Friday Thoughts

Update on the action in the precious metals + why the EU is way ahead of the U.S. in several respects.

Unless the o/i report is wrong, sometimes it is and they make adjustments reflected two days later, yesterday's gold o/i went up 912 contracts. To me this increase isn't the cartel shorting into momentum- buying by black box funds, it's dip buyers making fundamental buys. The computer hedge funds do not buy on days like yesterday. That's bullish. Second, yesterdays silver smash was all about the liquidation of the July contract ahead of 1st notice today. Silver o/i in July dropped 6268 down to 3952. Interestingly 6704 bought/rolled into Sept silver. My bet is that buying occurred late in the day after the SPX rallied back huge. This too is bullish. Furthermore, and I'm sure July o/i wall fall a bit today, but as of yesterday there were still 19.7 million ounces of silver which are funded for potential delivery. Those contracts can still be sold, but it's a lot of silver standing for delivery. I wouldn't read much into yet, but it's definitely something to keep an eye on. Finally, today's action shows what happens when cartel manipulation wakes up the physical buying world in the eastern hemisphere. Indian import ex-duty premiums were as high as $15 last night which means India was buying physical gold on the sell-off driven by the paper Comex very aggressively. China and Japan were also active buyers last night. When these buyers buy, the physical supply disappears.

Obviously today's snapback in the metals was fueled by the news out of the EU summit. A lot naysayers like Bill King of the King report are adamant that the ECB and the FED are done printing. I say that may be true, but that only happens if the ECB and the Fed want to see the banking system collapse. Germany has $109 billion in direct investments, most of it sovereign and bank loans, to the Club Med countries plus Ireland:

(click on chart to enlarge)

86.3 Billion euros = approx. $109 Billion U.S.

Most of that would be held by banks AND there would be substantial off-balance-sheet OTC derivative exposure. The real exposure just by German banks to southern Europe/Ireland could well be several hundred billion dollars. With that at stake, the best Merkel can do is put up a really dog fight for her own political benefit. Ultimately she will not go down in history as the person who triggered the EU/U.S. banking system collapse. Same analysis applies to the U.S. banks and the Fed. That is why I believe Bill King and Ray Dalio are wrong about no more printing.

The other interesting point of note - and no one in the media, even the good sources of analysis - have thought about this, but at least Europe is having systemic reform discussions. Whether or not they amount to anything is another matter. But at least the conversation is taking place. That is in direct contrast to the U.S., where not only are the systemic reformation discusssions NOT taking place, but the U.S. continues to accelerate its deficit spending and debt accumulation at both the Federal and State levels. Obamacare is a great example. I don't recall which organization put it out (people can google it) but a study was done that went thru the Obamacare legislation line by line and determined that it would add something $3 trillion to the Federal deficit over the next 10 year. I may be low on the $3 trillion but that's the number I recall. To me the EU is way ahead of the U.S. in this regard and it means the next move in the currency will markets will be: 1) dollar tanks 2) euro rallies 3) gold/silver really move higher.
 
Have a great weekend.  I'm out next week so posting might be spotty.

Animal Farm

ALL ANIMALS ARE EQUAL.  BUT SOME ANIMALS ARE MORE EQUAL THAN OTHERS - George Orwell, "Animal Farm"

If this is such a good law, then how come Congress - the people who passed this law - are not covered under this law but under their own "special" healthcare coverage?

There's not a lot to say about the SCOTUS decision on Obamacare other than, "okay, now how does the Government pay for this?"   That plus now that the SCOTUS has upheld the ability of the Government to "mandate" how you have to live your life by calling the individual mandate a "tax," where exactly will our Government draw the line on regulating everything you do?

Quite honestly this is probably one of the most depressing events I have witnessed with respect to the abdication of individual liberty - and the annexation of power and control - by the Federal Government.  The fact that this particular SCOTUS put its stamp of approval on this move toward a totalitarian system is quite shocking.

Initially the precious metals were blatantly smashed when the decision was announced.  This is because once the dust settles, the toughest question is "where will the financing for Obamacare come from?"  Several close studies of the entire legislation have suggested several trillion dollars will be required. Raising taxes on a declining income-earning workforce will not even remotely accomplish the task.  The Government already has an insatiable demand for the funding to finance its rapidly escalating spending.

The big banks backed by Fed know that this means more debt issuance and more money-printing and that's why there's been inexorable downward pressure on the precious metals once Asia - the phsyical gold buying part of the world - goes to sleep and the paper trading criminals in NY and London go to work.

The past 14 months have been extremely difficult for those of us heavily invested in the precious metals sector.  But the fundamental factors for doing so have become significantly stronger during this time period, punctuated by the affirmation by SCOTUS of Obamacare.   In the context of the globally collapsing banking system and the serially collapsing EU countries, when the markets fully understand what has happened in this country today, the precious metals will take off to new highs as it will become crystal clear that the only two possibilities going forward are to print or allow complete financial collapse of the western world.

Other than that, Mrs. Lincoln, how did you enjoy the show?

Golden Lies In The Media

The big banks have becoming hedge funds but are backed by the Fed and taxpayer funds. You think that provides them with a competitive advantage? The Fed encourages and abets big banks to trade like hedge funds so the banks can generate, even craft, earnings to keep them afloat.  Bill King, The King Report

If you woke up this morning and read some of the headlines that pertain to the housing market, you might be convinced that the bottom is in and the next bull market in housing is starting.  Of course, it's funny how homebuilder, realtor and Government numbers diverge from one of the best "grass root" statistics:  mortgage purchase applications.  Mortgage purchase applications declined again last week: "The unadjusted Purchase Index decreased more than 2 percent compared with the previous week and was almost 3 percent lower than the same week one year ago."  Here's the report from the Mortgage Bankers Association:  LINK

How can the housing possibly be going through a recovery when purchase applications have been mostly lower week to week during the peak home selling season?  Makes no sense.  Either the mortgage bankers are lying or the homebuilders, realtors and Government are all lying.  I know which constituent I would bet is lying.  I will say, that there has been a lot of strength in the low price end of the market.  But this is coming from investors who are taking advantage of Government financing programs to buy low-end homes and turn them into rentals.  As I have shown in previous posts, Fannie and Freddie announced this program several months ago.  Ironically, they needed an outlet for all the homes they repossessed to make room for more foreclosures...wash, rinse, repeat.  A friend of mine had put in an offer on a lower end priced townhome last week in an area of Denver that had bubbled up during the housing bubble and she was topped by an investor who paid the full asking price.  This won't last and real buyers would be well advised to not chase it.

The other source of housing market euphoria was this morning's earnings report from Lennar.  The headline proclaimed a huge increase in earnings for the quarter and the CEO announced that the housing market was in recovery.  Of course, what was not in the headlines was the fact that LEN used a complicated accounting maneuver to generate most of its earnings.  Of the $453 million in reported GAAP earnings, $403 million of it was generated by a non-cash "reversal of the deferred tax asset valuation allowance."  Essentially, a deferred tax asset occurs when a company pays the tax man more in actual cash taxes than it reports in GAAP income for reporting to shareholder purposes.  There's two sets of books, the GAAP book and the "cash" book, or the book of numbers used to calculate actual tax payments to the Government.   There are "timing" differences for recognizing income between the two sets of books, and depending on the circumstances, in any given year a company may pay a lot more or a lot less the Government in taxes than it reports to investors in financial statements.  It's a great earnings management tool for management.

Depending on the situation that creates a deferred tax asset or liablity, it has the effect of either reducing or increasing GAAP income vs. tax income.  When this happens, a balance sheet account is set up called a "deferred tax asset" (or liability) and over time, this asset is amortized into net income to "recapture" income that occurred but not recognized for GAAP reporting purposes.  In LEN's specific situation, the deferred tax asset resulted from declining revenues (it's too complicated to go into here).  So LEN decided that the housing market is going to get  better for the foreseeable future and it was allowed to recognize most of its deferred tax asset this quarter by "revaluing a lot lower (by $403 million to be precise) its deferred tax asset.  It has no real cash or economic impact on the company other than to juice the stock in the short term.  It's complete accounting chicanery and it's an accounting standard that needs to be reformed.  It also enables LEN CEO Stuart Miller earn a big bonus assuming part of his compensation is based on earnings.

