Thursday, April 12, 2012

Subprime Bubble Being Reinflated

Anyone who uses Goldman, JP Morgan or Bank of America/Merill  as their investment custodian is either ignorant, stupid or completely insane.  - Dave in Denver
IMF: Gold Is Scarce “Safe Asset” And “Rising Demand for Safe Assets”..."In the future there will be rising demand for safe assets, but fewer of them will be available, increasing the price for safety in global markets.”  - quote sourced from   LINK
Well, there ya go.  In fact, that quote ties into the subject of my title, but first I wanted to comment on potential for the bottom of this vicious precious metals correction that began in late April last year.  The sentiment indicators are at rock bottom.  I can say from some of the comments that have been posted on my blog over the past few weeks that even some pretty long time gold bulls have thrown in the towel on the mining stocks.   Usually this type of sentiment marks the bottom of the next big move higher. 
Also, Dennis Gartman,who happens to be singularly one of the best contrarian indicators of the gold market - and this fact has been close 100% consistent over the last seven years that I've been aware of Gartman mentioning gold in his newsletter - declared the end of the gold bull market about a week ago.  Gold is up 5% since he advised his readers to dump gold.  This so reminds of late 2005, when gold had a very difficult time breaking through $500.  Gartman sold everything.  Gold then proceeded to make a huge run up to $1000 before the next nasty correction.  Gartman missed most of it. 

(Click on the chart to enlarge)

That chart reveals the golden truth.  Gold has now corrected and consolidated into a seriously bullish technical formation.  Given that the fundamental backdrop - all of the factors constantly discussed on this blog - is significantly stronger than at the end of the last two nasty corrections, per the red circles above, the next move up in the metals/miners could be breathtaking.

Finally, for some icing on the cake, take a look at this article from Marketwatch on the Hulbert Gold Newsletter Sentiment Index:  LINK  The index reading now is -15.  Historically, as Hulbert points out, extreme negative indicators for this index have signalled a big move higher in gold.  In fact, to quote from the article:   "analysis of gold market sentiment over the last three decades has shown that, at the 95% confidence level that statisticians often use to assess whether a pattern is most likely genuine, gold tends to do better in the wake of low levels of bullish sentiment (like now)."  95% confidence level is a very high level of confidence in which to invest...

The subprime bubble is being reinflated with your help.  This should scare the shit out of everyone, because Taxpayer money was used freely by Obama and Geithner to bail out the big banks the first time around.  You can be sure that it will be again.  Just as an anecdotal aside, I heard an ad on the radio yesterday for a mortgage broker here in Denver, First Option Lending - who was promoting 0% down payment mortgages.  There's no doubt that this program is coming from the FHA and therefore is a taxpayer subsidized program.

Here's an article from the New York Times which describes how lenders are once again loaning to high risk borrowers:  LINK  Even worse, AIG is back to investing in real estate again:  LINK  I guess inflating and blowing up AIG the first time around, with about a trillion in taxpayer assistance,  was so profitable for AIG insiders, Goldman Sachs and JP Morgan that all the players are coming back for round two.  This should first make the hair on the back of your neck stand up and, second, make you move as much of your paper wealth into gold and silver as you can.  NOT GLD, SLV, GTU, CEF etc. (PHYS and PSLV are exceptions to this). 

Remember the invisible 2x4 that is now being swung at the collective heads of the middle class?  This reinflating of subprime is added fuel to the speed and power of that swing.  And it's the epitome of the moral hazard that is embedded in the system.  Make no mistake, the people who are doing the "swinging" are going to get even wealthier when the 2x4 connects with your head, unless you know how to "duck."  Got gold?


  1. Check out Gartman's ETF's performance. Sucking wind during one of the biggest booms in commodity history;range=5y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

  2. michael schumacherThursday, 12 April, 2012

    no fan of gartman however it's important to realize that they usually say one thing and do the complete opposite. Think about Gross' call to short treasury..... I doubt they shorted them as that would have been an MF global moment for them but ala gartman (and many others) the strategy offered to the public at large is nothing more than lip service. As far as the coment could say that about the Rogers funds as well (yes I am aware that it's only his name on them as he sold it out years ago)...those have not performed well either.

