Financial Notes

Financial Notes - 1

QE2 and the Fate of the U.S. Economy ~ by David Galland of Casey Research 4/26/2011 (pdf)

>>In the last few weeks, I’ve become particularly “attentive” to the intentions of Fed policy makers following the scheduled June end date for QE2.

This is no small matter; an actual shift in Fed policy – as opposed to the smoke and mirrors sort – could temporarily play havoc on equities and commodities markets alike. How could it be otherwise, when under QE2 the Fed has been writing checks to the Treasury in amounts of upwards of $100 billion a month since last November?

As a point of reference, at the end of April 2007, the monetary base of the U.S. was $822 billion. At the end of April 2011, it will be $2.5 trillion, a three-fold increase. Call it what you want, “quantitative easing,” “stimulus,” “political payola,” “madness,” but monetary inflation is the correct term. And monetary inflation on this scale invariably leads to price inflation on a similar scale.

It is this “money,” steadily ginned out of thin air, that provides the fuel to keep the spendthrifts in Washington spending and props up the wounded economy.

It is also this “money” that sends equities and commodities soaring as investors look for higher returns and things more tangible to hold ahead of the rising inflation.

Removing the stimulus, therefore, will almost certainly have consequences.

Yet, because the politicos and their pets at the Fed have taken things so far beyond the pale at this point, so would a decision to keep the monetary pedal to the metal past June. As you can see in the chart below, technically speaking, the dollar is breaking down...

This steep downward slope of the dollar’s trend line over the last year begs for the Fed to attempt something to slow the dollar’s descent. Were they to signal a continuation of the same level of monetization now underway, past June, can anyone doubt that the dollar’s steep fall would only worsen, risking even collapse?

To my way of thinking, therefore, the logical starting point is for them to let QE2 expire in June, as planned, in order to show the world some monetary spine.

That is not to say that the Fed will leave its seat empty at Treasury auctions post-June – various members of the inscrutable institution have already made clear the intent to continue reinvesting the proceeds of maturing securities in the Fed’s portfolio back into Treasuries. Yet, even with that ongoing action – resulting in Treasury purchases to the tune of $17 billion a month – the net result will still be a monthly gap on the order of $80 billion.

All Eyes on Interest Rates

The dialing back of the Fed’s monetary machinations increases the possibility that interest rates will need to rise in order to attract buyers in sufficient quantities to fill the gap. And if there’s one thing we know, it is that rising interest rates would be devastating to an empire of debt such as the United States circa here and now.

One typically doesn’t like to see the empire in which one lives crumble into lesser states, as that is usually accompanied by a flagging quality of life and social unrest. Though there is bupkis that I, or any of us, can actually do at this point to rearrange things on the larger stage – it does behoove us to look after ourselves. Which, in the current case, requires a quick detour on the nature of interest rates.

We humans don’t really like change. And so we tend to embrace scenarios involving only gradual change – the soft sort that are easily coped with, with small and measured adjustments to the riggings.

The risk in such a passive perspective can be seen in the chart here showing the benchmark 10-Year U.S. Treasury rates from 1945 to 2010. While it is worth noting that over that entire 65-year period rates have never been lower than they are just now, a clear sign that today’s low, low rates are anomalous – and doubly so given the amount of outstanding debt – my primary purpose for presenting this chart is to narrow your focus to the period between 1975 and 1977.

As you can see, in 1975 – a period associated with a temporary calm before heading into a final inflationary blow-off – interest rates were actually on the decline and had fallen below the levels of 1970. Then, in the blink of the proverbial eye, 10-year rates started accelerating upwards, moving from just over 6% to over 15%, driven by the raging inflation and, in time, a Fed policy shift designed to crush that inflation. While rates subsequently peaked and began to ease, in fits and starts, it took a full decade before they returned to the 1975 level.

Unfortunately, the situation today is worse, which is saying something. As you can see from the next chart here, in 1977, U.S. federal debt was a third of where it is today as percentage of GDP, and this doesn’t reflect the coming ramp-up of trillions of dollars in additional debt that is now baked into the federal government’s spending plans.

Should we see a similar spike in interest rates to, say, 15%, it would create a black hole that wouldn’t just suck in all the government’s revenues, but pretty much the entire economy. This is a very real risk.

But back to the Fed and the crossroads it is soon arriving at. In the absence of any substantial reduction in government spending – a reduction on a scale that isn’t even being whispered about in the halls of power – the Fed is damned if it dials back its monetization (jacking up the potential for rising interest rates), or if it doesn’t (dooming the dollar and in time triggering higher interest rates as well).

The politicians and their friends down at the Fed can pretend, as they do, that the overhang on the economy of some $14 trillion in debt, and another $50 trillion or so in longer-term entitlements, is much ado about nothing. This view of theirs is confirmed by the current budget discussions that talk of slashing $4 trillion out of federal spending over the next 12 years – but ignore that this slashing still anticipates annual deficits on the order of $1 trillion. There are facts and fictions in this universe of ours, and it’s a fact that the notion of spending our way to better days is a fiction.

And so, in my mind, there is no question that the Fed will ultimately be forced to unleash QE3, and that will be followed by QE4, QE5 and so on through QE15 – or whatever number is in force at the time of the dollar’s collapse.

