Friday, August 19, 2011

Friday Quickie!

A colleague alerted me to the recent bloodbath in the high yield market the other day (thanks JR) and then zerohedge happened to post that day that the high yield market had its worst monthly sell-off in its 25-year history:  LINK  I wanted to put some attention on this because - and zerohedge did not report this aspect because Durden was probably still in high school back in the 1990's - when I was trading the high yield market on Wall Street back in the 1990's, large directional movements in the high yield market always preceded the same kind of directional movement in the stock market.  So now that we've had a big drop in the Dow/SPX which was preceded by a big drop in the junk bond market, it will be interesting to see if "hot" money piles back into the junk market, which would likely precede a big bounce in stocks.

One other point of note about the statistics as reported in the zerohedge link.  The credit spread between BBB and BB bonds has blown out to over 300 basis points.  To me this indicates that the underlying economy is in much worse shape than is being acknowledged by the Fed, Obama and the media.  I would also argue that the stock market is not discounting this degree of economic deterioration, which means the risk of a big stock market "accident" is still very high.  To put this credit spread widening in perspective, at the height of the credit/housing bubble, single-B rated credits were trading tighter than 300 bps to Treasuries.  In other words, the "handicapping" of financial risk in our system has more than doubled over the last month. 

The implications of this massive repricing of credit risk points to a developing liquidity crisis in our financial system, similar to 2008, and reflects the overall dismal economic condition of the real economy.  I'm sure you won't hear this from the Teleprompter that sits in the White House and pretends to lead the country, but those two facts are what the big-money odds makers of the U.S. financial casino are telling us.

As this situation further develops, you can be sure that a lot of the "hot" money that has left the high yield market and that is mispricing the stock market will continue to flow into the precious metals and mining stocks.  Recently the idea that gold is in some kind of investment "bubble" has been promoted all over the imbecilic media, including a widely circulated report from the Einsteins at Wells Fargo that reads more like some kind flamboyant yellow journalism from the National Enquirer in that is was very poorly researched - if any bona fide statistical research was done at all - and its premise and assertions lacked any basis in fact.   Need I remind any Wells Fargo employee/analyst that the bank's balance sheet is connected to one of the greatest bubbles of all time and Wells Fargo would have been liquidated in 2008 had it not been for the generosity of Tim Geithner, on behalf of the U.S. Taxpayers...

So I wanted to link a must-read commentary from John Embry, one of the investing patriarchs of the current precious metals bull market.  Specifically, I wanted to highlight his comment about the nascent transition globally that is occurring from a fiat currency based system to the restoration of a gold-backed currency system (which has been the currency basis for 90% of the last 5,000 years): 
The unfortunate result of these machinations will be the destruction of the existing debt, the end of this experiment with pure fiat currency and the implementation of an entirely new monetary system.  Assets that will see investors through this traumatic transition will be gold and silver just as they have done in every previous example of fiat currency destruction. 
The very fact that the average citizen has little or no understanding of this phenomenon virtually ensures its outcome. Those who do hold the precious metals and other hard assets instead of paper instruments of wealth will be the beneficiaries of the what will likely be the greatest transfer of wealth in history.
The bold emphasis is mine.  I want to highlight that because it is either extreme stupidity or motivated deceit on the part of the bubble-promoters to label and define an investment bubble when the primary ingredient of dumb public money is so notably absent from the market.  Here's Embry's piece:  LINK

The next two weeks are usually among the slowest trading days of the year besides the year-end holiday period.  I will try to post daily but most of my attention will focused on managing our fund and watching/playing a lot tennis.


  1. More Embry...

    John Embry - Silver About to Roar Through $50 All-Time High

    There were some brilliant studies that were revealed at the GATA Conference. One study showed that had you just taken the trade during the Comex hours over the past number of years, I forget if the chart was five years or ten years, but gold has been up dramatically, and Comex action alone, by itself would have netted out an actual decline in the gold price of $500 an ounce based on price changes just during the Comex hours.