  3. Gross does that for sure. I can remember when I traded junk bonds, being on the phone with the Pimpco junk trader negotiation a trade where he was the buyer - go go higher quality, treasury spread stuff - and at the same time watching Bill Gross come on CNBC saying it was time to sell Treasuries - LOL

    Gartman, on the other hand, first of all is primarily a newsletter publisher. He writes advice, doesnt live and breath capital positions. His ETF has absolutely abysmal performance. In fact, it's safe for me to say that Gartman is one of the least savy investors and most overrated tv analysts that I have ever seen. He's Shakespeare's Polonius - a fatuous ass-absolute.

  4. Nice post Dave. The chart is great but admittedly the pattern if consistent does suggest that the sideways action "could" last several more months.

    On the sub prime front I can personally attest that in Ca. you cannot get a second home for anything less than 10% down. The subprime deals such as 3% down are for primary dwellings only. Of course that still does not negate the terrible re-inflation underway.

    1. Dave,
      If one has to be in the stock market what is wrong with
      PSLV, PHYS and CEF?
      Why would these three be dangerous/risky?

    2. Great question. I intentionally left out PSLV and PHYS because they are bona fide backed by gold that can be verfied, although it's still held by a third party custodian. If you don't own PSLV/PHYS to enable you convert your shares into physical gold/silver that is delivered, and most of the readers of this blog are not in that financial position, then you are still subjected to the custodian risk that comes with holding your securities in a brokerage. See MF Global for that risk. If you take custody of your PHYS/PSLV, it's as good as holding gold/silver.

      CEF, on the other hand, in my view, because of the fact that the issuer of CEF and GTU no longer enable shareholders to convert shares into the metal, has embedded derivative qualities. Many disagree with this view. BUT, if you take delivery of your shares, they are still not technically backed by gold in the event of a trust liquidation. I also don't like the way the Spicer's manage new share issuance, among other things.

      PHYS/PSLV are for sure the best way to hold a security interest in gold and silver that is accountably and reliably safekept. I still prefer holding physical gold and silver in an independent depository in a segregated account that I have control over in lieu of holding the metal under my bed. It's the only 100% method of obtaining the true benefits of converting your fiat cash into metal.

    3. Thanks Dave.
      Good info.
      The reason I have to keep some of my assets in PHYS/PSLV is to borrow on margin against them.
      Wish I was in a position not to have to do this and maybe in the future I will not have this situation.
      Thanks for your info. and help.
      And great blogspot.

  5. Thanks Ted.

    I would borrow against PSLV and PHYS and use the money to buy physical. If you don't have enough to buy from Tulving, buy from APMEX or even sellers on craigslist, as long as you're only buying sovereign-minted bullion coins (eagles, maple leafs etc.).

    At the end of the day, do you want your money disappearing in a collapsing brokerage firm or would you rather default on margin debt and make them come after you? I know what my choice would be...

    1. Dave,
      Re defaulting, I assume is this is what you would recommend?
      And not a bad choice
      Had not occurred to me.
      By the strong/weak would you rate Schwab
      and its chance of actually collapsing?
      Much thanks again.

  6. I use Schwab and Fidelity specifically because I think they are the lowest risk of any of the stock custodians. I would not go near a brokerage firm that is directly or indirectly owned by a bank or investment bank.

    Anyone who used Goldman or JP Morgan or BAC/Merrill as their investment custodians is either ignorant, stupid or completely insane.

    1. Thanks FYI and guidance Dave.
      Big help!

    2. Dave, I use Fidelity for most of my IRA/401K holdings.. so with you there. I am a bit confused though on the issue of holding shares of PSLV/PHYS... I know that if you are big enough holder of shares, you can take delivery of metal... but you seem to be talking about taking delivery of the shares themselves. Isn't this the question of who's name the shares are in.. your's vs.the brokerage? Why would this question hinge on how big a holder you are? Thanks, 1 Kg Lunar Dragon.