In the meantime, though, given the current ill health of the dollar, I remain convinced that the Fed will pause in its blunt-force monetization, come June. And that is likely to provide a shot in the arm for the dollar – versus the equivalent of a shot in the head to the dollar, should they reverse themselves and attempt to continue monetizing at the same elevated levels, past June. Among other consequences, a rising dollar could spell trouble for overheated commodities, at least over the short term.

The big unknown, of course, is what will happen to U.S. Treasury rates. And for reasons discussed a moment ago, this is a really important unknown. We shouldn’t have to wait overly long for some answers. But while we wait, a few scenarios to ponder:

Best Case: For a time, post-June the Fed becomes a relatively less important player at the Treasury auctions, buying about $17 billion in Treasuries, vs. the $100 billion or so they are buying now, and the market responds favorably to the policy shift. The gap left by the Fed is filled in by institutions, and by friendly governments, looking to roll back their diversification into the euro and the yen – given the poor outlook for both. For a while Treasury rates remain relatively stable. And that encourages the U.S. government to continue spending willy-nilly and keeps the party for equities continuing for awhile longer, albeit with the participants on edge and watching the exits for any movement.

A rebound in the dollar, one result of an inflow of renewed foreign buying, would hit the commodities, causing them to underperform until it becomes obvious to all down the road that the Fed will have to once again begin monetizing.

Medium Case: Post-June, participation at the Treasury auctions weakens, but not disastrously. Rates rise, but also not disastrously. The economy teeters on the edge, but doesn’t fall. Neither does the dollar rise overly much, and something akin to a twitchy status quo continues as people wait for the other shoe to drop, as it inevitably must given that the overarching problem of sovereign and household debt has not been resolved. Volatility in equities and commodities increases, but there is no sustained move one way or the other. Yet.

Worst Case: Post-June, auction participation falls significantly, and interest rates begin to accelerate to the upside, sending equities markets into a tailspin, dragging commodities down with them. The Fed quickly reverses course and begins writing the big checks to the Treasury, stabilizing interest rates but sending shock waves through FX markets as the dollar hits the floor and discovers the floor is made of glass.

The precious metals and other commodities soar. With nowhere else to run, investors begin bargain shopping for fallen equities – which are linked to tangible businesses, after all – and they bounce relatively quickly as well. Meanwhile, as the dollar collapses, the cost of everything begins to soar, crushing the unprepared and triggering real hardship. Unable to push interest rates higher to head off the price inflation, the Fed heads retreat to a hidden bunker and begin looking for friendly countries willing to give them sanctuary.
Of course, no one can see the future – but I think all three of those scenarios are likely to materialize in the relatively near future, one after the other from Best to Worst.

If I am right, then the way to play it is to expect a near-term rally in the dollar. While the U.S. dollar is toilet paper, it is of a better quality than the euro or the yen. Which is not to say that it doesn’t deserve its ultimate fate – the fate of all fiat currencies – but rather that, as long as the Fed shows some restraint here, it may be able to stave off that fate a bit longer.

And that could put some serious pressure on commodity-related investments, especially the more thinly traded junior exploration stocks. The chart here shows the relative performance of the Toronto Stock Exchange Venture Index – the index offering the best proxy for micro-cap resource stocks – against the price of gold.

As you can see, there can be quite a divergence in the performance of these small stocks over the price of bullion. While gold’s rise has been remarkably orderly, the rise in the stocks has occurred in fits and starts, with some breathtaking setbacks along the way. Of late, the stocks have had a substantial run-up, which again gives me pause. I think it is a fairly safe bet, therefore, that if gold were to correct 15% or so, the juniors would again go on sale.

In time, however, because interest rates are so low and the sovereign debt problems so acute, the worst-case scenario – of rates spiking – followed by the Fed quickly reversing course, is a certainty.

Which is to say that, in the now foreseeable future, all things tangible will do the equivalent of a moon shot.

Again, you have to make your own decision as to which scenario we are most likely to see. In my view, from a risk/reward perspective, as long as you have a core portfolio in precious metals and other tangibles (including energy), then selling some of your more speculative positions (you know the ones) to raise cash can make a lot of sense. That way you’d have the ready funds available to snap up the bargains that will be created during the Fed’s brief attempt at slowing the dollar’s current fall.

The way I figure it, at this point you can find all manner of analysis that will tell you it’s all blue sky from here for the commodities. Thus, a cautionary note seems justified.

Be careful, at least for the next couple of months. If I’m right, then there is a helluva buying opportunity right around the corner.

http://www.caseyresearch.com/gsd/edition/market-manipulation-mutterings-intensify

http://resourceinvestor.com/News/2011/5/Pages/The-Federal-Reserve-Note-is-Dead-Long-Live-the-Dollar.aspx

http://www.caseyresearch.com/cdd/cuisine-and-corrections

http://www.caseyresearch.com/articles/adrian-day-gold-prices-due-correction

http://www.butlerresearch.com/current-issue.asp

http://www.shtfplan.com/emergency-preparedness/investments-for-preparedness-and-wealth-preservation-that-your-financial-adviser-will-never-mention_03312011

http://www.shtfplan.com/marc-faber/marc-faber-stocks-and-silver-will-fall-sharply-in-may_05042011