    That’s just statistically aberrant, it couldn’t happen unless there was manipulation. It shows the extent of the manipulation. Eventually the cartel will run out (of gold) and when they do look out because the price is going way, way higher than anybody imagines....$50_All-Time_High.html

  2. If you look at the last gold run, gold went from $200/oz. in mid-1979 to $800/oz. in early 1980. During the 10-year period of 1970–1980, we saw a 20-fold increase in the price, from $40/oz. to over $800/oz. We also had a 20-year low in 2001 of $250/oz. If you apply that 20-times multiple, you're up to $5,000/oz.

    For silver, if you use the historic ratio of an exchange ratio with gold of 16:1, you get to $312, so $200 is conservative. I think we’ll see these numbers within four years' time.

    TGR: You are talking about a 15-year bull market for gold and silver, starting in 2001 and ending in 2015 or 2016?

    RM: Yes. I don't think prices will necessarily fall dramatically, but gold and silver will reach the zenith of purchasing power relative to other asset classes. When gold peaked in 1980, Volcker was channeling up interest rates. If you had rolled out of bullion into fixed income then, you would have made a tidy gain.

    TGR: Are you predicting prices of $5,000/oz. and $200/oz. as spikes, or plateaus that they will reach, stay at and trade around?

    RM: I think you'll have a spike at or above $5,000. Credit will become more expensive, and at some point credit will be denied. There'll be a need for liquidity, and the metals address that need.

  3. for all the oath takers....

    Goldman Sachs...An Organized Criminial Empire?

    There’s no greater evil against our great country of America, than those who are paid public tax dollars and swear an oath to pretend to defend the Constitution of the United States against enemies foreign and domestic – only to betray that high level of public trust – for personal gains! ...Laser Haas

  4. So where exactly Were the Wells Fargo expert analysts concerning housing from 2000-2008?

    Did they even try to mention the faintest possbility of a housing bubble, or would that have had a negative effect on fututre HELOCS and NINJA/fog the mirror loans made by Wells Fargo?

    It simply is amazing how so many "experts" (and I use the term very, very loosely) could not fathom the smallest possible chance of there being a bubble in tech stocks or real estate, but now have gained the ability to spot gold as a bubble.

    When will gold be in a bubble? When CNBS and the talking heads on the financial programs call gold the trade of the decade, when taxi drivers and shoeshine boys are talking about the killing they made on Krugerrands, When those selling gold are treated with the same contempt as the dot com paper millionares had for anyone who wasn't buying into the 'new economy'
    When that day comes, then we will be in bubble territory, but not yet, not by a longshot.

  5. Where's the metal coming from?

    Eric Sprott

  6. The Next De Gaulle

    Editorial of The New York Sun | August 20, 2011

    Our editorial yesterday in respect of Charles De Gaulle raised the question of whether someone could be found today who could talk about the monetary crisis with the sense and gravitas the leader of Free France brought to the monetary crisis that came into view in the mid-1960s. De Gaulle himself is now gone, of course, having died in 1970. He had his faults and had become, in many ways, an irritant to America. But his late career call for a return to a system of sound money that would — by virtue of being based on gold — hold all countries to the same standard is now echoing across the decades. And it turns out there is an heir to the economist who emboldened the French president to make his famous declaration.

  7. Will reinstating the uptick rule be a game changer for miners?

    Finally, I agree with Marvin Schwartz and Leon Cooperman, it's not just a potential collapse of Europe, there is a high frequency trading (HFT) free-for-all going on right now, and they need to reinstate the uptick rule to halt it. Schwartz is right, by reinstating the uptick rule, you will see "dramatic and permanent increase in stock prices." The big hedge funds, investment banks, and the NYSE might not be in favor, but the wealth destruction we're witnessing while a few make off like bandits is ridiculous (watch clip below).

  8. The Root Causes of the Global Financial Crisis

    Even though we expect at least a few more years of unrestrained leveraged speculation, it will then come to an end. It has become a crucial factor for monetary policy championed by both Sir Alan Greenspan and Ben Bernanke. Wall Street and baking love it, because their positions allow them to create inside information, which allows them to make money consistently with little or no risk. We also have the SEC and the CFTC perpetually looking the other way aiding and abetting their criminal behavior. If you add in that there are no limits to what they can do you essentially have an ongoing free for all. This is unrestrained finance via a policy of zero interest rates. This gives Wall Street and banking a license to steal.