Having said that, you can understand by Miller is so bullish on the housing market.  He has to be because it's the only way he can justify using the accounting gimmick he used to generate 88% of LEN's reported income.  I remember Stuart Miller and Lennar from my junk bond days.  We did a complicated junk bond financing for LEN's financing arm.  LEN is a by-product of the Drexel Burnham accounting fraud days and Stuart Miller has never seen an accounting gimmick that he didn't lovingly embrace.  In fact, Miller has been a very steady seller of LEN stock over the past decade.  If he's so bullish on housing, shouldn't he be loading up investment account with LEN stock?

The point here is you have to really "look under the hood" these days in order to differentiate from headline, reporting fraud/hype and the truth.  More important, you really have to know where to look.  I had to brush on the accounting for deferred tax assets from my U of Chicago days in order to make sense of LEN's earnings report, understand why it's fraudulent and understand my Miller was so ebullient on the prospects for the housing market.

After untangling that GAAP accounting mess, in conjunction with the mortgage purchase index indicator, in conjunction with what I know and have written about the escalating foreclosure dynamic, I have concluded that homebuilder stocks like LEN are still a good short-sell play and the real, organic housing market is still going a lot lower.

The Golden Truth About Operation Twist

People are always very quick at giving others advice...Mr. Obama should first of all take care of reducing the American deficit, which is higher than in the eurozone - Wolfgang Schauble, German Finance Minister  LINK

Last week I suggested that the Operation Twist extension by the Fed of $268 billion would be enough to fund the U.S. Government financing needs until the election in November, when the Fed can then crank up the printing press without being accused of supporting Obama's re-election efforts.  At that point in time, the Fed will likely roll out an enormous stimulus/printing package to make sure the winner of the election gets off to a good start, just like occurred in 2008...

I also suggested that the funding needs would be at least $400 billion between now then, of which the Fed would be able to fund at least 50% with the OT extension.  Well, there's nothing like seeing proof in the numbers.  Today the Treasury auctioned $35 billion in 2yr Notes, of which Wall Street banks bought $20 billion, or 57%.  This week the Treasury is selling a total of $99 billion in 2,5 and 7 year paper.  We'll see how the rest of the auctions play out in terms of how much Wall Street takes down, on behalf of the Fed, but so far my run-rate estimate for additional funding plus the rate of the Fed financing that funding looks pretty good.  Here's a link for today's Treasury auction results:  LINK

Regarding the quote above, it is going to be interesting from here on out to see the degree to which finger pointing between Europe and the U.S. escalates.  I can't think of anything that would irritate me more than to have that little moronic runt tax evader Tim Geithner in my face telling me how to fix my problems.  It would be like a meth addict telling a heavy drinker to stop drinking.   Of course, by now it's well known that both Geithner and Obama spent a considerable amount of their teenage years "up in smoke."

Here is what eastern hemisphere Central Banks are doing as a mechanism to dodge the escalating fiat currency devaluation war between the U.S., Japan and Europe:

Turkey raised its reported gold holdings by another 2% in the month of May. Turkey’s gold holding rose by 5.7 tonnes in May to total 245 tonnes, International Monetary Fund data showed, making it the latest in a string of countries to increase gold bullion reserves this year.

Russia expanded its gold reserves by 15.5 metric tons in May as Ukraine and Kazakhstan increased their holdings of the metal, International Monetary Fund data shows according to Bloomberg.

Russia’s bullion reserves climbed to 911.3 tons last month when gold averaged $1,587.68 an ounce, data on the IMF’s website showed. Ukraine’s climbed 2.1 tons to 32.7 tons and Kazakhstan boosted reserves by 1.8 tons to 100 tons, the data show.

Central banks are expanding reserves due to the Eurozone debt crisis and concerns about fiat currency debasement.  Central banks are on course to buy more bullion this year than the purchases of about 456 tons in 2011 as countries diversify their reserves.

Here's the LINK

Very Unusual Activity In Silver

"Who else would recklessly dog-pile on a market like that?" - long time Comex silver trader

I didn't realize Obama's new campaign slogan was "Forward" until I saw an Obama ad while I was watching the 60 Minutes piece on Novak Djokovic (which was very well done, by the way).  It added even more humor to the above "bumper sticker."  I hope someone produces it because, even though I never put stickers on my car, I would put that one proudly on my rear bumper.

I also found this fundraising campaign by Obama to be quite appalling:  LINK  The message from the TOTUS (Teleprompter of the United States) is this:  "Hey people, while y'all pay for my wife Michelle to take extravagant trips to exotic places that you'll never be able to afford like Spain, Aspen and Hawaii, instead of getting your daughter a wedding gift - or a your wife a 50th anniversary gift - why don't you contribute money to my re-election campaign in their name."

Atlas just shrugs, Orwell smiles in his grave.

I wanted to put some thoughts down about the trading action in silver since the FOMC last Wednesday.  As everyone is aware, the metals initially ran higher after it sounded like - based on a "between the lines" reading of the FOMC's statement - that the FOMC had become more receptive to implementing more QE, although not until at least next meeting.

The stock market tanked hard on Thursday, as the momentum hedge funds unloaded all of the the "risk on" positions they had put on in the 4 weeks leading up to the June FOMC meeting, anticipating that QE had to happen in June or it wouldn't happen until after the election.

Silver was absolutely annihilated on Thursday.  It was down over 5%.  There have been very few days over the past 11 years during this precious metals bull market in which a move like that has occurred.  Initially most analysts attributed it to JP Morgan - with its absurdly universally, illegal short position - selling short into a market that was cliff-diving.  After all, the metals held firm overnight and did not begin selling off hard until 7:30 a.m. Thursday NY time, with no news to act as a fundamental trigger for the selling.

Without going to into a bone-dry, boring analysis of the commitment of traders reports and the Comex open interest reports, the selling on Thursday, and intense buying in silver today, has all the signs of large hedge fund momentum-based computer driven trading all over it.  What this means is that the hedge fund "black boxes" start selling and short-selling silver - which is a characteristically small, easy to manipulate market - into the downward momentum.  The selling was non-stop and reckless - it did not have the characteristics of a skilled trader who was trying to trade out of a big position without disturbing the market too much.

While JP Morgan's market manipulating episodes often behave the same the way, the Commitment of Trader reports have been reflecting the fact that JP Morgan has been working to reduce its overall short position in silver and the smaller commercial bank Comex players have actually been increasing their net long positions in silver.  The latter players have a track record of good market timing.  The hedge funds, however, have been building up their short positions in silver - this was especially true during the latter stages of the silver sell off in April and early May.

Finally, I believe today's snap-back move in silver, in which silver is up $1.20 from its overnight lows - most of which includes a near straight-up move of 70 cents starting at 11:10 NY time - confirms my view that Thursday's unexplained activity was largely the result of reckless hedge fund trading.  To put an exclamation point on this, someone I know who is a long-time Comex silver trader (I traded Comex silver exclusively for awhile myself and my partner and I trade it for our fund) remarked on Friday regarding the trading of hedge funds:  "who else would recklessly dog-pile on a market like that?"

The point of this explanation is that the activity in the precious metals market on Thursday and Friday does not reflect fundamentals or a deteriorating sentiment.  Hell, the sentiment in the sector really can not get any lower.  Rather, it reflects the volatility that is characteristic of a market getting ready to change direction.  Since late April 2011, the volatility in the precious metals market has been mostly to the downside.  On average, the major price corrections during this gold/silver bull market have lasted 12-18 months.  We're right about at the mid-point of that range.  The difference this time around is the enormous global demand for physical gold and silver.  The physical component was not in place during the last three major price corrections like it is now.  That will help provide a major launching pad for the paper price when the volatility swings back to the upside, which I expect will happen before Labor Day.

One more point regarding physical demand.  On Friday the silver open interest increased by 416 contracts, with 160 in June.  That's unusual given that this Friday is June's last delivery day. Right now there are 172 open June contracts representing 860,000 ozs of silver open for delivery.  This is an unusually large amount 4 days before the final delivery day.  Assuming the buyer(s) of the 160 contracts are interested in taking delivery, at this point deliveries are likely being stalled by reluctance on the part of the entities required to make delivery, for whatever reason.  I can only see this as being bullish for the price.

