US MARKETS

There is now a total disconnect between Wall Street and reality as the Fed continues to push on a string while yield ratios between long term and short term treasuries go parabolic and monetization of debt and endless bailouts create the same geometric pattern for charts on actual inflation as opposed to the fairytales about inflation that we get from the Bureau of Lying Statistics.  The only bond and derivative losses that Wall Street pirates and buccaneers are focusing on are subprime bond and derivative losses, which are peanuts in the overall picture, albeit from an absolute standpoint the losses are far from being merely "peanuts."  The subprime losses alone most likely are at least twice as high as the cited $400 to $500 billion in losses, which have been estimated thus far worldwide, or about a cool trillion dollars.  Yet only about a tenth of that figure has been removed from the balance sheets of central banks worldwide so far, which can only be described as a total accounting fraud and a global disgrace for the world's financial and banking systems which have managed to totally evaporate what little trust there was left in the markets.

 Market confidence has been all but vaporized and at the rate losses are currently being recognized, the Fed may as well close the discount window for all the good that it will do.  Might as well take our lumps now or get pulverized later.  The discount window is useless in an atmosphere of opaqueness and mistrust immersed in a minefield of insolvencies.  Approve the wrong loan and your career, and possibly the solvency of your employer, could be in jeopardy.  Bankers are scared out of their wits and who can blame them.  No one should have to make decisions in an atmosphere laced with fraud and deceit, but now they have no choice because the Fed allowed, and even encouraged, these problems to grow and fester until they formed a terminal, malignant, cancerous tumor on the worldwide financial system that will now also eat its way through what is quickly becoming the world's former reserve currency as bailout after bailout, nationalization after nationalization, cause the sins of the banking and financial community to be dumped on the heads of hapless taxpayers everywhere while most of the developed nations of the West get to regress back to Banana Republic status.  We believe that we can safely express the opinion at this point that any statement to the effect that self-regulation and the repeal of the Glass-Steagall Act did not and will not work could well turn out to be the greatest understatement of the Twenty-First Century.  If Hanky Panky Paulson ever starts to extol self-regulation again, he should be made to suffer the modern day equivalent of being "tarred and feathered."  We can no longer tolerate this kind of buffoonery and tomfoolery from our government and business leaders.     

While the press continues to lavish all its moronic attention on subprime related losses in order to direct non-insider attention away from where all the real problems lie, mega-losses on AAA and Alt-A bonds and derivatives, which could be as high as 3 trillion dollars (yes, trillion with a "t"), are not even discussed, while the Japanese bankers continue to play a see no evil, hear no evil, speak no evil game with their subprime boondoggles, not to mention their AAA and Alt-A WMFD's (weapons of mass financial destruction).  AAA bond indexes representing at least 7 trillion in AAA bonds and derivatives have already plummeted 30% (now you know no thanks to the press) and this is before the monoline bond insurers, which have been lending their questionable AAA ratings to insured issuers, have been officially vaporized as they continue to move and operate as if they were some kind of walking dead.  Losses for Alt-A bond indexes are much worse as an overall percentage, closer in fact to the 80% losses suffered by subprime BBB's, and the potential losses for all categories of bonds and derivatives is a massive $4 trillion.  Wait until the various versions of Japanese atomic bombs are dropped on financial markets as a type of fitting revenge for Hiroshima and Nagasaki.  Let's call them the Subprime-BBB-Bomb, the AAA-Bomb and the Alt-A-Bomb.  The Nikkei liquidation and meltdown of CME yen shorts that will result when these bombs are dropped will send the yen on a moon shot, and as a result the carry trade will implode while gold visits the next galaxy.  This is because when Japanese banks begin to acknowledge their bond and derivative losses in the many hundreds of billions, everyone will flee to yen-denominated money markets and Japanese government bonds for safety just as we flee to the US equivalents denominated in dollars when our markets implode.  This is why the dollar often rallies when the stock markets tank, and why short-term treasury rates drop as demand for the "safety" (we use that term tongue-in-cheek for any dollar-denominated assets) of short-term treasuries drives Treasury bond prices up.  To have the yen rally the way that the dollar rallied during the recent stock market meltdown presents a double-whammy situation, especially considering the yen's relative strength viz a viz the dollar based on Japan's now trillion plus in forex reserves (if you count February), which are the largest in the world. Compare that to our trade deficit, which is also the largest in the world by almost as much in the opposite direction.  If the dollar can rally given its current fundamentals (albeit through rampant manipulation as well), imagine what might happen to the much stronger and vastly undervalued yen. Such a massive yen rally would start a chain reaction market meltdown courtesy of the imploding carry trade that would put stocks worldwide in a vicious downward cycle with no bottom in site. Dollar rallies do not yet carry the same dangers, but at some point dollar rallies will be just as deadly once the dollar replaces the yen as the carry trade of choice based on its continuing weakness that is about to accelerate as Bernanke throws all caution to the wind by taking out the bull-cutters in March and applying them to the Fed funds and discount rates.  The potential for the detonation of the Ultimate Yen Death-Star under the circumstances described above is the reason we have not heard so much as a peep from Japan about bond and derivative losses for any category of risk.  The silence of the Japanese bankers is deafening.

