Breakdown Approaches Climax
Jim Willie CB
Jim Willie CB is the editor of the "Hat Trick Letter"
Oct 2, 2008
Use this 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.
Pardon the brief and jumpy style, laced with more emotion than usual. The events of the last few days have been remarkable, alarming, chaotic, and surreal. Gonna attend the Toronto gold show hosted by the Cambridge House this weekend. If you are there, grab my arm and say hello. Let me know your perspective on the brewing crisis.
HEART ATTACKS & BANK HOLIDAYS
The banking system breakdown is very far along, but still early. Remember USFed Chairman Bernanke stated over a year ago that the mortgage problem was contained. Try not to laugh. The bond crisis is absolute, broad, deep, and all-inclusive, enough to kill the USTreasurys after it kills the US banking system. The heart attack signals are with the LIBOR spreads over USTreasurys, the money market, the TED spread (Treasury versus EuroDollar), and short-term USTreasurys. Charts resemble heart attacks and EKG electro-cardiogram monitors. Many details appear in the October Hat Trick Letter report just posted. The bank runs have begun in earnest. Nevermind the big banks for a moment. The smaller ones are entering seizures. The small and medium sized cities are also entering seizures. Here are two stories, one about a city and another about the bank holiday coming.
This from a friend in Seattle: "I was talking to my neighbor last night. He is in finance in the county government, King County (Seattle). He said there are some very secretive budget talks being held, very hush, hush. Apparently, the county has lost around $200 million of taxpayer money in toxic paper investments, with huge implications on the budget. He says he is not privy to the details, but he is taking a 10-day vacation starting today, because he has nothing to do since everything is in flux."
This from a friend in Atlanta with strong banking connections: "Reliable word that Bank of America branch managers just received a letter or memo from the USFed instructing them to perhaps be ready for a one-week universal shut-down of the banking system, including access to checking accounts, savings accounts and credit cards. Reliable word has it that BofA bank branches received a shipment of signs last week, reading "WE'RE SORRY, BUT DUE TO CIRCUMSTANCES BEYOND OUR CONTROL, WE CANNOT BE OPEN AT THIS TIME."
So the banks are in need of a respite, a break, a holiday. They need to shore up their positions. Economists and bankers avoid revealing the consequences of extended absence of short-term credit supply. Imagine all the supply chain DELIVERY routes being interrupted for lack of short-term credit, certain to interrupt the supply of food, gasoline, building materials, basic household wares, simple hardware, and more. The short-term credit would certainly also disrupt payroll streams for companies, inventory supply for retail chains, durable goods purchases by consumers (like washing machines & refrigerators), the maintenance of basic machinery (like cars, trucks, computer, communications), even cash dispensed at ATMachines.
BAILOUT BILL PASSAGE
The Senate passed the Wall Street bailout bill, by a 3:1 majority. Some sweeteners like tax cuts and raising the limit to $250k on individual accounts for bank depositors helped. Some people might think that finally the banking system can at last receive some meaningful fixes. Call me a killjoy, but this will accomplish next to nothing as a banking system remedy. It is more a paper seal to Wall Street corruption than to ANY solution. If passed by the House, as is likely, it puts an epitaph on the American badge of legitimacy. A decade of fraud has been underwritten, sanctioned, and sealed. Even foreigners might smile at the new & improved bill. Their impaired bonds can participate in the redemption process. The only trouble is they might have to accept hot shiny USTreasury Bonds in return, of certain questionable value.
Still the bill must be viewed as a giant paper net to catch a giant locomotive train, one that derailed and then went over the mountainside cliff 500 meters above and is hurtling downward with acceleration. Gravity is a bitch, and so is momentum! One should not doubt for a second that it will do much to halt the downward trajectory. One should remember that debt solutions accomplish nothing in providing remedy for debt abuse and damage inflicted by broken debt contraptions. Nothing is fixed, only accounts have been shifted and names have been changed. THE BANKING SYSTEM PROCEEDS ALONG ITS OWN CLEARLY DEFINED PATHOGENESIS, with great momentum and power, which no human devices can interrupt. The next shock will be why the bill has not fixed the banking system as Mini-Fuhrer Paulson claimed it would. The other next shock is why Wall Street will need another $700 billion within a year. The other other next shock is how much the AIG and Fannie Mae "INVESTMENTS" a la nationalization will each cost the USGovt conglomerate an unexpected extra $trillion. The bailout yesterday enables Wall Street executives to retire more comfortably, even as some seek asylum or face exile.