A Quick Primer On Why Operation Twist Is QE

Bernanke: Fed stands ready to take further action - 2:24 p.m Wednesday;  Bernanke - 3:01 p.m. Wednesday: Fed will not buy European sovereign debt  (We don't know if this is true or not becaue we don't know how the massive Fed dollar/euro swap program with the ECB is being used.  I suspect Bernanke is lying his ass off and that swap facility is the equivalent of an off-balance-sheet mechanism by which the Fed IS buying European sovs. - Dave in Denver)

Before I go over Operation Twist (OT), I wanted to point out that yesterday's economic numbers released were an unmitigated disaster, further confirming that the economy is tanking quickly.  The Philly Fed economic activity index was reported to be -16.6, vs. the no change expectation on Wall Street:  LINK This actually points toward significant economic contraction.  Furthermore, the jobless claims number was worse than expected and more people are falling of Obama's extended jobless benefits program (the 3 yr deal aka welfare).  Existing home sales dropped 1.5% from April, further confirming my thesis that the housing market is tanking (most of the low-price homes are being sold speculators who are turning them into rentals).  Seasonally, existing home sales should be climbing higher month to month.  Also, the purchasing manager's "flash" index contracted again, with exports plunging below the 50 level, indicating big contraction there.  Look for a much bigger than expected trade deficit to be reported next month for May, which is GDP negative.

Bernanke knows all this better than any of us because the Fed has access to much better data than is filtered through to the public.  Instead of unleashing a full blown QE3 to try and stimulate economic activity and risk being accused of supporting Obama's re-election, Bernanke announced an extended Operation Twist.  Again, in my view, this was imperative in order to continue the Fed's funding of Treasury auctions as a means of preventing interest rates from spiking higher.

The additional OT amounted to a $267 billion extension of this version of QE, which serves to pay for a large portion of new Treasury issuance.  Here's how it works mechanically:  the Fed solicits bids from the primary dealers (big U.S. banks) for the Fed's short term Treasury paper - 1 month to 3 yrs in maturity.  Because there is unlimited demand from short term Treasuries from money market funds and from foreign banks who need the short term Treasuries for collateral use, the Fed knows the primary dealers do not need to use their balance sheets to buy this paper.

Next, the Fed solicits offers from the primary dealers for 6-30 yr. Treasury bonds.  Now, we know the primary dealers own a lot of this paper, as they have been buying anywhere from 25-50% of 7-30 yr Treasury auctions.  If the primary dealers were not using their balance sheets to participate in Treasury issuance, a higher rate of interest would be required to induce the next marginal buyers to participate, and the death spiral of higher Treasury interest rates would commence.  Technically the Fed can claim that OT is "sterilized" funding because the Fed doesn't technically print any money and it's swapping one asset for another.  But because of the dynamics of demand for short term Treasuries, the Fed's OT creates money flows from sources that ordinarily would not be available to buy longer term Treasuries.

Moreover, since the Fed buys the longer term paper off of the big banks, it frees up balance sheet capacity for the big banks to continue their heavy buying of Treasuries at auction.  The Treasury has been issuing roughly $100-125 billion of new issuance monthly.  Between now and the election, the Treasury will likely have to sell an additional $400 billion of new paper.  The OT capacity of $267 billion will enable the big banks to continue funding their share (really the Fed's share) of new Government spending plus gives the Fed some room for injecting some bank liquidity into the banking system for derivatives accidents like JP Morgan's little $5 billion "tempest in a teapot" mishap.

The reason this is a de facto form of QE is that QE accomplishes two goals:  1) keeps the banks from collapsing;  2)  provides the mechanism for the Fed to indirectly finance new Treasury issuance in order to keep interest rates artificially low.  Here's the math on why #2 is crucial:  Assume the Treasury needs to issue roughly $1.5 trillion in new bonds this year.  If interest rates were to ratchet up by 200 basis points on those new bonds (2%), the increase in interest expense to the Government would be $30 billion.  Capito?  You understand?

One last point, without getting into the details because it's Friday and I want think about other things, OT is definitively QE from a theoretical, risk-adjusted standpoint.  Briefly, with the short for long Treasury swap, the Fed is significantly increasing the "duration" of its balance sheet holdings.  By doing this the Fed increases the risk-factor of its Treasury holdings, thereby increasing the probability of losing money on the OT operation.  If the Fed loses a lot of money on its OT bond holdings, it will eventually have to print money to make up for the losses.  On that note, let's refer to the Fed's Operation Twist maneuver as "kicking the QE can down the road a bit, but it's really QE."

Have a great weekend.

Looks Like I Was Right

CNBC's Steve Liesman's brains fell out of his head at the same time he lost his hair. - Dave in Denver

I hate to waive my own flag, but guys like Reggie Middleton and Tyler Durden pimp themselves so shamelessly and repetitively - and with brazen historical revisionism, especially Reggie - that I had to say something.  The other day I suggested that the Fed might extend Operation Twist and shift the Treasuries it sells out to 3 years and the Treasuries it buys out to 30 years.  The FOMC just announced the extension of Twist until the end of the year and it would sell Treasuries it holds out to 3 yrs and buy Treasuries from 6 to 30 years.

The Fed also said that it stands ready to use other methods to try and stimulate the economy if needed.  It will be needed and it's just a matter of time.

By the way, Operation Twist, especially now that the duration of the Fed balance sheet will be significantly increased, is a de facto form of QE.

Just for the record, in follow-up to my commentary on housing yesterday, today's mortgage purchase application index from the Mortgage Banker's Assoc. was down 9%.

Democracy And Rule Of Law Are Dead

Democracy has failed when Rule of Law is replaced by Rule of Men.  In the case of the U.S., Rule of Law has been replaced by Rule of the Teleprompter. By the way, anyone besides me wonder who is responsible for writing the script read by Obama on the Teleprompter?  Is it Eric A. Blair, aka George Orwell?

Don't even bother voting in November.  Why bother?  It does not matter which candidate or which party is in office.  Obama's extraordinary election was fueled primarily by a massive backlash against the destruction of the Constitution and implementation of totalitarian policies by Bush.  As an example, note that Bush signed and utilized more Executive Orders than all Presidents before him collectively.

An Executive Order, the ability of which should be completely, unequivocally abolished, enables a President to avoid and and all of the checks and balances in our system, like Congress and the Constitution, and implement his own rules.  Obama is now on track to sign more EO's than Bush:  "President Obama has granted an 11th-hour request by Attorney General Eric Holder to exert executive privilege over Fast and Furious documents..." LINK

It's bad enough that Obama and Eric Holder have enabled the persistence and rapid growth of financial industry fraud and theft by refusing to apply the law to the Too Big To Fail banks.  And now Obama is going to let Eric Holder walk away from the Fast and Furious scandal.  Democracy is dead and we only have ourselves to blame.  Anyone who can possibly defend a vote for Obama is completely brain dead.  If you have to vote to feel like an American, you don't have to vote for Romney, write in Ron Paul.

Truth In Reporting

Before I correct a comment from another daily metals report, I wanted to mention the housing starts number.  Housing starts for May were reported today to be down 4.8% from April:  LINK   Don't be fooled by the headline "spin" about housing permit applications spiking higher.  A certificate to build does not mean that a home will be sold, as evidenced by downward trend in mortgage purchase applications.

As I have mentioned in previous posts, I'm not sure how trustworthy the housing start numbers reported by the Government are, and certainly the trend reported by the Government recently of rising starts is quite inconsistent with the persisten decline in mortgage purchase applications tracked by the Mortgage Bankers Association.   Furthermore, May is part of what should be a seasonal peak in the entire housing industry.  But despite the Government/Fed's best attempts to heavily subsidize mortgages, the housing market is turning back down.  Given that personal income after netting out Government entitlement/transfer payements is declining, I'm not really sure who is buying the new homes being built other than the people who now qualify for the new FHA no down payment, taxpayer subsidized interest rate programs.

One last point about the housing market, which I contend continues to bounce around a "bottom" that has been temporarily put in place by the Government, Fannie Mae is out with a report that suggests the housing market will now bottom in 2013:  LINK  Fannie Mae has been remarkably unreliable in its housing market forecasts over the past several years.  And for as egregious as Fannie Mae's soothsayers have been, Wall Street and the National Association Of Realtors' Einstein economists have been downright dismal.  For anyone looking to buy a house thinking that an elusive bottom is somewhere nearby, all I can say is "caveat emptor" - buyer beware...

