THE INTERNATIONAL FORECASTER
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An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman
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The theory of spreading the losses may have seemed like a good idea, but what has happened in the MBS, CDO, ABS & SIV distributions is that dispersement has brought distrust and a loss of confidence at the highest levels of the financial world. Instead of seeing a handful of institutions go under, we have thousands of institutions having to declare losses. It has been over 3 months since central banks were forced to inject liquidity into the banking system. Some $800 billion to $1 trillion and the problem is nowhere near being solved. Daily we see admission of massive losses and there is no end in sight just as we predicted so long ago.
Again the fiasco was created by the Fed and natured by the rating services and the lenders. We have written for years of the terrible conflict of interests of these three groups, but as usual few wanted to listen. How can a rating system be objective when its members are paid by the people they rate? After all the forensics are done, years from now, what you have just witnessed in the mortgage market will be called the biggest scam of all-time created by the Fed to keep the economy from collapsing and to buy time until the elitists were ready to finally pull the plug. The rating agencies magically made BBB securities into AAA securities by mixing both together. They structured the product at the behest of banks and the Fed, just like the pressure that was put on mortgage originators to write loans that should have never been written. There is absolutely no question that a conspiracy existed between the Fed, the banks and the rating agencies that worked with the banks creating this toxic garbage to be dumped on professional inventors worldwide.
What we have now is professionals that are trying to dump these toxic securities into a market that is almost non-existent. That means in order to balance their books these investors have to sell other assets to offset these paper losses. This is called contagion and the spreading of misfortune into other markets. Positions in other investment areas are being sold to realize cash. This has led to unsettled lower markets in stocks and other investments. Hedge funds are in serious trouble as well with these CDOs, ABSs, MBSs and SIVs and if they are in trouble so are the banks that lend to them. Usually loses can be easily absorbed by all parties, but not when you are using leverage and that is what all these parties have been doing. The full damage done would be finally known for another year or two. If you mix in an overpriced stock market, a real estate collapse and major losses you come up with a deep recession accompanied by inflation. The only alternative is gold and silver related assets.
GOLD, SILVER, PLATINUM, PALLADIUM AND URANIUM
Wall Street has a big, dark secret that you almost never hear mentioned in the mainstream media. All we ever hear about are the underlying mortgages, bonds and other securities which are in the process of being trashed with ever-increasing thoroughness, such as CDO's, ABS's, MBS's and other types of toxic alphabet soup which we have become all too familiar with over the past several months. But these instruments along with other equity swaps, futures and options are only the tip of the iceberg. There are two other types of weapons of mass financial destruction that comprise roughly 97.5% of the roughly 400 trillion dollars of notional value for all outstanding derivatives. The loss exposure from a meltdown of these derivatives is the big, dark secret referred to above, and has been totally and deceitfully miscalculated by the Bank of International Settlements (BIS) to be a tiny fraction of the actual potential risk because they do not want investors to panic at the sheer, gargantuan size of this loss exposure on a worldwide basis should these derivatives fail. And believe us when we tell you, investors should be panicking. If they had even a lick of sense, they would be fleeing all financial markets in terror, with the exception of precious metals and their resource stocks, because all these other markets will be vaporized when the final cataclysm becomes manifest.
The first type of killer derivative is called a credit default swap (CDS). Without getting too technical, this is basically a contract where party A receives a periodic fee from party B over a specified period of time to insure that party B suffers no loss from a default in the repayment of debt owed in connection with a bond or other obligation of a reference entity C. Never mind that party B does not necessarily have to own any of C's bonds, as we can just make up the contract out of thin air if we want to without any money being put up as collateral by party A for their potential liability to party B. The total amount of insurance covered by all party A's for all party B's, incredibly, has no relation to the actual amount of debt owed by C on the underlying bond. As an example, you could have CDS's covering many multiples of the total subject bond debt of C, because there could be many different party A's insuring the full amount of C's debt to their corresponding party B's. This is total insanity, because if party C defaults, the resulting losses to the various party A's under their insurance contracts with their corresponding party B's could be many multiples of the actual total debt of party C. The impact of C's default on the markets where its debt is traded could thereby be greatly amplified due to this duplication of insurance. It is the functional equivalent of allowing anyone with enough bucks to insure the life of someone they do not even know, thus allowing for rampant speculation on whether that person will live or die and inviting a potential murder of that person by the parties who could benefit thereby. These CDS's also give a false impression of market security, thus reducing risk assessment and risk aversion, because multiple parties are insured against the same risk, namely C's default, and no sell-off of the underlying asset, namely C's bond, occurs because the risk of loss has been insured over and over again by most, if not all, major investors in C's bond. Who are the freaking geniuses who came up with this magnificently imbecilic idea?