In fact, the silence of all the banks on non-subprime loss exposure has been deafening.  But now, suddenly, we start to hear some leakage about the further exposure of Swiss bank UBS to Alta-A and various other non-subprime mortgage bonds and derivatives as the elitists begin to prime us for the next round of major thermonuclear financial meltdowns.  After a second half write-down of $18.1 billion, UBS now tells us that they have another $26.6 billion of exposure in non-subprime, Alt-A mortgage related assets.  This $26.6 billion was in addition to the previous total for subprime exposure of $27.594 billion as of the end of 2007.  This news sent UBS shares down to their 2004 lows and to less than half of their mid-2007 values.  Ouch!  Adding to UBS's woes were $11.4 billion in unsold LBO's and another $11.2 billion in a complex securitization product called a U.S. reference-linked note program.  Monoline insurer exposure was listed at $3.6 billion.  Others on Wall Street claim that total exposure should be somewhere around $60-70 billion, while Deutsche Bank claimed that the figure should be $68.7 billion.  Can we get a straight story from anyone, especially from the banks themselves?  Note that this does not even address UBS's exposure to bonds and derivatives based on AAA prime (non-subprime, non-Alt-A) mortgages which are also now imploding due to massive layoffs, among other reasons.  Bonds and derivatives based on AAA prime mortgages are among the AAA assets that have declined by 30% as mentioned above!  AND HELLO, IF THIS IS WHAT WE GET FROM UBS, LOSSES IN DRIBBS AND DRABBS, WHAT CAN WE EXPECT FROM ALL THE OTHER BANKS WHO WE CAN MOST CERTAINLY ASSURE YOU ARE IN EXACTLY THE SAME POSITION AS UBS TO EITHER A GREATER OR LESSER DEGREE!!  Good Golly, Miss Molly!!  What will happen when these devil's take their blue dresses off and reveal all the toxic waste that is underneath, and we mean all of it!!!

Tuesday was another banner day for the precious metals and for oil.  Light sweet crude closed above 100 for the first time with a finish of $100.01 per barrel and set a new all-time intra-day high of $100.10.  This now sets the stage for 100+ oil in the future as dissension in Kosovo and along the Israeli borders heat up once again and as supply threats from OPEC loom in the offing while Hugo continues to battle with Exxon.  Spot gold, ignited by oil, went on a $21.60 rampage to a new all-time closing high of $927.70.  Spot silver got radical as it managed to equal its 27-year intra-day high of $17.60 and then proceeded to set a new 27-year closing high of $17.53 while platinum continued its reign of terror to set a new all-time high of $2,160.  As you can see, this rally is far from over as inflation, the credit-crunch and the real estate debacle continue to send people fleeing in terror and desperately grasping for the safe-haven and inflation-fighting qualities of precious metals and commodities. The XAU and HUI were up big as well in contrast to other stock sectors, which were all mildly negative.  We are just getting started in this bull market, having just entered phase 2 of what will be at least 3 and possibly 4 phases in total.  In order to equal the 1980 high of 850, gold must break $2,500 just taking into account official inflation to date and must take out about $6,200 in order to account for actual inflation to date as calculated by us and by Shadowstats.com using 1980 methods of calculation that were not yet warped by hedonics.  But most people have not even considered that if the bull rally continues as inflation rages in the 15 to 20 percent category, which is carved in stone by the M3 tallies if they continue unabated as they must in order to keep our economy from imploding and deflating, for say another 3 years, then using an extremely conservative 15% rate of inflation, gold must take out 9,400 to equal the 1980 high.  And if we go a fourth year, we're looking at five figure gold around $10,800.  Using 20% inflation, those figures jump to about $10,700 and $12,800, respectively, so as you can see, the sky's the limit!!!