Regarding my other issue, Ed Steer's Daily Gold and Silver - which is always worth at least skimming - cited commentary by Ted Butler in which Ted - who has been a staunch defender of the legitimacy of SLV and GLD - references a website that now posts a frequently updated list of the silver bars in, added to and removed from the SLV Trust:  LINK  Ed comments that this website, by virtue of its existence, proves that SLV is completely legitimate.

Hmmm...I guess because JP Morgan files its quarterly financial reports with the SEC, according to SEC and FASB GAAP accounting standards, that JP Morgan's financial reporting is therefore legitimate.  Anyone buy into that?  If not, then why would anyone buy into the legitimacy of a website that purports to accurately report the silver bars sitting in SLV's Trust.  Let me preface my comments by saying that I have utmost respect for the work Ted Butler does on the COT report and Comex silver market.  But he completely misses the boat - either because of blind naivete or  tragic stubborn optimism - with regard to the CFTC and the legitimacy of GLD/SLV.

To begin with, I can't find any information about the "about.ag" website.  Who owns it, controls it, publishes the information, etc.  I see they have a lot of ads on their site so they clearly have some kind of profit-motive.  But you'll note at the bottom that the data compiled by about.ag actually comes from SLV.  If you don't trust SLV, why would you trust the data provided by SLV on the about.ag website?  If you want to know why I don't trust SLV, please read this report on GLD I wrote in 2009:   LINK  Just by virtue of the fact that about.ag makes money from publishing the SLV-provided data calls into question a conflict of interest as to about.ag's independence from SLV.  In other words, about.ag has no motivation to ensure that data provided by SLV is bona fide.

Regarding the bar list website for SLV: Just because SLV lists the bars it has taken into custody does not mean that the bars are not leased out or hypothecated/rehypothecated. In a lease transaction, the lessor does not move the bars unless the lessee is called on to deliver the silver the lessee has sold in the marketplace. It's typically just a paper transfer of ownership. And most of the time the bars remain in the vault of the lessor but are theoretically moved into a "segregated account" area of the vault. Whether or not this movement actually occurs is open to debate, since an independent audit is not offered. As for hypothecation of assets, see MF Global. Coincidentally, or not coincidentally, JP Morgan is the silver bar custodian for SLV. Recall that JP Morgan is at the center of the MF Global customer hypothecation fraud.

When an asset custodian hypothecates an asset, the asset is still reported in the account of the rightful owner, in this case the SLV Trust. So just because SLV has an inventory list that it sends to about.ag, that does not prove that SLV has not hypothecated or leased out the silver bars. Please refer to my GLD report linked above to see how these ETF prospectuses are structured to enable leasing and fraudulent reporting. And all of this does not relieve SLV of the short interest issue. For those unaware, the short interest in SLV stock certs typically runs around 10%. When SLV certs are borrowed (hypothecated) and short-sold, the Trust does not take in money from this transaction in order buy silver to back those shares with silver. This means that 10% of the SLV shares sitting in owner accounts are not backed by any silver.

Ed Steer mentioned that he was not aware of a similar website for GLD's gold.  He said this in a manner in which he implied about.ag lends further credibility to SLV. If this is so, then I guess Jerry Sandusky's self-witness testimony lends credibility to his defense.  Again, I need to correct misinformation here. First, the about.ag website gets its data from SLV. It does not audit the SLV Trust nor will it ever be allowed to audit the Trust. GLD publishes a list of its gold bars on its website. So why would GLD need to give that information to someone else to make money off of?  Furthermore, GLD supposedly has it's bars randomly audited by some shady outfit in London. You can find the link on GLD's website. I shredded that audit report a few years ago on my blog. The Bob Pisani/CNBC incident in the GLD vault confirmed my thesis presented back then.

Butler has been wrong about the CFTC eventually cracking down on Comex manipulation since at least 2001, that I know of, and he's wrong about SLV and GLD being legitimate. It took him at least 10 years to admit he was wrong about the CFTC - how long will it take him to admit he's wrong about SLV and GLD? I guess if Butler wants to believe that the same JP Morgan that is the primary illegal manipulator of the silver market, is at the center of the MF GLobal fraud, among many other frauds being committed by JP Morgan, and yet is a fully accountable, legitimate custodian of SLV silver trust, that's his business. But on that basis, I would love invite Butler to big poker game at my house.

Just How Cheap Are The Junior Mining Stocks?

Short answer:  historically cheap.  For those who want an explanatory answer, continue reading.

Anyone who participates in or follows the mining stock sector has read the numerous commentaries recently describing the extreme relative undervaluation of the mining stocks, especially the juniors.  In fact, I saw an article this past weekend which demonstrated that the last time the mining stocks, in general, were as undervalued as they are right now was in 1924.

Regardless of which relative value thesis to which you are want to subscribe, there's no question that the mining stocks as a sector have become extreme value plays.  "Value" as opposed to high growth rate speculative plays (like Facebook, for instance).  And while it's true that vs. "benchmark" metrics, the miners are cheap, for my investing capital nothing reveals "market truth" like a point of trade.  "Point of trade" being that economic intersection at which a buyer is willing for fork over money and a seller is willing to fork over the goods.

Monday provided us the with truth benchmark of an actual trade.  Yamana (AUY) bought Extorre Gold (XG-TO, TSE-listed) for $414 million, mostly cash/some stock.  If you net out the cash on XG's balance sheet of $27 million, this price represents $161/oz of XG's total 43-101 resource of 2.4 million gold-equivalent ounces (XG's defined gold plus silver converted to "gold equivalent").   The price was a 68% premium to XG's closing price on Friday.

The high premium to Friday's close is one way to view the current relative undervaluation of these mining stocks by the stock market.  Furthermore, the $161/oz price is substantially higher than the "generic" $100/oz price of some recent acquisitions.  

To be sure, the high quality attributes of XG's deposit - like the expected high metallic recovery from the ore and anticipated low cash costs of production - would induce an acquirer to "pay up" a bit for XG.  But these highly attractive features are offset by the fact that XG's trophy property is in Argentina, which presumably poses considerable political risk now that Argentina's Government has demonstrated a willingness to nationalize foreign-owned oil companies.

The Wall Street genius analysts, in their desire to come up with reasons to try and convince institutional investors to avoid the sector because Wall Street has very little ability to make money off the mining stock sector by shuffling around paper financing deals and skimming big fees, would tell you that the political risk of most mining stocks is the best reason to avoid them.  In fact, not one single U.S.-based brokerage firm covers Extorre:  LINK  I guess Wall Street's finest have plenty of ideas up their ass that will generate a 68% gain...

Throwing Wall Street aside, besides the fact that this Truth Revealing trade shows just how cheap the mining stocks are - especially the junior miners - it also tells me that the most sophisticated possible buyer of mining assets - an actual successful industry operator - has determined the political risk in South American countries like Argentina is substantially less than is being discounted by the market.  As a result, I expect to see several smaller junior mining stocks experience a strong price move higher.

One company I like that has substantial exposure in Argentina is McEwen Mining - MUX.  MUX has had the crap beaten out of it because of the perceived political risk of Argentina.  MUX traded up over 6% today.  Most of that gain is attributable to the AUY/XG deal.  But MUX is still 57% below its 52-week high of $7.  I am betting that MUX closes that gap relatively quickly and move a lot higher than $7 as the next big move in this sector unfolds.  Oh, by the way, Rob McEwen of McEwen Mining is the same McEwen who guilt Goldcorp into one of the largest and most successful gold mining companies in the world.

About two years ago Goldcorp paid over $1,000/oz. for Andean Resources, which is situated mainly in Argentina.  That's a good benchmark for where the market is headed until the real "internet bubble" dynamic kicks into gear in this sector.

Every Banker Gets A Ribbon On Field Day

Standards which had been established to make the world a safer place to do business by imposing reasonable reserve requirements are now going to be rescinded, which will enable the big banks of the world to continue contiue polluting our lives with fraud and corruption and enrich the bankers at the expense of everyone else:

International regulators are poised to ease a core element of new banking rules that were designed to improve the safety of the financial system...regulators say they now plan to make it easier for banks to comply with a key provision of new international banking rules that will require lenders to maintain sufficiently deep pools of safe, liquid assets  LINK

Regardless of how ugly the global economic/financial system gets, we will never have real reform until the big banks are allowed to collapse and the existing Governmental systems are destroyed and rebuilt from the ground up.  We can start with the original Bill of Rights in this country.