The second type of killer derivative, and by far the largest in terms of notional value, is the interest rate swap (IRS), and we might add that you have far less to fear from the IRS tax collectors than you do from these IRS swaps. This little beauty comes in many shapes and sizes, but the most common is a fixed-for-floating rate swap in the same currency where party A agrees to pay party B a stream of floating or adjustable rate interest income payable in a specified currency in exchange for a stream of fixed rate interest income to be paid by party B to party A in the same currency, starting with a zero net differential between the floating and the fixed rate payments, with the principal amount for purposes of calculating interest payments being notional only. This means that the "principal" is an imaginary amount determined by the parties for purposes of making interest calculations and that no money is exchanged between the parties in terms of principal value, only in terms of interest differentials between the fixed and the floating rates on the notional principal as will vary over time depending on whether interest rates are rising or falling. This means that the swaps are totally naked, which allows once again for rampant speculation based on fluctuations in rates of interest and which further reduces risk aversion for what anyone would normally consider to be deadly adjustable rate loans based on the illusion that they have hedged their bets even though no collateral has been put up to cover the other party's potential liability under the derivatives contract if rates move against them. This is how risk is skewed by derivatives. Presumably, "all" you have to worry about is the cost differential between the floating and adjustable rates when applied to the notional amount of principal selected if interest rates turn against you. So you can imagine how large the notional principal might become for those with money to burn like hedge funds. These IRS contracts are literally created out of thin air and are limited only by the respective imaginations of the parties. And as with CDS's, no collateral has to be put up by either party to secure their potential liabilities under the derivatives contract, and due to their often unique nature and the fact that they trade on the OTC derivatives markets, they may at some point become very illiquid like the other forms of toxic waste if interest rates get way out of balance. Again we ask, who are the boneheads that came up with this idea?
Adding fuel to the upcoming conflagration will be the fact that the majority of these CDS's and IRS's are as naked as a jaybird and are leveraged to the hilt! This is why the IBS figures are so very wrong, because they fail to take into account the myriad of leveraged situations that these weapons of mass financial destruction are now a part of, and what impact the sudden loss of market security resulting from a meltdown of these derivatives might have on markets overall. There could well be a synergistic effect where total losses are much greater than the sum of their parts. What happens when nearly all bank reserves are vaporized in a matter of a few months, or even within weeks, as they and their customers swirl around in a big bankruptcy toilet bowl on their way into being flushed into fiat money hell and oblivion? Will the Fed skip monetizing trillions of dollars in repos and move right into monetizing quadrillions? How much would a dollar be worth then? We shudder to think!
As usual, our financial "geniuses" have not thought the full derivatives process through to its potential ultimate conclusions. They look at the positives and ignore the negatives. Just as with the black boxes used by Wall Street and institutional investors that do not take into account catastrophic situations involving heart-rending volatility of prices, the whole system of derivatives is doomed to fail catastrophically if anything happens outside of the artificially predetermined parameters chosen by the "geniuses" who continually fail to recognize that playing markets is a form of art and can not be boiled down to a series of mathematical equations. The human elements of greed and fear which drive markets can not be quantified with sufficient accuracy to safely trade when large imbalances suddenly grip entire market segments such as with the real estate debacle. The "geniuses" always get screwed any time something unprecedented occurs. You cannot set parameters for something that has never happened before, at least not accurately enough to remove the risk of substantial and systemic failure.