    3. The shares are held in "street name" at the custodian/brokerage firm. You have an electronic entry in your account that contains a line item that indicates that you bought PHYS or PSLV shares and shows the market value of those shares. You don't directly own the shares.

      You can call the brokerage firm and ask them to deliver the shares to you. Then you keep them in a safe place. You'll get an official share cert that shows that you own "xxx" amount of shares. The brokerage firm subtracts the value of these shares from your account.

      If you leave the shares in street name form, if the brokerage goes tits up, you risk losing the value in your account that would be represented by those shares if you get MF Global'd. You see what I'm saying.

      Once you actually have the shares registered in your name and you have the certs, you can redeem the shares with the company. Hell there's probably even an OTC market somewhere where you can sell the shares and transfer them privately. That would be more expensive, though than presenting them to Sprott.

  7. Largest US Teacher Pension Fund Underfunding Increases By $9 Billion To $64.5 Billion, Only 69% Funded

    While the epically underfunded status of the US, by all definitions a ponzi scheme, whose combined liabilities have a net present value of about $100 trillion, is known to everyone, most can simply shake it off for too reasons: 1) it is a number too big to comprehend, and 2) by the time the ponzi blows up it will be some other generation's problem. However, it may not be so easy for California's retiring teachers. Minutes ago, CalSTRS, or the California State Teachers' Retirement System, with a portfolio valued at $152 billion as of February 29, 2012, and is the largest teacher pension fund in the United States, reported that its underfunding increased by a massive 15%, or from $56 billion to $64.5 billion, which happened despite the market being relatively flat over the past year. In fact this is supposed to be good news: as CalSTRS states, its underfunding was supposed to be even worse by $4.3 billion. So this is really good news. We wonder how good the news will be to tens of thousands of retiring and retired teachers once they understand that their obligations are only funded 69%. And dropping. But wait, there's more: new normal, no new normal, here is what CalSTRS did: it reduced "the assumed rate of investment returns from 7.75 percent to 7.5 percent, which increased the funding shortfall by $3.5 billion." In other words, if the market grows at a true New Normal of 1-2%, or worse, is flat over the long run, we wonder if the obligation coverage ratio would even be in the single digit percentage.

    I thought private equity was going to save them? guess those fictitious marks are only good for skimming fees......

  8. Green Slime Drives our Financial Crises

    Green slime drove the current crisis, just as it did the Enron era frauds and the second phase of the S&L debacle.

    Modern finance theory was falsified by research findings in criminology two decades before modern finance theory was created. Control frauds cause greater financial losses than all other forms of property crime – combined. The “weapon of choice” for financial control frauds is accounting. The optimal “recipe” for a lender or purchaser of loans engaged in accounting control fraud calls for the creation of vast amounts of green slime. The recipe has four ingredients.

    Grow extremely rapidly by
    Making or purchasing crappy loans or derivatives (green slime) at a premium yield while
    Employing extreme leverage and
    Providing only trivial allowances for the inevitable eventual losses

    Those commercial and investment banks pooled the green slime mortgage loans to create the ultimate in cynicism and fraud – the greater green slime known as CDOs. The underlying instruments for CDOs were commonly liar’s loans. The “AAA” tranche of the typical CDO represented 80% of the overall CDO. Think of what that means. The investment banks took loans they knew to be endemically fraudulent – the slimiest of green slime available – and called the vast bulk of the slime “AAA” – the credit rating that is supposed to be granted only to the investments posing the absolutely lowest degree of credit risk. Calling green slime “AAA” is the ultimate in financial chutzpah.

    The recent passage of the fraud-friendly JOBS Act will produce increased green slime. The Bush and Obama administrations’ failure to hold the elite CEOs who led the massive control frauds that spread the green slime accountable for their crimes is as pusillanimous and reprehensible as it is dangerous.