Someone Is Lying: How Can Greece Bring Down The Global Economy?

It was noteworthy that George Soros, the world's most successful currency speculator, was revealed this week to have tripled his position in gold in the first quarter of this year. That he is a man who knows his currencies is without question. That he chooses gold speaks volumes.   - David Galland, Casey Research

I'm confused.  I'm not really sure why the world should be in fear of a Greek systemic collapse and exit from the EU/euro LINK .  So, while most of the world's hoi polloi chooses to accept news that is fed to them like hungry ducklings with their beaks open waiting to be fed by momma duck (the elitists), I prefer to look under the "hood" of a proposition that, prima facie, seems absurd.  Furthermore, unless I'm missing something, the world is being willingly fed a gigantic lie by the elitists.

The proposition is that if the Syriza party wins Sunday's elections, the Greek austerity programs required for and EU bailout of Greece would be abandoned, Greece would exit the EU and reinstate the drachma as its currency.  The sum of these events would cause global systemic chaos.

Let's examince the situation.  According to wikipedia, Greece is the 32nd largest economy in the world based on GDP and the 37th largest based on purchasing power.  Seems somewhat insignificant so far.  Greece's nominal GDP is $312 billion.  As a percent of total EU economic output - $12.6 trillion in 2011 - Greece represents a miniscule 2.4%.  As a percent of total EU+US economic output, Greece represents 1%.  80% of Greece's economy is service based, the rest is agriculture, fishing and industry.  Greek sovereign debt is around $450 billion.  The U.S. stated Treasury debt outstanding is close to $16 trillion.  The U.S. Government issues an additional $450 billion in debt every 3 1/2 months.

Now I'm even more confused.  How could the collapse of such a seemingly economically insignifant country in comparison to the rest of the world cause global systemic/financial turmoil?  Before you read on, please see this report regarding Greek derivatives:  LINK

The Truth of the matter is that the situation with Greece is being used as the cover-job to mask the truth about the catastrophic derivatives exposure of the world's biggest banks.  I demonstrated a couple days ago how looking at just Greece in isolation could lead to tens of billions in losses for the biggest banks - primarily JP Morgan - if Greece leaves the EU and reinstates the drachma as its currency.

The fact of the matter is that if proper OTC derivatives regulations and oversight had been in place - more importantly, properly enforced - then the situation in Greece would barely be newsworthy.  Zimbabwe went through a financial/monetary collapse a few years ago which culminated in a "do-over" for its curency and most people in the world probably never even heard of Zimbabwe or could tell you where it is.  What's the difference between Greece and Zimbabwe?   Off-balance-sheet OTC derivatives.

Once again - just like the 2008 bailout of the U.S. Too Big To Fail Banks - we are being fed a gigantic lie by the political and banking elitists.  The global financial system is in extreme peril because of the catastrophic loss-exposure embedded in the near-quadrillion OTC derivatives positions of the world's biggest banks, which are primarily U.S.-based.  JP Morgan, Citibank, Goldman Sachs, Morgan Stanley, Bank of America,  Deutche Bank, HSBC, Credit Suisse, Barclays and Society Generale.  Those are your culprits - not Greece.

And the Greek situation - just like the Lehman collapse provided a cover-story for the massive mult-trillion dollar bailout of Wall Street's finest in 2008 - is nothing more than an insidious cover-story to enable the Fed/ECB/BOE to print up and inject several more trillion in paper fiat currency in order to bail  out the big banks listed above out of their catastrophic insolvency, rendered largely by moral hazard-enabled investment failures made worse by the layering of 10's of trillions in derivatives over the bad investments.

That's the bottom line and that's the Truth that you will never hear about from any politician or any mainstream media source. And here's what the non-western Central Banks are doing about the political/financial disaster over which they have no control:  LINK  You'll note that since 2008, the BRIC Central Banks and other peripheral Asian/South American countries have become big net buyers of physical gold (not GLD and not CEF/GTU).  The charts in that article do not include China.  China not only does not allow the export of the 300+ tonnes of gold internally mined, it is now the world's largest importer of physical gold bullion.  In other words, China is aggressively and voraciously accumulating physical gold.

I think the message in that link and the message conveyed by China's actions pretty much tells us all we need to know about the future of the U.S. dollar as the world's reserve currency and the future direction of the price of gold.  As the article mentions, gold represents less than 15% of the listed countries' Central Banking reserves.  What it does not mention is that one way to make that number a lot larger is for the price of gold to rise substantially in price.  Please note that in 1933 the U.S. - with its currency backed by gold - revalued the price of gold by 75% from $20/oz to $35/oz for the specific purpose of instantaneously increasing value of its gold reserves and increasing the ratio of gold as percentage of its total reserves.

I would suggest that eventually we will see a globally coordinated event (which may or may not include the U.S.) that will accomplish the same purpose as was undertaken by FDR in 1933, but on a much larger scale.   Please take another look at the opening quote to put my comment in proper context.  Have a great weekend everyone.

Who Are They Kidding?

There are many inside and outside the US who have been looking forward to an important and healthy debate about America’s future for a long time. Sadly, they all know that this is NOT going to happen in a contest between Barack Obama and Mitt Romney for the presidency. So does the US establishment and both the major political parties.  - Bill Buckler, The Privateer

I've been arguing for quite some time that the real reason we will see more QE, despite the rhetoric coming from the Fed, for the simple reason that it is the only way for the Treasury to keep funding its rabid debt issuance at the current low rates.  As has been widely documented, in 2011 the Fed bought 60% of all new Treasury issuance.  As noted by zerohedge, yesterday and today the Fed directly monetized this week's 10-yr and 30-yr Treasury auctions by purchasing an amount equal to 20% of the 10-yr paper sold and 15.4% of the today's 30-yr auctions:  10-yr POMO; 30-yr POMO. 

Just to clarify, the POMO operation by the Fed is a "reverse" auction, in which the Fed solicits Treasury bond offerings from the Wall Street banks.  This is paper that comes from each bank's inventory (balance sheet) and purchased by the Fed.  So yesterday, for instance, the Treasury auctioned $22.4 billion of 10-yr paper, of which the Wall Street banks purchased 7.8 billion.  The Fed POMO operation represented 59% of the bonds purchased at the auction by the dealers.  As you see, de facto, the Fed thus financed 20% of auction and gave the primary dealers the bidding power, at the margin, to drive the yield down.  Notably, yesterday's 10-yr auction rate represented a record low rate.  This would not have occurred without the Fed's invisible hand in the background.  Similarly, with today's long bond auction, the primary dealers bought $5.6 billion of the issue, with the Fed POMO purchase representing 36% of the total purchased by Wall Street.  LINK

So, who are they kidding?  What I'm waiting for is for someone to explain to me why the dollar took a decent hit yesterday, despite the run-up in the Treasury bond market.  If this was new foreign money seeking the dollar as "a flight to safety," the common myth that has gone "viral" in the financial media, the dollar should have rallied substantially.  Why?  Because when a foreign investor buys Treasuries, they first have to sell their native currency and buy dollars, then buy Treasuries.  The net effect of that trade would be to push the dollar higher because of an increased demand for dollars.  But the dollar tanked yesterday and continues lower today.  I would suggest that this is because big foreign pools of money, like the Chinese and Japanese, are continuing to diversify away from the dollar - choosing NOT to seek the dollar as a flight to safety.  And if the Fed were not directly monetizing the Treasury auctions, we would see Treasury yields spiking a lot higher in order to entice real, "organic," buying.

Need more evidence?  Take a look at this article in which the former head of Hong Kong's Central Bank says:  "Hong Kong should review its US dollar peg and consider linking its currency to the renminbi, according to Joseph Yam."  LINK

The Cost Of Doing Business

JPMorgan is Banking Committee Chairman Tim Johnson's second-largest contributor over the last two-plus decades, according to the Center for Responsive Politics, which analyzes campaign giving from companies' employees and their political action committees since 1989. The same is true for the committee's top Republican, Sen. Richard Shelby, and its second-ranking Democrat, Sen. Jack Reed.  (link below)

I have been arguing since way before it has become vogue in the media that the economy is a lot weaker than the Fed/Obama people would have us believe.  Especially when measured on a real, inflation-adjusted basis.  A big part of the GDP equation is retail sales/consumerism.  In fact, during the past decade, debt-fueled consumption has been 70% of the GDP in this country.  Pathetic if you ask me.   