http://www.caseyresearch.com/articles

http://www.growthstockwire.com/2691/The-Curse-of-the-Silver-Trade

http://www.growthstockwire.com/2712/What-the-Crowd-Is-Missing-About-Silver

http://www.thedailycrux.com/content/7602/Silver/rss

http://www.thedailycrux.com/content/7554/Silver

http://www.growthstockwire.com/1630/Why-Silver-Could-Shoot-Hundreds-of-Percent-Higher

http://www.thedailycrux.com/content/7591/Gold

http://www.bullsource.com/james-turk-forecasts-‘waterfall-decline’-in-us-dollar/

http://www.caseyresearch.com/editorial.php?page=articles/qe2-and-fate-us-economy&ppref=CRX217ED0411B

http://www.zerohedge.com/article/weekly-chartology-and-why-goldmans-clients-are-confused-weimar-rally

http://www.mineweb.co.za/mineweb/view/mineweb/en/page31?oid=124608&sn=Detail&pid=31

http://www.silverbearcafe.com/private/silveraccident.html

http://fofoa.blogspot.com/2011/05/costatas-silver-open-forum.html

http://www.zerohedge.com/article/jim-rogers-comments-triple-digit-silver-and-issues-warning-parabolic-moves-always-collapse?

http://www.zerohedge.com/article/silver-bears-are-back

http://www.zerohedge.com/article/presenting-slvs-largest-holders

http://www.zerohedge.com/article/physical-precious-metals-vs-precious-metals-stocks

http://www.zerohedge.com/article/another-decline-registered-silver-brings-total-comex-physical-multi-year-lows

http://www.zerohedge.com/article/wall-street-slogans-centrally-planned-generation

http://www.zerohedge.com/article/and-now-todays-mini-silver-flash-crash-same-time-same-place

http://www.zerohedge.com/article/wsj-reports-soros-burbank-selling-gold-silver-paulson-sees-gold-hitting-4000-three-years

http://dailyreckoning.com/hyperinflation-and-double-dip-recession-ahead/

http://dailyreckoning.com/predictions-of-the-gold-silver-ratio/

http://dailyreckoning.com/the-long-legs-of-the-silver-rally/

http://www.stansberryresearch.com/secure/digest/2011/html/index/792

http://www.zerohedge.com/article/physical-silver-update

http://www.bulliondirect.com/nucleo/showProducts.do?cat=Silver_Bullion&category=1

http://www.zerohedge.com/article/how-cbot-comex-and-cftc-coordinated-break-last-silver-price-surge

http://www.zerohedge.com/article/centrist-think-tank-conducts-study-finds-us-default-would-push-us-recession

http://www.youtube.com/watch?v=-IiarVvZguY&feature=youtu.be

http://www.zerohedge.com/article/guest-post-gold-silver-ratio-–-another-look

http://www.zerohedge.com/article/hong-kong-mercantile-exchanges-1-kilo-gold-contract-end-comex-gold-futures-trading-and-bang-

http://www.silverbearcafe.com/private/home.html

Should I Sell My Silver? (4/26/2011) (pdf)

http://www.silverbearcafe.com/private/04.11/sell-silver.html

http://www.silverbearcafe.com/private/04.11/$100silver.html

http://www.silverbearcafe.com/private/05.11/goldrush.html

http://www.silverbearcafe.com/private/05.11/silverbulls.html

http://fofoa.blogspot.com/

http://www.usatoday.com/money/markets/2011-05-05-silver-bear-market_n.htm

Auto Crazy
12:53 AM on May 6, 2011
Another manipulated market. Let's face it folks - Wall Street and Washington, D.C. set the markets up the way they like it.

The U.S. no longer has a free market. It's government run with Wall Street, The Fed, and Treasury in cohoots and pulling the strings. Socialize the loses and privatize the gains.
2 replies
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Score: 10
TheLoanRanger
1:01 AM on May 6, 2011
Silver had a big move from $8 to $50. The big boys and you know who we are talking about were getting pretty nervous so the margin requirements went up many times in a short span of time to shake out the wobbly knee guys and gals. I say screw them and everyone buy an oz. of silver. Hey; you don't think nothing of purchasing a pack of smokes or a bottle of fine wine or a case of your favorite beer. Just buy, buy, buy. BUY SILVER.
These day traders and other crooks are just manipulating and scaring the little guy out of their position so just fight back and buy physical. Just look what happened to the other platium group of metals when we found industrial demand for them and then couple that with quantatative easing 1,2,3A,3B,3C etc.
Now if you own an ipod, a black berry, lcd tv, led tv or have solar panels or drive a car or have a water filter or WEAR ANTI-MICROBIAL SOCKS. What about nano silver coating on door knobs and hospital linen to fight super bugs. I even have nano silver on the back of my linoleum because I could glue it directly onto my cement basement floor and guess what....my lino is perfect and it has been there for ten years. Do you see anyone scraping this off for recycling. Nooooo. it is being used up exponentially and you are all dupes to the big banks. Screw the banks. Screw the day traders. Just buy one oz and forgo a bottle of wine or a pack of smokes. Give an oz. for a gift. Hey this recent drop is only a 50-60% retracment of the $8-$50 move and then watch out.
Don't leave your position. It is time to add. Back up the truck. I am tired of crooked bankers and day traders that do not contribute a single thing to society and only screw everyone out of their hard earned savings and pensions. They would attack their grandma if she had dementia. Look. the tax payer bailed out the banks. The banks got a low interest loan, invested at a few points higher. They than reported a quarterly profit and gave themselves another huge bonus. Quit being a donkey. Cut back on a bit of drinking, reduce smoking and buy physical silver. Give it away but not like the lone ranger did. But I am sure when he fell off his horse, he just got back on and exclaimed....."HI. HO. SILVER."