The credit crisis isn’t going away anytime soon. It will take some time for all the losses to be wiped off corporate balance sheets. Some markets are already frozen and tomorrow’s investment vehicles will look somewhat different and definitely less leveraged.

As we mentioned in our last issue the $330 billion slice of the municipal bond sector, the auction-rate securities market, probably will cease to exit. Like asset-backed commercial paper, auction-rate securities, a form of rolling short-term funding for long-term municipal commitments is in its terminal stages. Of course, borrowing short-term for long-term commitments is always a bad idea. We now see risk revulsion as Wall Street backs away from the sector refusing to use there own capital to support the sector. There is no market liquidity, nor confidence, and what we see is another run on a previously popular risk market/asset class by vultures, but who can blame them, they did not create the problem.

Those with the writedowns and bad debt are being ingenuous as they write off bad debt piece by piece. Debt-write offs are appearing around every corner and our banking system is on the edge of collapse. The core of the monetary system is rotten. Yet our media tells us very little and what they do say is limited and far from the truth.

The result of the fallout is that CDOs, ABSs, MBSs, municipal and even investment grade debt has no market. We have a number of institutions that are broke and the world knows it, and the Fed is keeping them afloat.

The economy is collapsing and it is increasing in intensity. Negative real interest rates are grinding the economy and the stimulus package is a 2-month loser. The crisis is getting worse, not better. The bubble won’t go away, it is like a bad dream. The days of easy and risky credit are gone.

There is no question that our financial system is being ripped to pieces. It isn’t only in the US - it’s worldwide. Global stock markets have lost $6 to $7 trillion in share value in January alone and had it not been for the intercession of the Fed and other central banks, January would have resembled October 1929. The top ten economic powers control 75% of the world’s $65 trillion economy and they are well aware of the major problems they face. They know these corrections could last for months or years and that inflation is the price that has to be paid to try to rescue the system. That would consist of coordinated interest rate cuts and continued increases in money and credit and direct intervention into markets to keep them from falling. The bank write offs alone in the subprime, ALT-A and prime loans will be over $500 billion. Then there are the mortgage holder losses and the losses of those holding the mortgages. That adds up to over $2 trillion. Those assets have to be replaced and that can only be done with money and credit created out of thin air. In 2008 about $45 billion of all mortgages will reset each month and in all probability half of the owners won’t re-qualify or won’t be able to make additional payments. This situation is made worse by falling house prices and the fact that there is about $2 trillion worth of these loans at risk not only to the homeowners but to the investor as well. Houses have another 15% to 25% to go on the downside in the former 30 hot areas, so removing equity will be difficult. In addition, inflation is raging making life even more difficult.

Eighteen of the top central banks have been participating in the bailout. They knew this was coming four years ago and that is why M3 has averaged a 14% increase each year on average. They knew the risk of global inflation but they have very little choice. They cannot allow deflation to take hold, because if they do it is all over. That is why other central banks have lowered interest rates. The lone major exception is the ECB, the European Central Bank.

As a result of these policies over the last seven years gold, silver, platinum, palladium and all commodities have been in bull markets and they all have some ways to go. All that money and credit is fueling these markets. This is what we predicted in April 2000, when we recommended gold and silver related assets. Just as an example since August gold has been up over 30%, silver over 25%, platinum and palladium are in another world and if you look at the three commodity indexes they are up 22% to 30%.

Inflation is moving higher in every country. The US dollar exports inflation but so does every other major currency except the Swiss franc. You have seen the increase in money and credit, which were printed last week and that we discussed innumerable times. Thus, it is easy for anyone with any intellect to understand that this massive creation of money and credit and low interest rates has and will in part continue to flow into precious metals and commodities.

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-- Posted Wednesday, 20 February 2008 | Digg This Article