Retail sales for May were reported today and they showed a decline vs. April.  More troubling, but consistent with the "report positive news then revise it downward the following month when no one is paying attention" policy our Government, April retail sales were revised to down .2% from the originally reported gain of .1%.   The credit-card fueled consumer bounce has died and another leg of the economy is broken:  LINK  See the pattern here:  a decline on a decline, month to month.

The big news of the day, and that which is nicely deflecting attention from our tanking economy and the ongoing collapse in Europe, is Jamie Dimon's testimony in front of the Senate Banking Committee on JP Morgan's massive derivatives loss.  For anyone who naively thinks that Jamie Dimon will be properly brought to justice, or that the Senate intends to take any action beyond publicly grilling the boozehound who runs JPM, you better read this:  LINK

Like most Americans, if you are too lazy or complacent to read about the truth, here's the Cliff Notes to that article:  JP Morgan owns the key players on the Senate Banking Committee (see the opening quote).  Here's a nice chart from zerohedge which details the big money beneficiaries in the Senate:  LINK

As you can see, and as I've been arguing for a long time, party affiliation makes no difference.  It's irrelevant.  "Show me the money" is what counts.  For all you liberals/Democrats who idolize Chuck Schumer, please take note that he's by far the biggest ankle-grabber for the Too Big To Fail Banks.

Bottom line:  democracy is dead and the big banks will continue to rape and pillage our system until it collapses.  Those monetary donations are nothing more than the cost of doing business for Wall Street.  If you ask me, the whores in Congress are selling out way too cheaply and anyone who thinks it makes a difference as to whether Romney or Obama is the next President is an idiot.  Obama has received a record amount of whore money from Wall Street and he had the nerve to campaign on a populist, I'm for the people platform.  Everyone forgot to nail him down on exactly who his "people" are.

Finally, I wanted to share a must-watch speech given in the European Parliament by Nigel Farage.  Mr. Farage is one of the UK representatives on the EP, which is the parliamentary body of the EU.  Mr. Farage is known (and hated by elitists) for his outspoken criticism of EU system policies which are being implemented in tragic failure to address systemic disaster in Europe - the same tragic policies and disasters we are experiencing in the U.S. 

Please watch this video and wonder how awesome it would be if the U.S. Congress had someone who had the balls to speak up like this - of course, any Congressman who preached the Truth would never get elected:

More On Greece And More QE

One of the biggest issues in Europe at the moment is whether or not Greece will exit, or be allowed to exit, the EU.  My view is that the massive bailouts that have been going on globally since 2008, starting with the massive taxpayer bailout of the big U.S. banks, are about saving the banks and not about saving countries. Because of this, I would argue that Greece will be kept in the EU family and the financial systems in Spain/Italy/France/England/U.S. will be re-monetized, likely in that order.

But let's look just at Greece for a moment.  It has been estimated that the big banks have around $60-70 billion in derivatives exposure to Greece.  The "net" exposure is supposedly around $3 billion.  Of course, we are now seeing with the JP Morgan derivatives meltdown going on that the "net" number reported by banks and widely accepted by regulators and institutional investors is not to be trusted.

I think it's probably fair to estimate that, in a chaos, "2-sigma" scenario, that the likely "net" exposure to Greece via derivatives is at least 50% of the notional.   Mind you, this estimate rests on the viability of the counterparties who have issued payment guarantees in the event of default being able to stand up their side of contract.  This is not a given.  But let's go with 50% for the sake of running a "stress test" (note:  a realistic stress test as opposed to the Fed's fraudulent version of a stress test - see JP Morgan for more proof the Fed is full of shit).

Now let's run through the math if Greece leaves the euro.  If this happens, Greece would reinstate the drachma as its currency, which would then start trading against all other fiat currencies (plus gold) in the world forex market.  It has been estimated that a new drachma would likely trade at about 30-40 cents vs. euro, so roughly 38-50 cents vs the dollar.  Now,  what happens to the value of a credit default swap on Greek debt that was denominated in euros but is now denominated in drachmas, because Greece would now be paying those debt claims back in devalued drachmas? 

For the sake of argument, let's say banks which are the largest underwriters of credit default swaps have 90% of the exposure to Greek credit default swaps.  This is actually a quite realistic assumption per the quarterly BIS report on OTC derivatives, with JP Morgan by far the largest underwriter of these instruments.  This would mean that U.S. banks likely have gross derivatives exposure $45-63 billion in Greek credit default swaps.  If Greece were to revalue and repay its debt claims using drachmas, it would mean that the big banks like JP Morgan would potentially be on the hook for their ratable share of $22-32 billion in credit losses.

I personally do not believe that the big banks/central banks will allow this happen and will therefore engage in some kind of coordinated money printing, bailout operation.  It's already being done in the "disguised" form of the massive dollar/euro swap facility that has been put in place by Bernanke.  We would love to see the details of this swap facility - like how much is used, by whom is it being used and what's the current market value of the swap - but the Fed has spent a considerable amount of money to legally keep these details undisclosed (so much for the new Fed transparency policy).

Now take the Greece scenario and multiply it out by roughly 4-5 multiples for the potential Spain problem, and so on for Italy and France.  And make no mistake about it, Germany/Merkel understands this, as Deutsche Bank is probably the largest credit default swap underwriter after JP Morgan.  This is why Merkel and has been backing down from her "no more bailouts" stance is starting to issue statements of support for some kind of structured bailout for Spain.

The liquidity in the entire western financial system is starting to dry up and it will require a lot more printing in order to avoid a massive banking system collapse.  We are starting to see all of the Fed officials - even the liquidity hawks - make statements in recent speeches with allude to "all options are still on the table" with regard to more QE.  See speeches yesterday from Lockhart and Evans, for example.  And just yesterday one of the chief policymakers for the Bank of England made the statement that Bank of England should consider buying more than just Government debt to facilitate QE:  LINK

I would also argue that this is the reason we are seeing the eastern hemisphere Central Banks ramp up their purchases of physical gold:  LINK  Gold is starting to shift into view as a primary store of value.  In fact the Central Bank of Turkey - Turkey being one of the largest importers of gold in the world - is now allowing commercial banks to count gold as part of their capital reserve calculation:  LINK

Several people asked me why, in the absence of any specific news, gold and silver spiked up this morning about 30 minutes into Comex trading.  The only explanation I can think of - again, in the absence of any specific news - is that the smart, wealthy pools of capital around the world are finally starting to move a lot of capital into physical gold and silver in response to the "print or collapse" corner into which Europe and the U.S. have painted themselves.

The only way to protect your wealth against what is coming our way is to own a lot physical gold and silver.  This would unequivocally not include any ETFs like GLD (although it would for sure include PHYS and PSLV if you own enough shares to convert your shares into delivered bullion).

Obama's Arrogance And Ignorance

Obama says U.S. has tried not to scold Europe  - headline on Marketwatch.com

I'm not really sure why Obama thinks he has a right to "scold" Europe.  Scold Europe over what?  Over trying to politically manage the kind of systemic problems that are multiples worse/bigger in the United States? 

How about Obama warning Greece to not leave the Euro zone?  LINK 

Where does Obama feel like he has right exhibit hubris like this?  Is this the sense of entitlement one subsumes as being an extensive life-long beneficiary of affirmative action? 

What Obama fails to understand is that many of the financial problems in the EU banking system have their roots in the American banking system.  It's funny because I have not noticed any EU leaders congratulate themselves over refraining from "scolding" the U.S. over MF Global, Lehman, Madoff, AIG, Enron, ad nauseum.  "Hubris" can be defined, with reference to Greek tragedy, as an excess of ambition or pride which ultimately leads to the ruin of the person exuding hubris.  I would say, in this context, Obama has likely put on a tragic display of hubris.

Furthermore, he exuded serious ignorance.  I suggested in an earlier blog that the Fed/Obama administration will use Europe as one of its excuses for more QE/Government-borrowed stimulus.  Obama used his speech on the economy today to set that up.  Ironically, per this report posted on FT/Alphaville LINK , U.S. exports to the Euro zone account for a mere 3% of U.S. GDP.  Even if Europe's import demand from the U.S. disappeared completely, it would have a negligible effect on our economic output.  So how can economic weakness in Europe be the cause of economic issues here?  Europe has been nothing more than a device for the U.S. elitists to divert attention from the much more serious systemic problems in this country.