Only-the-Truth
5:42 AM on May 6, 2011
Like all my other investments, I took my profits and cashed out last week @ 42. No man ever went broke taking a profit.

NotLiberal
8:13 AM on May 6, 2011
Agreed Animus.

I personally got out of the silver market after the price jumped passed $25 an ounce.

Have I lost out on some potential income? Sure I did, but you know what, even at $25 an ounce silver is still at an over inflated price. As it pushed in the $30 then $40 and then hovered near $50 an ounce I knew it would eventually drop like a rock.

Which is exactly what it is doing now. Short of some billionaire buying what people are trying to sell in a mad rush the price will continue to drop. But frankly, I don't see any billionaires buying silver right now. They didn't become billionaires by buying high.

The price is likely to go back to the $20 / ounce range. Only then will they get back in the market.

http://www.zazzle.com/keep_you_guns_bumper_sticker-128645164060761782

http://www.istockanalyst.com/finance/story/5119927/silver-in-crash-mode-time-to-get-out

http://seekingalpha.com/article/268054-thoughts-on-the-silver-crash

http://www.ibtimes.com/articles/141891/20110505/silver-crash-comex-margin-trick-and-soros-rumors-success.htm

http://seekingalpha.com/article/267942-why-the-plunge-in-silver-is-no-surprise-and-how-to-play-it-now

http://seekingalpha.com/article/268089-why-i-m-holding-my-silver-shorts

http://seekingalpha.com/article/268339-silver-prepare-for-the-flood

http://www.zerohedge.com/article/physical-silver-update

http://www.zerohedge.com/article/how-cbot-comex-and-cftc-coordinated-break-last-silver-price-surge

http://goldscents.blogspot.com/2011/05/greatest-profit-potential-of-last.html

http://www.theaureport.com/pub/na/8889

http://blogs.forbes.com/investor/2011/05/02/why-gold-has-room-to-go-higher/?partner=dailycrux

http://goldscents.blogspot.com/2011/05/greatest-profit-potential-of-last.html

http://dailyreckoning.com/the-case-for-cash-why-a-0-yield-is-sometimes-your-best-bet/

http://www.caseyresearch.com/articles/word-corrections

http://www.zerohedge.com/article/iran-speaks-paper-dollar-destroying-world-economy

http://www.zerohedge.com/article/weekly-insider-selling-buying-ratio-565x

http://www.zerohedge.com/article/ireland-proposes-tax-pensions

http://www.zerohedge.com/article/jim-rogers-says-he-plans-short-treasurys-soon-afternoon

http://dont-tread-on.me/the-silver-bullet-and-the-silver-shield/

http://www.zerohedge.com/article/people-vs-goldman-sachs-taibbis-magnum-opus

http://www.caseyresearch.com/articles/peter-grandich-gold-price-volatility-opens-opportunities

http://www.caseyresearch.com/cwc/doug-casey-civil-war-past-and-potential

http://www.zerohedge.com/article/guest-post-some-thoughts-recent-commodity-correction

http://pragcap.com/downside-targets-for-silver

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/5/6_Hathaway_-_Gold_%26_Silver_to_Explode_Again_After_Consolidation.html

http://www.gata.org/node/9896

http://www.caseyresearch.com/gsd/edition/gold-and-silver-prices-will-explode-again-john-hathaway

http://www.zerohedge.com/article/so-about-speculative-and-undisputed-silver-bubble

http://www.zerohedge.com/article/things-make-you-go-hmmmm-where-theres-smoke-theres-fire

http://www.zerohedge.com/article/guest-post-anatomy-silver-manipulation-how-low-can-it-go

http://www.youtube.com/watch?v=en5wD7Gw3nU&feature=grec_index ------storing silver

http://www.youtube.com/user/PeterSchiffChannel

http://peterschiffblog.blogspot.com/

http://www.zerohedge.com/article/war-speculators-goes-global-shanghai-gold-exchange-hikes-silver-margins-third-time-month

http://www.zerohedge.com/article/energy-futures-market-halted

http://www.zerohedge.com/article/commodity-flash-crash-part-two-senators-demand-immediate-position-limits-crude

http://www.zerohedge.com/article/and-todays-margin-hike

http://www.zerohedge.com/article/it-was-supposed-go-zero

http://www.zerohedge.com/article/one-trading-loss-day-q1-between-goldman-jpmorgan-and-bank-america-combined

http://www.24hgold.com/english/buy_sell_silver_coins.aspx?co_id=0

http://www.zerohedge.com/article/shanghai-silver-trading-volume-surges-65-last-month

http://www.zerohedge.com/article/not-inflation-you-are-looking

http://flowofvalue.blogspot.com/

http://www.youtube.com/watch?v=PM-LrMimRys

http://www.goldmoney.com/gold-research/eric-sprott-forecasts-three-digit-silver-price.html