The irony of the lifted depositor insurance is that big financial conglomerates can now raid the private accounts worth over $100k now, with government coverage in the bankruptcy courts. The October Hat Trick Letter contains some multi-sided evidence of USFed open license to use subsidiary accounts toward the aid of liquidity strains. What constantly leaves me shaking my head is how intelligent people continue to attribute fair spirited motives to the system, when it resembles a crime syndicate more each year. The reason why it resembles one is that it IS a crime syndicate operating under the USGovt roof. There are three crime syndicates operating under the USGovt roof, the others identified in the report this month. Each has had a profound financial effect on the nation, as in killing its host.
One can make a fine balanced and credible argument that the Fannie Mae bailout package represented an aggregate parallel of the simple Trenton New Jersey home loan fraud. The parallels are argued, with conclusion being the USGovt bailout was tantamount to abandonment by the mafia gangsters, who walked away from the $250k loan on the $50 crack house dilapidated property. Parallels are disturbing, as Wall Street and USGovt players fill out the example carried to the aggregate. The other Fannie Mae fraud is the simple bond certificate counterfeit, just plain paper printing without bother of Wall Street involvement. That fraud helped to run up the total Fannie Mae fraud past the $1 trillion mark. Given the sleazy guys who ran Fannie Mae, and all the protection run for it by politicians averse to reform, the fraud was quite easy. Who would want to question a shiny Fannie bond, a device which powered the great housing boom?
FDIC AS NEW I-BANK RAIDER
A new role seems to have come to the Federal Deposit Insurance Corp. They are the newest brokers on Wall Street, the new investment bankers, raiders true to the name. They do not protect depositors any more than Christopher Cox at the SEC protects stock investors. The FDIC has minimal funds, most likely co-mingled with the USTreasury anyway, just like the Social Security Trust Fund. The measly $45 billion lying around in the FDIC fund would not cover more than one or two decent sized banks, or one Washington Mutual or one Wachovia. So what does Sheila Bair do in response? She defends Wall Street, avoids liquidation by dead banks, and steers them to the JPMorgan chop shop and slaughterhouse. A great arbitrage results, as JPMorgan obtains bond assets for nothing, and can sell them to a stupid captive customer, us taxpayers.
In doing so, several things happen:
1) JPMorgan obtains the entire corporate asset kit & kaboodle for next to nothing
2) deposits are used to help the JPM asset ratios
3) bond assets can be sold to the USGovt bailout fund
4) senior bond holders for the dead banks are screwed, receiving a pittance
5) dangerous credit derivatives are placed in the JPM Garbage Can
6) the Wall Street Consolidation Plan continues.
The Big 3 Banks are JPMorgan, Citigroup, and Bank of America. Just how on earth can Citigroup even consider acquiring Wachovia? Buy it with what? Citigroup is insolvent. That does not stop the Wall Street firms from spreading their cancer. Besides, King Cox has a plan, to remove 'Mark to Market' asset accounting rules. Poof! The US banks are solvent again. Only trouble is they become Walking Zombies. Couple this desperate policy change with short stock restrictions, and the Third World Finances label fits even better, from lack of credibility. The new Wall Street I-Bank is on the scene. The modern FDIC might make Michael Milken proud, the junk bond king from Drexel Burnham. By the way, he only served two of his ten years in prison. Wall Street does have its privilege. The Wall Street investment bank model is dead & buried, with the door slamming shut by Goldman Sachs changing its coat to read bank holding company.