Expect a lot more Euro-bashing from the Obama people over the next few weeks leading up to some serious money printing and Government borrowing/spending.  As an aside, I was driving down I-25 through Denver last night and I saw a sign, which preceded a bunch of annoying road work, which proclaimed that the construction being done was part of Obama's spending to put America to work.  Ironically, it was just a couple years ago that a massive $13 billion overhaul of I-25 was completed.  I don't understand why the Federal Govt has to spend more on I-25 so soon.  Irritatingly, as I drove by the area where the work was supposedly being done, I saw several workers in orange vests hanging out and sitting on the road barrier.  I guess these workers were just taking after the guy responsible for their paychecks (Obama) and were expecting to get paid while someone else does the heavy lifting.

And last, the real reason the U.S. elitists fear an EU financial implosion is that it would take down our banks with it, as our banks have trillions in derivatives exposure to the EU financial system.  Please note:  the derivatives have absolutely no contribution to economic growth/health.  They are, instead, a way for Too Big To Fail banks - like JP Morgan and it's $100 billion whale bet - to use Taxpayer guaranteed money for making speculative bets.

Consumer De-Leveraging?

Maybe, maybe not.  The media is reporting that the consumer is "de-leveraging" per the Fed's latest "Z-1" flow of funds report (quarterly).  You can look at pretty graphs here:  LINK

Let's get one thing straight.  On the surface, the numbers may make it look like the consumer is reducing it's debt load.  But we need to see more data about where this "de-leveraging" is coming from.  Given that banks are processing a voluminous number of foreclosures, short sales and credit card charge-offs, I would bet a lot of money that the source of this "de-leveraging" is the banks writing off bad consumer debt.

In other words, on the surface the news about consumers might appear positive.  However, I'm sure a deeper analysis beyond regurgitating the headline statistics would likely show continued decay in the financial health of the average American household, and therefore the economy.  One metric that would be of better use than grabbing macro numbers from the Z-1 report would be to look at household debt as a percent of personal income, after subtracting Government transfer payments from the personal income number.  Think about that one, given that we know that personal income net of Government entitlements is declining.

More QE Signals

I wish I could borrow big city housing the way you can borrow stocks - I would be shorting the heck out of Chicago and NYC properties right now:  "what's that? you have a $500k bid?  I got one to sell there and two more to go at the price if you want them"  - Dave in Denver

It seems that the market status quo after Bernanke's testimony today is that QE is still on hold.  For instance, the purveyor of forexlive.com had this to say:  "that he’s a lot more relaxed about both the recent US data and Europe than the market thought he would be."

Hmmm, really?  I'd love to play poker at the same table with him...In fact, if you step outside of short-sighted, narrow U.S. perspective, the Finnish Prime Minister, after a being on a conference call with Geithner and Bernanke, had this to say:

“They were very worried about what was going on,” Katainen said in a Bloomberg News telephone interview yesterday. Katainen said he discussed with Geithner and Bernanke the options for recapitalizing banks in trouble.  LINK

That was buried on Bloomberg this morning and I had to search google to easily dig up the link.  That's a quite different tenor than is being conveyed by the media after losing a hand of poker to Bernanke.   Moreover, the S&P 500 is still up over .75% after the Bernanke's b.s.  Someone explain to me please why gold and silver have been hammered 2.5% during Bernanke's circus and yet the stock market is flying.  We can't have it both ways.  Please note, my inquiry is purely rhetorical.  If you don't understand why the stock market is up - reflecting QE on - and gold is down - reflecting QE off - please visit http://www.gata.org/ and sift through the archives.

This brings to me my topic on looking for QE signals.  To preface, as a good friend of mine pointed out this morning, Bernanke has to be careful about employing more QE, otherwise he'll be accused of supporting the re-election of Obama.  This is why Mr. Katainen's comment is so crucial.  Bernanke and Geithner aren't worried about the U.S. economy per se, they are worried about the U.S. banks and the exposure to European banks via those off-balance-sheet transactions also known as OTC derivatives.  You know, the ones that led to JP Morgan's $2 billion $20 billion in losses this year so far.  If any of the big European banks blow up on Spain/Greece/Italy/Portugal, the Too Big To Fails in this country will suffer a financial nuclear explosion.

My view has been that more QE will first start with some sort of disguised version of it, like a much bigger dollar/euro Central Bank swap program plus more Operation Twist.  Interestingly, and drawing on a great post on FT/Alphaville from yesterday, a signal from hedge funds not being reported on in this country was reported by FT:  LINK  You'll note in the link that the chart shows hedge funds loading up on long bond futures.  This investing stance is based on the unequivocal expectation that the Fed will expand Operation Twist to include the longest part of the Treasury curve.  So far Twist has entailed the Fed selling short term paper and buying in the 7-10 yr area.  But since the Fed is running out of short paper, I would anticipate that it might sell 2-3yr paper and buy even longer duration paper.  Again, this is veiled version of QE, because when the bond market collapses, which it eventually will, the value of the Fed's long duration Treasury holdings will plummet in value, leaving the Treasury/taxpayer with the tab.

Finally, for all those suckers at Bernanke's poker table in the U.S. media, I wanted to highlight this commentary from the FT post regarding the Fed's stance on more QE in 2011, right before more QE was rolled out:

But the situation is reminiscent of last August. All signals before that meeting were for policy to stay unchanged, not least because inflation was higher than it had been in 2010, the last time the Fed acted, and it was rising rather than falling.


In the last ten days leading up to that August FOMC, however, came the debt ceiling debacle, an S&P downgrade of US debt, and full scale market panic about growth. In the end, that meeting produced the Fed’s forecast of low rates “at least through mid-2013”. The next Fed meeting will conclude on 20th June, three days after Greece holds fresh elections, and the potential for similar market turmoil is considerable.

In fact, I can recall in the summer of 2008 - I believe at this same Joint testimony session - that Bernanke said in response to one of the questions that the Fed was prepared to get "creative" with monetary policy if necessary.  I don't have the source of the quote, but I know recently that Bernanke said that the Fed has a lot of options on the table with respect to monetary policy.

Again, my point is that you can't go by Bernanke's prepared, highly massaged statement.  His statement did what it was intended to do which was to trigger a sell avalanche in the paper gold/silver Comex pits. Instead, look at the signals below the smoke being blown and use today's market action as a gifted opportunity to buy more gold and silver before they really take off.  I know the Chinese, Indians and Russians will:  LINK

One last question:  why is the dollar down today if QE is off the table?  With China cutting rates overnight, the dollar should have been flying today...

Jon Corzine And George Zimmerman Should Have A Lot In Common...

To be a “sophisticate” in the 21st century requires the same ability that has been required in almost all the previous ones. It requires the ability to shut one’s eyes and one’s mind to anything one does not want to see or think about. The more glaring the contradiction between what is said and what is done becomes, the harder it is to remain sophisticated. The tragedy here is that the only alternative - that of becoming independent - is looked upon as more terrifying than to go on pretending to be deaf, dumb and blind. One has to be all three to maintain the ridiculous notion that the Fed can “save” the system it has destroyed.  - Bill Buckler, The Privateer

Is anyone besides me disgusted with all of the focus in the media on the queen Elizabeth thing going on in Britain?  I mean, why should anyone in this country give a rat's ass?  It's a meaningless, ceremonial position in a country that has become largely irrelevant on the world scene, other than to help our Government manipulate markets and maintain a highly leveraged, fraudulent monetary and banking system.  It's not coincidental that JP Morgan had its CIO derivatives unit set up in London (see below).

I'll tell you why Americans care.  Read the above quote.  It's a distraction.  "People need something to make themselves feel good."  Right.  Feel good about what?  That some person deemed "royal" by lineage gets to sponge off the public wealth (confiscated and taxed)?  The only thing a distraction does is keep the public from focusing on the fact that the people in control of the system are robbing and pillaging the public, holding the system up long enough to take what they can while the public remains "distracted."  Taking your mind off a problem doesn't fix it.  And the longer the problem goes unfixed, the worse it will be when it really hits hard...

Let's take a look at a couple ways in which the elitists are robbing the public blindly, while the public focuses on "distractions."