  9. John Embry & Chris Waltzek: “Deep pockets are buying all the physical gold they can get their hands on”

  10. end

    GATA has a long time subscriber who I admire reports the following on gold.He states but I have been telling you over these last several years:
    (courtesy of Nicholas from Lagos..longtime GATA subscriber)

    Salvation via Hedging

    Good Afternoon Bill, (from Nigeria)
    In the last few months, the GATA ‘story’ has gone viral on the internet, and receives more and more mainstream coverage Anybody with ears to listen and eyes to read should know by now that...
    • The USA gold reserves of 8.1 thousand tones are little more than some melt gold sweepings, unsighted and unaudited for some 50 years.
    • The IMF official gold reserves of 2.8 thousand tones have never existed and are merely pledged quota allocations from the IMF’s founding members and have been double counted for sixty years in respect of official gold holdings.
    • The GLD SPDR physical gold reserves are unknown and almost certainly primarily paper gold investments.
    • The unallocated gold bullion accounts in LBMA custody accounts are fractionally reserved by 100 to 1 (nobody really knows).
    • The FED and BOE have almost certainly swapped/leased/loaned custodial gold held on behalf of other central banks-nobody knows the exact figures and the BIS accounting rules enable the co mingling of vault gold and gold receivables as one reported line item in order to ensure that this. Information is never available or discussed. There is, however, a growing awakening amongst concerned citizens that many national heritages of gold reserves no longer exist as such, and there are significant calls for repatriation of gold reserves.
    • New gold backed exchanges are starting to emerge as a rival to the dominance of COMEX in the paper markets-after the PM London gold fix, there is no guarantee that any physical gold ever changes hands in the coming hours up to the next AM fix, despite the gold price moving every nano second on world markets.
    Nevertheless in South Africa’s most serious newspaper today, Business Day is a headline report that SA gold miners must start hedging again to preserve any long term future value according to Paul Walker of GMS. Gold is going to catastrophically collapse as interest rate regimes start to normalize and it is a dereliction of duty to shareholders if Boards do not start locking in today’s high prices by a resumption of hedging. Maybe this is all one desperate last throw of the dice to attempt to secure more physical ammunition in respect of the continuation of the suppression of the gold price. The mind boggles at such propaganda.
    Regards Nicholas


  11. This may be viewed as a bit cynical but here goes-
    Those know it alls who laugh, sneer or ridicule gold buyers today are much like the ones who laughed, sneered or ridiculed the first passengers to board the lifeboats on The Titanic. "The boat is unsinkable, all the experts said so" was the attitude of the passengers who ignored the dire warnings until it was too late.

    May all of the vicitms of that tragedy so long ago rest in peace

  12. Was The SEC "Explanation" Of The Flash Crash Maliciously Fabricated Or Completely Flawed Due To Plain Incompetence?

    It is no secret that one of the main reasons why the retail investor has since declared a boycott of capital markets, which lasts to this day, and manifests itself in hundreds of billions pulled out of equities and deposited into bonds and hard assets, has been precisely the SEC's unwillingness to probe into this still open issue, and not only come up with a reasonable and accurate explanation for what truly happened, but hold anyone responsible for the biggest market crash in history in absolute terms. Instead, the SEC, naively has been pushing forth a ridiculous story that the entire market crash was the doing of one small mutual fund: Waddell and Reed, and its 75,000 E-mini trade, which initially was opposed to being scapegoated, but subsequently went oddly radio silent. Well, if they didn't mind shouldering the blame, the SEC was likely right, most would say. However, as virtually always happens, most would be wrong. Over the past few days, Nanex has one again, without any assistance from the regulators or any third parties, managed to unravel a critical component of the entire 104 page SEC "findings" which as is now known, indemnified all forms of high frequency trading (even as subsequently it was found, again by Nanex, that it was precisely HFT quote churning that was the primary, if not sole, reason for the catastrophic chain of events) with a finding so profound which in turn discredits the entire analytical framework of the SEC report, and makes it null and void.