The group likely to initiate lawsuits is the senior bond holders to the broken banks. They should have entered an orderly procedure led by the FDIC. They face ruin when they should salvage something. The FDIC sets up banks to be raped. The label of pimp is too generous and connotes too much respect. To think that Sheila Bair at the FDIC is being praised for her leadership lately is enough to make a bond holder vomit. These mergers are nothing but disguised 'Chop Shop' rapes. At least the FDIC receives fees. JPMorgan donated $1.9 billion to the FDIC cause. By the time the dust clears after the locomotive crashes, three giant hollow monoliths were be standing, a tribute to Manhattan, in the Big 3 Banks. Their glass and aluminum fittings might be in much better shape than the World Trade Center though. It is doubtful that they possess any gold bullion in basement vaults. Let's hope the third of these buildings does not suffer a structural sympathy, only to collapse.
LOOMING TIME BOMBS
Clearly they are AIG with its raft of Credit Default Swaps, and Fannie Mae with its raft of mortgages and their bonds. Fannie also has a scad of Interest Rate Swaps. As explained in past Hat Trick Letter reports, the quarterly bills payable to JMPorgan and Goldman Sachs might be considerable on these swaps. The USGovt swallowed two really big ugly hairy hungry tapeworms, that will possibly each cost an extra $1 trillion in unplanned expenses. Actually, my guess is the figure might be conservative. A year ago, when clowns like Bernanke and harlots on Wall Street were estimating the entire mortgage fiasco would result in $100 to $200 billion losses, my figure was $1.5 to $2.0 trillion. As the time bombs go off, they will do so in dribs & drabs, actually giant dribs & giant drabs. The costs will take esteemed senators in the august body of the USCongress off guard.
An interesting thought came to me tonight as the Senate Bailout Bill was written. Actually, more sinister than interesting. The Fannie bill, the AIG bill, and the Wall Street omnibus bill might have been greased by private bribes. Imagine the hefty $138 billion paid to JPMorgan by the USFed, ostensibly from counterfeit Dept of Treasury hotmoney, during the Lehman Brothers failure and confusion, approved by Bankruptcy Court judge James Peck in Manhattan, all executed in pre-dawn during the weekend. Sorry, wanted to paint the background accurately but succinctly. If the 74 senators were each given $2 million in a basic traditional bribe, located safely in a Cayman Island account, then the total cost to JPMorgan would only be $148 million, in the neighborhood of 1 part in 1000 on that disgusting under-the-table handout of $138 billion. It makes good business sense in a day and age when rules mean nothing, when preserving the system is paramount, especially when BS bylines can be spouted about helping the common man.
RUN ON BANKS, RUN ON BONDS
Those talking perpetual campaign managers known as USCongressional members, they like to talk about "the fact of the matter" a lot, as thought they have some innate ability to recognize facts. Here are some facts. A broad and deep run is occurring on US banks, small, medium, large. Banks rely upon deposits and bank equity (stocks and bonds) to supply themselves with capital. The bank runs strip banks from their ability to continue operations, at a time when their stocks have cratered. Stock price declines of over 70% and 80% are common, the norm, not the exception. Insolvency plus illiquidity means bankruptcy, without benefit of time extensions. As Meredith Whitney (the intrepid bank analyst from Oppenheimer) said in a recent interview, "There are a ton of regional banks that also face a similar predicament." She correctly forecasted much bank distress, and expects a flood of FDIC activity to deal with failing banks.
Europeans have also lost respect for the US financial leadership, public statements having been made by the German Finance Minister Peer Steinbrueck to the effect that the United States has lost its geopolitical leadership mantle. A powerful reversal in investment flow endangers the US bond markets. Private flow of money resulted in the movement of $92.9 billion out of the US in July, after $46.8 billion entered the nation in June. A profound new trend is in place, whereby the three major continents of North America, Europe, and Asia are bringing home money. With a US budget deficit easily eclipsing the $1 trillion mark this coming year, demands for USTreasury sales will be left wanting, as USTBonds will be left on the table. The money printing machines will be the main recourse, as US$ monetary inflation will enter at least one and maybe two new gears in higher usage.
