is from the Jim Sinclair section from about a year ago, but I wanted to bring it to everyone’s attention again. Please review the following bullet-points and prepare yourself financially, mentally, physically….

Because at some point the “Great Depression” will end and the strong will come out stronger. Corrections are necessary to liquidate mal-investment (kinda like a forest fire). Over the past 2-3 decades we have had tremendous amounts of mal-investments which require a MAJOR liquidation. Unfortunately the powers-that-be are going to fight the natural order, tooth-and-nail which means that they will only make things worse.

The key to not only surviving this mess, but prospering… is to own gold.

Dear Comrades In Golden Arms,

On or before January 14th, 2011 Gold will trade at or above $1650. This is simply reporting on the symptoms created by my Formula originally posted in 2006.

30 reasons for Great Depression 2 by 2011
New-New Deal, bailouts, trillions in debt, antitax mindset spell disaster
By Paul B. Farrell, MarketWatch
Last update: 11:53 a.m. EST Nov. 19, 2008
(Excerpted from larger article)

30 ‘leading edge’ indicators of the coming Great Depression 2
Every day there is more breaking news, proof Wall Street’s greed is already back to “business as usual” and in denial, grabbing more and more from the new “Bailouts-R-Us” bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas — anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.

Scan these 30 “leading indicators.” Each problem has one or more possible solutions, but lacks unified political support. Time’s running out. We’re already at the edge. Add up the trillions in debt: Any collective solution will only compound our problems, because the cumulative debt will overwhelm us, make matters worse:

America’s credit rating may soon be downgraded below AAA
Fed refusal to disclose $2 trillion loans, now the new “shadow banking system”
Congress has no oversight of $700 billion, and Paulson’s Wall Street Trojan Horse
King Henry Paulson flip-flops on plan to buy toxic bank assets, confusing markets
Goldman, Morgan lost tens of billions, but planning over $13 billion in bonuses this yea
AIG bails big banks out of $150 billion in credit swaps, protects shareholders before taxpayers
American Express joins Goldman, Morgan as bank holding firms, looking for Fed money
Treasury sneaks corporate tax credits into bailout giveaway, shifts costs to states
State revenues down, taxes and debt up; hiring, spending, borrowing add even more debt
State, municipal, corporate pensions lost hundreds of billions on derivative swaps
Hedge funds: 610 in 1990, almost 10,000 now. Returns down 15%, liquidations up
Consumer debt way up, now at $2.5 trillion; next area for credit meltdowns
Fed also plans to provide billions to $3.6 trillion money-market fund industry
Freddie Mac and Fannie Mae are bleeding cash, want to tap taxpayer dollars
Washington manipulating data: War not $600 billion but estimates actually $3 trillion
Hidden costs of $700 billion bailout are likely $5 trillion; plus $1 trillion Street write-offs
Commodities down, resource exporters and currencies dropping, triggering a global meltdown
Big three automakers near bankruptcy; unions, workers, retirees will suffer
Corporate bond market, both junk and top-rated, slumps more than 25%
Retailers bankrupt: Circuit City, Sharper Image, Mervyns; mall sales in free fall
Unemployment heading toward 8% plus; more 1930’s photos of soup lines
Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists
China’s sees GDP growth drop, crates $586 billion stimulus; deflation is now global, hitting even Dubai
Despite global recession, U.S. trade deficit continues, now at $650 billion
The 800-pound gorillas: Social Security, Medicare with $60 trillion in unfunded liabilities
Now 46 million uninsured as medical, drug costs explode
New-New Deal: U.S. planning billions for infrastructure, adding to unsustainable debt
Outgoing leaders handicapping new administration with huge liabilities
The “antitaxes” message is a new bubble, a new version of the American dream offering a free lunch, no sacrifices, exposing us to more false promises
No. 30:
At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan’s Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America’s problems will take years and will burn trillions.

He sees “nothing but large increases in the deficit … I think it would be worse than the depression. … Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of U.S. government bonds.” It’ll get worse because “the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government.”

Reuters concludes: “Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes. ‘I just want to get people thinking about this, and to realize this is a road to disaster,’ said Whitehead. ‘I’ve always been a positive person and optimistic, but I don’t see a solution here.'”

We see the Great Depression 2. Why? Wall Street’s self-interested greed. They are their own worst enemy … and America’s too.


Note to junior exploration, development and producers:

Unless the person or company is well known to you, already a large “registered” stockholder or a proven long, do not take private placements. The shorts are looking to cover.

Things may well be turning. Deal with well known friends only, not strangers and most certainly none of the bad guys.

When the HUI turns, the cover is on.


Gerald Celente Tells It Like It Is.. We Are A Fascist Nation Now

If you’ve got some time, then I highly recommend this interview with Gerald Celente by Eric King of King World News. Gerald cuts through all the bull shit and calls it like it is. The United States is now a fascist nation. Fascism is the merging of private and state enterprises. Let’s see… the US government now controls the auto industry, it also controls the major media corporations, it now supports a large portion of the housing industry, it is in bed with the major banking firms, it is now the owner of a very large insurance agency that has its hands in all sorts of derivative instruments (AIG) …. and the list goes on and on and on.

Oh, and I should mention that we have a Video Channels section where all these videos are posted into. I believe it’s well worth your time to have a look.

The video comes in 5 parts.

Part 1/5:

YouTube – pt 1/5 Gerald Celente on King World News

Part 2/5:

YouTube – pt 2/5 Gerald Celente on King World News

Part 3/5:

YouTube – pt 3/5 Gerald Celente on King World News

Part 4/5:

YouTube – pt 4/5 Gerald Celente on King World News

Part 5/5:

YouTube – pt 5/5 Gerald Celente on King World News