http://www.zerohedge.com/article/central-banks-purchase-127-tons-gold-q1

http://www.zerohedge.com/article/eric-sprott-says-gold-now-worlds-reserve-currency-says-silver-was-manipulated-lower?page=1

http://www.zerohedge.com/article/nhk-reports-fukushima-reactor-1-melting-down

http://www.caseyresearch.com/editorial.php?page=articles/when-gold-necklace-isnt-jewelry&ppref=CRX228ED0511A

http://www.zerohedge.com/article/guest-post-bernanke-100-sure

http://fofoa.blogspot.com/2011/05/costatas-silver-open-forum.html

http://www.zerohedge.com/article/bin-bernanke

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/5/5_Ben_Davies.html

http://www.zerohedge.com/article/commodity-plunge-resumes

http://www.zerohedge.com/article/carry

http://www.zerohedge.com/article/what-make-todays-market-move

http://www.zerohedge.com/article/guest-post-todays-silver-scandal

http://www.zerohedge.com/article/and-so-it-continues-another-92-thousand-ounces-physical-silver-withdrawn-comex-despite-histo

http://www.zerohedge.com/article/silverfinger-true-story-nelson-bunker-hunt

http://www.zerohedge.com/article/downside-targets-silver

http://www.metalaugmentor.com/eforum/?p=6750

http://www.zerohedge.com/article/cme-hikes-silver-margins-17-4th-hike-8-trading-days

http://www.zerohedge.com/article/cme-margin-hike-4th-and-5th-charting-parabolic-rise-cme-silver-margin-hikes

http://www.zerohedge.com/article/getting-close-now

Ed Steer's Gold & Silver Daily - 2011-11-23 (pdf)

Richard Russell: "My advice: We are moving closer and closer to what I call "survival period" -- the period where the magic of compounding turns into what will be the poison of compounding. This isn't a time for timing. This is a time for action. Reduce your exposure to bonds and all items that provide fixed interest rates. Similarly, reduce your exposure to stocks except the gold miners. Look to expand your positions in inflation-protected assets, especially gold...Those who are holding stocks in the hopes of the usual rebound are going to be terribly disappointed in the years ahead. This bear market is going to be unlike anything we've ever seen before. In the end my survival vehicle will be gold. I say again, timing is hopeless. Gold will have purchasing power and true wealth as almost everything else is destroyed by this unprecedented bear market. The US Government is now so loaded with ever-growing debt that it has become a mathematical freak. We return to different times, when rising interest rates will eat up the US government. With $55 trillion in assorted debts, the US is in no shape to deal with rising interest rates. We are in a state of reverse compounding, leading to inevitable bankruptcy on a massive scale."

Ed Steer's Gold & Silver Daily - 2011-11-25 (pdf)

Silver analyst Ted Butler: "The manipulation, which I liken to financial terrorism, takes on a regular pattern. There’s a group of around 20 commercials on the COMEX, including JPMorgan, that know how to suddenly rig prices lower (usually in the middle of the night or at some other thinly-traded time). Knowing that this will scare some people into selling and keep others from buying, this small group of commercials then sits back and waits to buy what they can scare others into selling. The proof of this is that government data consistently reveals that these commercials are always the big buyers on any sharp sell-off in silver. No exceptions. Some might call this just good luck on the part of these commercials. I call it manipulation and financial terrorism...The most ironic thing is that most silver and gold investors originally bought precious metals as protection against exactly the type of financial crisis we are going through now. In other words, the price of gold and silver should be soaring based upon current conditions. Instead, the manipulation and financial terrorism is so pronounced that the crooked commercials on the COMEX have managed to convince the market that financial crises involving a flight from paper assets is somehow bad for precious metals. That’s preposterous...and you should not be fooled by their crooked games. The proof is that these commercial crooks are buying hand over fist on the contrived sell-offs. So should you."

Richard Russell [pillar of the gold community for 60 years]: "At the La Jolla Rehab Center I still read 10 papers and maybe 25 magazines every week, and let's be honest. The news is so confusing that it is absolutely impossible to come to any sort of intelligible conclusion. I'm embarrassed to say that for the first time in six decades I don't really know what's going on. The Dow the last few months has traveled thousands of points and ended up nowhere -- actually as of yesterday's close the Dow and the S&P were down for the year showing net losses for all the frantic activity. My advice, is to stay with gold, some cash, and Permanent Portfolio (PRPFX). I also think silver is particularly interesting here, and I advise the purchase of 10 oz. silver bars. Buy them and pile them up in your bank vault."

2015.5.16. David Stockman interview @ King World News

KCT summary: The massive inflation of major central bank money supply in the last 7 years from $6 trillion to $22 trillion has led to an enormous overcapacity of production and commodities. Humanity simply cannot consume -- nor the earth maintain -- all this excess. Stock prices reflect a belief that hyper-consumption will continue forever. But it will not. There will be massive layoffs as economies worldwide stall. We may have a decade or more of deflationary pressures on stocks, commodity prices, and incomes. Since the solvency of the big banks are linked to asset prices, at some point the deflation wipes out the economic system and there will be a reset. This could be next year, 10 years, or 20 years from now. The "unimportant" people do not know. Will precious metals owners and the producers of real value to society benefit from a return to financial reality, a reality where it is understood that a society cannot print itself to prosperity? Hopefully. But the fear is that there will be a corresponding increase in financial repression by which taxation, confiscation, and discriminatory regulations will be used to ensure that the top .01% of the population grow richer still. MORE (sometimes written MOAR) is always better in their eyes. Then there are the wildcards of war, false flag terrorism, bio-engineered plagues, fascist police state tactics, and so forth (enabled by a complicit and basically State-mouthpiece media) that "elites" can use to distract, divide, and weaken their enemies, i.e., the common man.