MF Global - Jon Corzine and all of the MF Global management should be in a jail cell sitting next George Zimmerman (I'm sure everyone knows who that is, as its an example of a "distraction") awaiting arraignment.  But Corzine is running around raising more campaign money for Obama.   Despite headlines yesterday which announced that MF Global bankruptcy trustee James Giddens "might" file charges against Corzine, this article was posted on Marketwatch which suggested that Corzine would likely get away with his fraud:  LINK 

Not only is Corzine guilty, the entire upper management knew that the firm was going to hit the wall way before it starting illegally using customer funds to keep MF alive:  "Facing pressure last summer to increase its capital cushion, MF Global moved some of its risky European debt holdings to an unregulated entity in an effort to avoid having to raise the extra money."  LINK  Someone really want to try and tell me with a straight face that Corzine didn't know exactly what was going on with customer funds?

Here's one that should piss everyone off.  The Government/FHA is introducing a new FHA mortgage refinance program - using taxpayer money of course - to incentivize homeowners to refinance their existing mortgage into one that carries much lower mortgage insurance fees.  And guess what?  This refi program is a no-income, no employment verification and it's okay to be under water program:  "The new lender is not required to verify homeowner's income, employment or credit score. And no appraisal is required, so the homeowner can be underwater."  LINK

Really what this program does is it takes taxpayer money and taxpayer guarantees, applies them to bank mortgages that are not yet delinquent, and enables the existing lender to convert the mortgage into a mortgage with lower monthly payments. It helps the bank keep the borrower current.  It's back to the mortgage bubble days where the borrower's credit quality is ignored.  It does free up some income that can be used to buy "thinga-ma-jigs," but it does so using taxpayer money and shifts more of the risk of mortgage onto the taxpayer.  Like that everyone?

Here's a biggie.  With very little public notice, and something of which 99.5% of this country is unaware, the Government has quietly put in place taxpayer guarantees of the Comex, CME and a couple of other lesser known derivatives clearinghouses: 

Readers know Mr. Gensler as the chief regulator of MF Global, which was run into bankruptcy by his old Beltway and Goldman Sachs pal Jon Corzine. An estimated $1.6 billion is still missing from MF Global customer accounts. What an amazing feat Mr. Gensler will have performed if, through his agency's oversight, he can manage to have U.S. customers eat the cost of Mr. Corzine's bets on foreign debt and have U.S. taxpayers underwrite bets in foreign derivatives trading.  LINK

Even worse, via FDIC, the Taxpayer now is on the hook for derivatives blow ups at the Too Big To Fail Banks.  This has been in effect for awhile, but here's an article from the Financial Times on the hold-up in Morgan Stanley's move to get FDIC guarantees using the same legal maneuvering already approved at other banks:  LINK

How many of you reading this knew that your tax dollars were backstopping the derivatives risks being taken at banks like JPM?  For those of you who don't know about this, or don't care, enjoy your "sophisticate distractions" while they last.  By the time the public really takes a good look at reality, it will be too late to do anything about it.  It likely is too late already - got gold?

Thinga-ma-jigs That Leave Me Speechless

QE is coming in one form or another, both in Europe and the U.S.  It has to happen in both places because the European banks are blowing up and the U.S. banks, via massive derivatives exposure, are exposed to the European banks on a significantly leveraged basis. 

Not only is QE coming, but Obama is starting to hint at more fiscal stimulas (read:  Government borrowing and spending money to employ more public union workers).  What I found staggering is that Obama referenced giving Americans money to spend on "thinga-ma-jigs" recently in a campaign speech in Minnesota. (Sourced from zerohedge.com) Obama:  "there are some folks here who could use $3,000 a year...Let's get that done right now...it helps you pay down your credit cards...maybe someone will replace some thinga-ma-jig for their furnace."  Truly staggering.  Here's the video link:  LINK

So Big O is basically floating a trial balloon for initiating some kind of program to stick $3,000 in the pocket of each household in order to pay down credit cards and buy thinga-ma-jigs.  I wouldn't have believed it unless I saw the video myself.  Half of the population in this country lives in households that get Government benefits:  LINK  More troubling, the number of people who actually pay taxes now is less than 50%.  So what Obama is proposing is to take money from those who pay taxes and give it to everyone so they can pay off credit cards and go shopping.   Think about that for a bit...

The Obama's have stooped to new lows in their quest to squeeze campaign money from the public.  Someone who voted for Obama and will probably vote for him again forwarded an email she got from Michelle Obama announcing the new campaign.  She prefaced it with, "this is kind of low for them, don't you think?  A presidential raffle?"  Here's the email:

Sarah Jessica Parker is a loving mom, an incredibly hard worker, and a great role model. She's one of those people you can't help but admire.  Barack and I are thrilled that we're invited for an evening at her home in New York next week.  And I'm hoping you'll be there, too, along with whoever you'd like to bring. Tonight at midnight is the deadline to enter.  Chip in $3 or whatever you can to this campaign, and you'll be automatically entered to win -- airfare and hotel included: LINK  Thanks for all you do for Barack,  Michelle

So Michelle is out soliciting campaign contributions in exchange for the donor being put in a raffle to be flown to NYC and join Sara Jessica Parker in fund-raising dinner for Obama.  This really horrifies me. 

Make no mistake, I'm not a Romney supporter.  But Obama has taken the U.S. Presidency to a new low.  Not even Clinton, who barely had a pot to piss in before he entered the Oval Office, was this petty. 

If you want to take Obama's "thinga-ma-jig" speech full circle, you could actually see where he sends every household $3,000 as part of a stimulus package and those who support him contribute part of that to one of Michelle's lottery raffle fundraisers.  Campaign financing taken to a new level of creativity.  I can't wait to see Romney raffle off a planet to the highest bidder in a campaign fund-raising effort...

The Sound And The Fury Of Financial Nuclear Air Raid Sirens

Everyone stupid enough to sell their gold and buy Treasury bonds is climbing out of the lifeboat and getting back on board the Titanic - guest on Fox Business

Anyone rooting for Ben Bernanke to print more money and Obama to borrow more to spend on "jobs creating" projects like Solyndra is one of the chickens in the coop cheering for Colonel Sanders...Dave in Denver

I'm going to keep today short if I can.  Sometimes once I start writing there's no telling how amp'd up I'll get.  Obviously the jobs report came in significantly below the Wall St. Einstein forecast.  Because these numbers are mostly make-believe anyway I won't go into them in-depth.  But for the purposes of comparing make-believe to make-believe, the number of jobs Obama wants us to believe were created in May was 69,000 vs. the expectation of 150,000.  Even more troubling was the big downward revision in April. 

The highlight of the whole Disneyland affair was hearing Joe Kernen exclaim to Mark Zandi - CNBC's economic Einstein - "wow Zandi, how did you miss this so badly?"  The fact of the matter is that I remember trying to read Zandi when he was a junk bond credit analyst back in the 1990's.  I thought his work was so poor that it was entirely unreadable.  In other words, he was a moron back then and he's a moron now.  But I guess when the company you work for pays huge advertising fees, you get elevated to genius status on CNBC.  Zandi isn't "big hat, no cattle" - he's "no hat, no cattle."  Zandi has been wrong for past 10 years on housing, the economy and gold.  Especially on gold. 

It's all fairy tales and fantasy anyway, but when the fairy tale turns into a horror story - for real - you have problems.  And we have big problems right now.  The economy is collapsing - GM and Chrysler badly missed sales estimates, all the manufacturing data is coming in substantially weaker than expected by our resident TV Einsteins, like Zandi, and housing is doing another el cliffo.

But what really should be jerking people from Lego Land and into Friday the 13th is the Treasury bond market.  The yield on the 10-yr Treasury is at a record all-time low and the yield on the 30-yr Treasury - the Big Daddy - is below it's lowest point during the Lehman crisis.  That's not just warning signals flashing, that's the equivalent of financial nuclear air raid sirens going off.

What this means is that all liquidity is being sucked out of the global financial engine and it's going into Treasuries and precious metals.  I suspect today's big move in both reflects the expectation that we may get a heavy dose of QE3 in some form - likely not an obvious, overt form - at the June FOMC meeting.  Just like everything else going on in our system - of which the Obama farce and fraud is supremely emblematic - I'm sure our resident Talmudic scholar at the Fed, who masquerades as an economic expert, will do his best to inject as much electronically created currency into the system but disguise it in a way that the public will accept as nothing more than some temporary, "sterlized" lines of credit.

Trust me, that's a loan NO ONE wants to take unless they have a lot of physical gold and silver on the side...