    Nanex' approach is simple and elegant: they unravel the fundamental argument at the core of the entire paper, and thus the SEC's conclusion, with definitive factual proof and material evidence. And in doing so they make all the primary and tangential conclusions of the SEC invalid.

  13. Everyone in the financial media is praising this earnings beat...why?

    JPM Earnings Beat Courtesy Of $0.28 Benefit From Loan Loss Reserves Despite First Increase In Nonperforming Loans In Years

    As for the EPS beat, as usual the one-time items swamped everything else, of which the primary one, reduction in loan loss reserves which is the traditional way for the bank to pump up the bottom line, accounting for $1.8 billion or $0.28/share. We are curious how Jamie Dimon will justify this accelerating release even as the firm's Nonperforming loans increased for the first time in years from $10 billion to $10.6 billion: just the TBTF put or something else? Other amusing "one-time" items were the $1.1 billion ($0.17/share) from the WaMu bankruptcy settlement as well as a $0.9 billion loss ($0.14/share) loss from DVA this time hurting the bank as JPM's CDS tightened in Q1. Also curious was a substantial $2.5 billion expense for additional litigation reserves, which is certainly not a one-time item now that every bank is suing JPM and is merely a catch up for Dimon to where he should have been reserved. That, or something else - just what is JPM seeing that others are not (hint: ask Bank of America). This number will continue rising. So net of the real one-time items, EPS was less than a $1.00.

    But the key chart is the following, which shows that no matter what happens, Jamie Dimon is happy to boost earnings by reducing his loan loss reserve, which over the past 2 years alone has generated $12.3 billion in non-earnings earnings! Naturally, loan loss reserves were down $3.9 billion from a year ago: easy money.

    Finally, JPM's presentation of its Net Interest Margin: down to 2.61% and sliding. You better hope we get some steepness in that curve soon.

  14. Yes, Virginia, this is Obama’s JOBS Act

    But this bill accomplishes those things at the cost of slashing investor protections to a degree that isn’t just unnecessary, but stone-cold crazy. It includes ideas that just ten or fifteen years ago were conclusively proven to result in wide-scale fraud.

    For instance, if this bill is supposedly about increasing access to capital for small businesses, why do we also need to repeal the conflict-of-interest ban on bank analysts talking up startup firms in an attempt to gain their investment banking business? Wasn’t it just ten minutes ago that Eliot Spitzer had to drag the entire financial services industry into court for pumping up worthless stocks in order to get their business?

    Read more:

  15. economy going no where...

    Steinhardt On The Fed's Failure And The End Of Wall Street As We Know It

    The low interest rate 'logic' is not working and "the economy can't gain any zest, can't gain any vigor" is how Michael Steinhardt describes the crushing of 'widows and orphans' that the Fed has embarked upon. In a Bloomberg TV interview, the WisdomTree chairman notes the broad 'pall' over the equity markets (conjuring images of a funereal procession down Trinity Street) pointing out that there is no reason to be wildly bullish here. Citing Wall Street's lack of 'spirit', he questions the entire raison d'etre of efficient capital transfer as becoming secondary as he rather poignantly asks who has benefited from Fed's policies "Certainly the banks. But ordinarily you'd say, well, low interest rates benefit housing. It certainly hasn't benefited housing." Reflecting on his performance as a hedge fund manager he concludes that extraordinary performance is sadly not necessary anymore as the money flowing into hedge funds means people do exceptionally well for themselves despite diminished performance. While finding equities broadly unappealing, and suggesting talk of QE3 should cease, he notes there are pockets he would invest in but ends by noting that "Bonds are no place to be".

  16. Tired of Obama..not into one's listening to the masses...remember Ron Paul's gesture to Bernanke with the silver coin? Vote.

    Max Keiser's Silver Take Away

    I take away an important perspective on Silver from Max Keiser which I did not consider previously. I contrast and find synergies between buying silver as the expression of free speech within the context of corporate fascism and oligarchy.