What shall I do in response? Continue to do my best to live an honest, decent life, investing in personal health, the health and awareness of my friends and family, and as the gold bugs say, "stack." Weaknesses that I need to address for my survivability include my need to develop greater independence from the complex energy and food systems 99% of modern man depends on; and shrouding more of my computer-based creative and investigative efforts from Google/NSA/Etc. Having had a few Apple Computer customer support calls recently, during which they were able to view my screen and the contents of my computer, I was amazed by how easy it is for third parties to gain access to everything I do, write, view, and store. What I just spent $2500 on is the most sophisticated tracking and enslavement device ever created. I would like to find ways to maintain my online activity but not have so much of me transparent to unknown others who would use that information to market to, more effectively propagandize, and -- perhaps when the slow moving fascist takeover turns hot -- imprison me.

2015.7.4. Citigroup Just Cornered The "Precious Metals" Derivatives Market (pdf)

Nexus789

The financial system outside the delivery of a basic banking service is one gigantic skimming operation. They extract value for themselves and in doing so they destroy value elsewhere. They create no value - making money through the manipulation of money. This has been analysed via political economy. A book, ‘The Enchanted World. Inflation, Credit and the Global Crises (1982)’ took the analysis beyond a focus on production and examined the role of money and financial commodities.

UncleChopChop

i think it's more akin to a simple, exponentially growing paper short. ie, in simple(r) trading terms.... short $1bn of gold contracts.. in order to keep from booking a big loss, defend your short (which you of course roll forward) with more and more new contracts - exploding the notional amount in your book. as long as you keep doing this such that the spot price of paper gold stays below your VWAP short, you can say truthfully (albeit only technically) that your 'commodity hedging activities' have produced [some] gains.. sweeping under the rug (kicking the can.. pick your euphemism) the massive unwind that will have to happen at some point - which as the article points out, will be picked up by the taxpayer. amazing how the common citizenry is [unconsciously] funding the very mechanisms of their financial undoing. seems to me there is a bigger lesson there about what is really going on with humans these days.

disabledvet

It's just a contract to pay not actual payment.

So the "other side of the coin" so to speak (the Hedge as it were) is that a huge new source of supply will enter the market ala California in the 1800's "depressing prices."

Already entire Nations are being wiped out because there are no dollars to be had right now...

daveO

Yep, they seem to be betting on rate hikes. Who would know better than the ones who control the FED?

saints51

Great Work Tylers.

This is what happens when private banks have an unlimited supply of digital cash with a simple keystroke and the taxpayer has all the debt and risk exposure.

ebworthen

Loading up the "destroy tangible stores of wealth" cannon on orders from the FED.

tdogg

Nothing to see here.

Move along.

Please ..... just move along.

pff136

Does everyone have a short memory? The defense bill passed this past December. Citigroup snuck in a provision at the last second and the bill was passed quickly by both House, Senate, and the president....in like a week. The provision was putting off TRILLIONS of derivatives onto the American tax payer if they ever fail. To me, it's not if but WHEN. Does that have anything to do with why it soared in the first quarter????

Tyler Durden

Presenting The $303 Trillion In Derivatives That US Taxpayers Are Now On The Hook For

EscapeKey

Actually the account holders funds are transfered to the derivatives parties, first. BOA had to move their entire derivates arm back under the hood when these changes where made, so that the derivatives parties were assured access to the accounts assets.

yeah, that's what i was thinking of. perhaps not quite as egregious as tyler's article, but yet another clear indicator that the house takes all.

were wall street regulated as tightly as casinos, it'd be shut by now...

https://www.fdic.gov/about/srac/2012/gsifi.pdf

Paragraph 13 - An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution. Throughout, subsidiaries (domestic and foreign) carrying out critical activities would be kept open and operating, thereby limiting contagion effects. Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers

Tall Tom

If CITI dumps a lot of paper on the market at once then the price declines.

The price for Gold or Silver is not a price for the actual metal but the price of a paper futures contract that promises delivery of that metal at a later date.

CITI can make the price for those paper contracts decline, or even crash, if they want that outcome,

They are in a position to set the price at any price that they want.

The Gold price which is reported as Spot is just a Fraction of the price of a Futures Contract which is a piece of paper. It is the same with Silver.

And as CITI can borrow virtually unlimited amounts of capital from the Fed at zero percent then they can cover any book losses that may unexpectedly happen.

What is the funniest aspect of this? There is more PMs accounted for in those paper cotracts than there actually exists as Physical Metal.

It is all a fraud. ALL OF IT. THE ENTIRE FINANCIAL SYSTEM.

vincent

The metals arena has been nothing more than a psychological game for several years now, and it will continue to be until the criminals decide to present us with the reality of the situation. Make no mistake, they hold all of the cards and the physical. The majority of small holders have been lulled into complacency and/or have capitulated.

Those who control these markets (and all others) want it all, and the music will continue until some catastophic event, be it market or sovereign, motivates them to take action.