And now because of the Fed's profligacy and the Treasury's incompetence, we will soon become the next Weimar Republic, so fire up your wheelbarrows full of dollars for the next time you have to go to the grocery store. The rampant gambling and speculation on the back of ludicrously low interest rates set during Greenspan's Folly, an out-of-control national debt which has exploded on account of perpetual wars for perpetual peace and perpetual profits, trade imbalances from free trade, globalization, off-shoring and outsourcing, and now monetization of repos in multi-hundreds-of-billions in bank bailouts together with a hapless, abandoned dollar that is about to become a Banana Republic currency as the Fed continues to lower interest rates to bail out its denizens of Wall Street, we are headed toward inflation like nothing anyone in the US has ever seen before in the entire history of the United States. The resulting hyper-stagflation will drive interest rates into the ozone and completely fry and vaporize those who are on the wrong end of IRS's (i.e. those paying out interest based on the floating rate side of the contract). And consumer spending and the real estate markets will dry up, sending many corporations into bankruptcy and igniting a thermonuclear meltdown of CDS's, with each defaulted company bringing down multiple CDS insurers due to the duplication of insurance discussed above. Perceived risk in the markets will then accelerate, driving interest rates even higher, exacerbating hyper-stagflation and further vaporizing both CDS's and IRS's in a cascade of defaults that will take down the entire world economy and all financial markets around the entire globe just as sure as God made little green apples. All the leverage used by, and all of the interconnections between, the various counter-parties involved in the many types of derivatives will finally start to be known, and only those in gold, silver and their related stocks will be saved from complete and utter financial annihilation.
Well, the mainstream media, the analysts and the pundits are already predicting the downward trend in gold to a price somewhere in the 750 range by the end of the year. The Fed-heads are out jawboning about how we may not need more rate cuts in order to slow gold down and support the sagging dollar as they continue to lie through their Wall-Street-bailing teeth in their desperation to save the commercial shorts from a walk into Crispy Critter Country. They say there will be a big correction in gold and silver this year and prices will not move up until next year. What they fail to mention is that there are still almost 240,000 open December gold futures contracts even after the 22,000 that were closed out on Thursday which undoubtedly accounted for gold's rise to about 818 that day, and that the commercial shorts own most of them, many of which are now still underwater by about $15,000 per contract even with gold stubbornly holding at about 790. Already the open gold futures contracts for February have soared to a very manipulative level of 116,000 contracts as the cartel gears up for the winter/spring rally for precious metals, and as the cartel attempts to intimidate traders and attempts to take the public out of the precious metals markets for fear of a big correction and much lower prices. They hope that everyone will forget about the issue of the 240,000 December gold futures contracts that is still unresolved. Do not be intimidated. Support the large specs in their battle to push gold past 850. Do not let up on the cartel. The gold alarm must be rung so people can be alerted to the coming danger. The covering of 22,000 shorts sent gold from Wednesday's close of 797 to a high late Thursday of 818 before a series of substantial central bank sales brought gold down to 785 on Friday. Can you imagine what would happen to the price of gold if there were a short-covering of many multiples of 22,000 short contracts?
The large specs have supported precious metals admirably, and have used the strength provided by many seasonal factors to do substantial profit-taking in gold, silver, oil and other commodities as they load their 16 inch guns with massive physical gold and silver projectiles and push the charges filled with the powder (cash) they have kept dry into the firing chambers to get ready for the final assault on 850. The large spec market strategists are in the conning tower of the USS Silver & Gold, the ancient flagship of our Founding Fathers, deciding on the coordinates for the upcoming bombardment of the gold bear capital located within the COMEX complex in the Land of Fiat Dollars. Many grim looking gold bulls can be seen on the aft deck as they ponder the day they will board the LST's for what can only be described as the next D-Day invasion, financially speaking, embarking on a trip into shark and barracuda infested waters where there can be no turning back. The Screamin' Gold and Silver Eagle special forces were dropped behind enemy lines and attacked the stock markets in the last hour of trading on both Wednesday and Thursday to protect the huge gains they made with their protective derivatives, especially those expiring in November, which the evil Illuminati tried to squeeze with another rally-crash, starting with Tuesday's 319 point Dow dead-cat bounce. The big Dow gain on Tuesday was promptly erased by the large spec's special gold bull forces, who attacked in the closing minutes of trading on Wednesday and Thursday so the evil Fed and PPT did not have a chance to recover the losses. Large gains were also made by large specs in stocks, which were sold into the false strength provided by the PPT. Even the tiny resource stocks seemed to light up on Friday. The large specs have paused to rest and reload. This battle is not over yet, not by a long shot, so stay tuned to your short wave radios as the epic battle between the forces of good and evil takes center stage once again, and heats up to the boiling point as the reprobate forces of the cartel attempt to take on the combined forces of the large specs, ETF's, sovereign wealth funds, Indian brides, and jewelers and investors from India, the Middle East, Russia, China and Asia. Hopefully once we take out 850, the US and European public will wake up and take gold to $2,000 and beyond!!!