THE RISK LIES WITH HIGHER USTBOND YIELDS OFFERED, OR LOWER USDOLLAR EXCHANGE RATES FORCED. Either way, foreign US$-based bondholders face big losses. The nationalization demands will quickly force the issue of USTreasury Bond default. Bear in mind that now 52.7% of USTreasury debt is held by foreigners, and that proportion is fast rising. At yearend 2007, a hefty $9.4 trillion in US$-based securities were in foreign hands, as in liquid assets, easily divested. Risk to foreigner reserve accounts grows. They recognize their risk of becoming bagholders of greatly damaged debt paper. Amidst this pressure and isolation, the US Federal Reserve might simply resign its contractor position with the USCongress. After all, their balance sheet is decimated. It is not unlimited. It does have creditors.
The gold price will respond, as the USDollar faces a trashing. On the other side of this storm, characterized paradoxically as a USDollar rally at a time of truly devastated fundamentals, the USDollar will get trashed. To this end, a shocking admission came from New York City mayor Michael Bloomberg. He is a bit of a maverick, speaking his mind. He actually stated, "The next cause for concern in the battered US economy is whether there will be buyers abroad for the nation's billions in debt."
USDOLLAR AT RISK, USFED RATE CUTS SOON
The USDollar is at extreme high risk. Since its bounce in July, behavior is erratic, volatile, and fully dependent upon central banks and market rule changes. The US$ money supply had been steadily growing at a 15% growth rate, give or take. Expect it to surpass 20% soon, and the US$ to reflect the debased currency from a flood of supply. The United States will be the first nation to cut interest rates, from desperation financially and economically. Other nations will eventually follow, but not right away. The effect few talk about regarding the mammoth nationalization and bailouts underway is the powerful jump in price inflation, along with currency debasement. Both are inevitable, sure to lift the gold price in powerful steps. The isolation of the US in geopolitical circles, the utter shock at failed leadership witnessed the world over, the widely perceived national bankruptcy will translate into shunned USTreasury auctions and outright divestment of US$-based assets. The only buyers will be central banks. The USDollar is at very very very high risk of serious declines, exactly like the US stock markets.
A trump factor has entered the room. THE USDOLLAR & GOLD WILL SOON RESPOND TO THE FAILURE OF THE US FINANCIAL SYSTEM, WHICH COULD QUICKLY RESULT IN NATIONAL EMERGENCY, BANK HOLIDAY CLOSURES, AND TOTAL FRUSTRATION BY BANK LEADERS, AS NOTHING SUCCEEDS. The Wall Street bailout bill fixes nothing in bank system structure and integrity and function, as problems remain intact tragically. The United States controls the world reserve currency in the USDollar. In Hat Trick This late summer, my analysis stated that gold must make a difficult transition from an anti-US$ trade to a hedge against monetary inflation, a hedge against realized price inflation, and a hedge against geopolitical risk, even a national US banking collapse. Some movement has been made on the transition from the tunnel vision anti-US$ trade. One should keep focus on how the US official lending rate at 2.0% is more than 3% below the current suppressed Consumer Price Inflation rate. So money is actually free for those who can access that rate.
The USDollar increasingly is being defended by market interference mechanisms of the worst and most egregiously shameful order, such as a) restrictions to short financial stocks, even though they are insolvent and more illiquid by the week, b) calls to eliminate 'Mark to Market' accounting of bank assets, and c) the trusty Plunge Protection Team devices used to prop up stocks, bonds, and the US$ itself. The major currencies are all at risk actually. One contact with international connections recently wrote me, "The US$ will drop to 2.00 against the EUR not before long. And then the EUR will crash shortly thereafter." Many fine analysts expect the USDollar to suffer a severe markdown as the recent US nationalizations and bailouts are fully digested. Their forecasts would coincide with the notion that the USTreasury Bond suffers a severe market interruption like a suspension or possible default, but then later the euro is victimized by new global gold-backed currencies. This is a very possible scenario.