  9. Saturday, August 20, 2011
    More on Cover Ups and Fraud At The Highest Levels of Government
    A reader asked how history will record these times. I believe history will say that the past few decades - and especially the decades of 2000 to 2011 - were America's darkest and MOST CORRUPT. Corruption in government is rampant, obvious and evident.

    Here now a few links provided us by readers that need attention.

  10. *The strong potential for a bank holiday, which could be announced out of the blue.

    *Central banks asking for their lent gold back. You won’t hear this outside of the GATA camp, but the notion of lent gold to support the gold price suppression scheme has been one of our basic themes of understanding the gold market. If central banks, like Venezuela, ask for their gold back, it could cause a PANIC, and has to have sheeple central bankers who have lent gold out, to be in a twit. These are risk adverse types whose worst nightmare is to be embarrassed and exposed to their public as having been duped into folly. If this is so, as I suspect, the price of gold is likely to advance much faster than even we thought, as nervous central bankers start making demands of those who have their gold. Yeah baby!

  11. Sunday, August 21, 2011

    Some Like It Hot

    Normally, short positions are reduced into weakness (blue arrows) rather than strength (green arrows).

  12. Scroll down...find...

    The PhD Standard:

    “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” John Maynard Keynes

    This week, Federal Reserve “money printing” became a focal point of American political discourse. Across the Atlantic, a worsening banking crisis failed to diminish German resolve against backing the issuance of “eurobonds.” Many of us have read and pondered Keynes’s famous quote on debauching the currency so often we’re rather numb to it. But in light of recent developments, it’s worth reminding readers that history is unequivocal: The soundness of money – monetary stability – is fundamental to the well-being of both the economy and society. The myriad consequences of prolonged monetary instability are these days increasingly difficult to disregard.

  13. ING’s Gupta: Yuan to become reserve currency in two years
    ASIA - ING Investment Management Asia’s CIO believes the yuan will become a reserve currency within the next two years driven by the ongoing debt problems in Europe and the US.
    Pranay Gupta said the yuan will continue to appreciate despite as China seeks to control inflation and assets continue to move away from developed markets.

  14. So the giant Ponzi trading of gold ledger entries can be sustained only if there is never a liquidity
    crisis in the REAL physical market. If someone asks for gold and there isn’t any, the default would trigger the biggest bank run and default in history. This is, of course, why the central banks lease their gold or sell it outright to the bullion banks when the bullion banks are squeezed by high de-mand for REAL physical gold that cannot be met from their own stocks.
    Bingo! There it is.
    “If someone asks for gold and there isn’t any, the default would trigger the biggest bank runand default in history.”

  15. WHEN GENIUS GETS their blood blue?

    Wall Street Aristocracy Got $1.2 Trillion in Fed’s Secret Loans

    “These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

  16. Utah Rep Leads 11 US States to Recognize Gold as Money

    Ken Ivory continues:

    “Then with respect to the federal government, we have about eleven states now that are looking at running the same legislation. And to the extent that we get the states standing in unison, that sends a very strong political message to Washington that the guardians of the liberty of the people in the states are not going to tolerate any longer the unchecked devaluation of our earnings and savings.”
    When asked about the genesis of this Act Ivory responded, “I think it’s a lot of the same things that you deal with everyday Eric. We’re seeing a federal government $14 trillion in debt, overspending by over $1 trillion+ per year, that’s paying for 57% of the government as we go and pushing 43% off to our children and seeing the devaluation of our currency. It’s that same idea that we really need to look at something to preserve the purchasing power for our citizens....”

  17. Another reason to end fed!

    Call for Resignation: Kathryn S. Wylde, NY Fed

    The NYT reports that the White House and the NY Fed are pressuring NYS Attorney General Eric T. Schneiderman.

    Given the sadly misguided history of both the Obama administration and the NY Fed (led by the President Tim Geithneir, now Treasury Secretary) when it comes to Bailouts, this is not a huge surprise.

    But what is surprising is the utterly inappropriate behavior of Kathryn S. Wylde. She is not only a member of the board of the Federal Reserve Bank of New York, but occupies the seat supposedly reserved for the representing the public.