The short sellers are not finished, and eventually metals are going to fall through the floor. It is at that point that the music will stop, and those who chose to pay attention throughout will be the beneficiaries. It matters not to the criminals how large that group is. They continue to position themselves for the great transition, and once complete the game will start over.

It's no coincidence that mayhem abounds. One could argue that this was the plan all along. Plenty of distractions to provide the moneychangers cover to corner the world. Like it or not the US/USD is positioned to stay relevant longer than most believe possible. The pain will increase for you and I.

Have faith, pay attention, and distance yourself from the blast that will most assuredly occur

Quinvarius

They only mine about $15 billion of silver a year. These bets seem absurd. Even if they are multiyear, they are absurd.

tarabel

Interesting data point that will have to be filed away and watched to see if anything else builds upon it. Such as indicators that other large banks are now cornering other segments-- a sure sign of complete collusion.

So the first hypothesis that comes to my mind with regard to specific banks cornering individual derivative market segments is that they are trading out among themselves.

i.e. -- my commodity contracts for your gold and silvers. That sort of thing.

So why would they do this?

To eliminate the risk involved of having to deal with multiple players in the event of the forthcoming crash. The 2008 crash really got going when banks starting doubting the ability of each other to honor their calls. This appears to be frontrunning against a repetition of that factor.

If Bank A controls all the contracts both up and down on a single entity, it is insulated against potential counter-party risk. Or so it believes.

In this regard, it may well be a good idea (at least from the bank's perspective). Controlling one entire segment by yourself is bound to be easier to manage than being wrapped up in a widespread crisis involving negotiations with many other players globally-- some of whom may no longer be reliable.

On the other hand, the fact that they are dancing with the Vertical Trust devil in the face of anti-monopoly laws everywhere would seem to indicate that they fear collapse a lot more than they fear the Sherman Anti-Trust Act. One is an immediate danger while the other is only a potential future risk that can probably be made to go away with cash.

Not a good omen, no matter how it plays out.

rbianco3

I've got what might be a dumb question. What about the Chinese and Russians who are supposedly buying phisical? Won't the price for physical continue to demand higher premiums, and if we are able to affect those countries why would they not attack the crap out of us?

HamFistedIdiot

Collusion. Everyone's in, and each has its role to play.

Fed-up with bei...

What we as readers of this Website SHOULD be concerned about is tha they will shut down ZH! I have been surprised by that fact...that we have this source for information not found ANYWHERE else in a consistent way and with widespread reading by "us."

Then, when I begin to unwind my thoughs, and think according to the new ethical and moral standards of our Congress and the Oligarchy we now have here, seemingly worse by any other standard in History (I am a likely wrong here, but I think of Nixon being brought down and how truly different our Press is now, which is NOT challenging the status quo being that they ARE the system, after all)...I can only CONCLUDE:

They are not afraid of anthing found in the alternative press due to the fact that they will not ALLOW this story to propagate! I send copies of these pages to my friend and family and they think it is untrue, what is presented here or THEY ARE SO apathetic now, that no one believes anthing will change!

We should be very scared here of how this might unwind!

HamFistedIdiot

The apathy and unwillingness to look truthfully at this situation is profound in my own family. Dad, Mother, Brother, Uncles, Aunts -- they all bank at Chase, trust the government, and are riding their stock portfolio up with the moneyprinting. The few that I convinced to buy precious metals are angry with me now, seeing the value in USD go down 30-50%. I try to bring up all the fraud at work and THEY DON'T CARE. All they care about is the current COMEX spot price. They watch their 60 Minutes, read their NYT, and listen to their NPR and believe they are informed. The matrix is fueled by the fiat debt dollar. If the moneyprinting stops, and the EBT cards, stock buybacks, and no-bid military contracts no longer function, THE MUSIC WILL STOP. Part of me wants to rub everyone's nose in the truth, seeing their delusional worldview shattered, but I don't want a nuclear exchange or other manufactured crisis that will be the death of many, to be the catalyst. I was listening to Dane Wiggington's weekly radio broadcast at GeoEngineeringWatch.org and he quoted a Chinese proverb: "You can't wake someone who pretends to be asleep." I am writing to my family members again regarding new laws putting the derivatives holders ahead of share holder and depositors in the event of a banking crisis; and the FDIC being underfunded on the order of 100:1 ($40 billion to insure $4 trillion in deposits). We're entering a period of profound lawlessness. If you don't hold it, you don't own it. There might be some good laws and regulations somewhere, but they are not effective if they are not enforced. I am buying more PMs, beans, water filters, and firearms as we speak. I figure if I am willing to die for what is rightfully mine, then that is a better survival strategy than waiting for Obama, Holder, Roberts, Pelosi, and Boehner to do the right thing.

OhBaldOne

No one is answering "why" the two biggest crooks in the business are cornering the two markets…speculation: when the shit hits the fan and normally in those circumstances gold and silver would then soar through the roof, JPM and Citi can use their control of those two metals to stamp the price down and keep it from soaring - all at the bidding of the US - to keep the dollar "secure" in it's role as the Reserve Currency - and keep it from being trashed by a through the roof gold and silver price. Any thoughts on this?

KCT Comment 2015.7.10.

need to continue editing

I have a family member sitting on a lot of cash at Chase Bank. I want her to get that money out and into banks and credit unions with no derivatives exposure, my thinking being that these unlevered institutions will be less likely to confiscate via bail-ins. But as Catherine Austin Fitts has stated, we are entering a period of increased lawlessness. Who knows who or what is safe now? Given the corruption of the system, I don't see how biggest and most levered banks won't come out on top -- even after all their derivatives bets blow up. Legislation was enacted recently giving derivative holders top placement among a company's creditors; after the derivatives comes shareholders, and in last place are deposit holders. So if you put $50,000 in Chase, and Chase's $100 trillion derivatives exposure goes bust and they file bankruptcy or take some other extreme action, then you will be last in line to be made whole again. If there is no money left to reimburse you, then you will need to go to the FDIC which at last check has $40 billion to insure over $4 trillion in deposits. It's possible that you might get back less than 10¢ on the dollar.

Upon my urging, family members went in and bought gold at $1400 and more at $1650. Now it is trading at $1160 per ounce. I am blamed for family members' loss of wealth. They remind me of their loss every time I see them. I respond with the tired argument that wealth should be measured in ounces, not dollars. But such logic is lost on them in a world that revolves around fiat debt instruments like the US Federal Reserve Note. All they can see is that when they go to buy something, gold gives them less dollars to do so than before. I contend that someday gold will again outperform the dollar as a store of wealth. But how much longer must we wait before gold's 5000 year track record reasserts?

Acting on principle -- doing the right thing -- is never easy. For me, in 2008 when the banking crisis made me pay attention to the longterm viability of my investments -- and the trustworthiness of their custodians -- I developed a righteous anger for the Federal Reserve (and its member banks) and its fraudulent, unconstitutional currency -- a currency that is issued as debt and is guaranteed to pay 6% to the private shareholders of the Federal Reserve. The $17 trillion of debt the US has could be issued as credit, with no interest accruing, by the US Department of the Treasury, as it is supposed to do by law. But no, someone somewhere thought that paying 6% on $17 trillion to the world's richest families was a more fiscally prudent path. I despise bankers and other parasites who skim off other people's labor. Such behavior is nonproductive. It contributes nothing to society. It's immoral, and the debts it creates (at no cost or risk to the bank) are odious.

I figured the whole thing was a ponzi scheme where, at some point, likely soon, the system would blow up. Promises would be broken. Trust would vanish. The average person -- pensioners, depositors, common stock holders -- would be defrauded in some catastrophic way. I didn't want to be a sucker, so to the best of my ability I got out. I still have a big chunk of my financial dreams tied up with the investments of CalSTRS, the California teachers' pension plan. Other countries that have gone bankrupt have raided the country's pension system, trading the stock and real estate holdings for government bonds that, if the crisis got worse enough, could become worthless. It's hard to have zero skin in the game. I figure that if I were to be screwed that I'd be accompanied by a million other retired teachers getting screwed, and so some kind of common voice would emerge. With a million pensioners from the respectable profession of teaching complaining in unison, my hope is that we'll be able to negotiate a better deal than most as the tax hammer falls.

I must admit, however, that my righteous anger was fueled by an equal dose of greed. I was hoping to profit from the demise of the US dollar. I was not only going to do the right thing and return to constitutional money (silver and gold), but I was going to increase my purchasing power three-fold (or more) as precious metals increased in value relative to paper currencies. I was going to profit from this shift to real assets and use the proceeds to build a home on vacant land I own in the California desert. In 2008 the time frame I expected was three to four years. Well, it's now seven years later and the metals I bought are down 40-70% from their highs in 2011. If I had purchased all my metals in 2008 at market lows, I would be okay, but I was greedy and took out loans to buy metals as they continued to rise into 2011. I was happy to pay 10% or more on loans because I was certain that -- as long as the US government were printing $trillions per year in excess of their revenue -- that inflation was bound to strike -- and international confidence in the US dollar fade -- and the metals would continue to rise in $USD at a rate very much exceeding 10% per year. What I didn't anticipate is the coordinated efforts of central banks worldwide to devalue their currencies together so that there would be no safe haven; and that, in this group of competing currencies, the US dollar would still be #1 despite its weakened economy. I didn't understand how accounting fraud, blackmail, violence, destablizing independent countries, and military incursions all over the planet would prop up the US dollar as the world's reserve currency well beyond the point that it should have been dropped. I didn't anticipate, as the article describes, that the country's largest banking institution would be buying $trillions in precious metals short positions in the futures market as a means of keeping the spot price down and thereby defending the US dollar from silver and gold that might act as competing currencies and stores of wealth for the masses. I didn't see how these and other entities would use this time of depressed precious metals prices as an opportunity to buy out and/or shut down many of the world's largest precious metals mining operations.

So, really, I don't know where I stand now. I have precious metals, but I have "lost" US dollars on them. It's a hassle to store them and to keep watch over them. Seven years after my initial purchases, I was hoping to have been able to sell some of them at a profit to advance other goals of mine. But that time has still not arrived. The metals themselves are dead, inert, inactive. I like them more than cash, but they are hated by the establishment and my tax dollars are subsidizing their suppression via the citizens of the US backstopping any all losses realized by the banks acting as agents of the US government. How long can I wait? How long can the US government remain solvent? Will this even be a world worth living in when the metals are priced fairly again? I have no easy answers here

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