Wednesday, September 19, 2012

A Paradigm Shift

We suspect last week’s events, in which both the ECB and Fed committed to open-ended base money creation – against a geopolitical environment in which China’s USD reserves are being held astride an increasingly dynamic domestic political regime and in which the petro-dollar regime of the past forty years seems under attack – may be the catalyst that begins to raise public awareness of the link between monetary inflation and price inflation.   -  Lee Quaintance/Paul Brodsky, QB Asset Mgmt  LINK
"Raise public awareness of the link between monetary inflation [i.e. QE] and price inflation" (real price inflation, not the insidiously corrupted Government CPI).  Paul Brodsky's writing, in my view, is intellectually and stylistically brilliant.   That one sentence captures the "essence" underlying the reasons the broad public has not yet understood the role gold plays as both a currency and an investment and why the latest round of Central Bank balance sheet expansion could begin to trigger the much-awaited massive move of public/institutional/pension money into gold and silver as an asset class.  I've linked the entire essay and it's worth a close read (c'mon, it's less than four full pages).

I wanted to post and comment on a few news items released yesterday but not widely publicized.  But first I want everyone to see that the Government is already spending the money being printed from the Fed's latest mortgage purchase QE.  Fannie Mae has rolled out new mortgage product that enables the borrower to refinance up to 105% of the appraised value of the home.  The program has the appearance of implementing some control over assessing the borrower's credit quality, but it leaves plenty of room for mortgage brokers to go outside of the "guard rails."  Furthermore, it provides Taxpayer subsidized mortgage principle insurance.

Maybe on the surface this sounds okay.  Why not let good credit mortgage borrowers refinance an underwater home at a lower rate and stretch out the amortization schedule, thereby lowering the monthly payments.  But there's several problems with this scheme, two of which can put the Taxpayer at substantial risk.   First, how trustworthy are the appraisals?  Egregiously inflated appraisals were rampant during the housing bubble.  Why has this changed, especially with a mortgage broker who is incentivized to process as many applications as possible and banks who underwrite the mortgages can flip them into Fannie Mae and take their skim?  Second, the program is based on the assumption that housing values have bottomed.  Let's assume my view is correct, which it is, and we have another 25-30% of downside.  Now the Government/Taxpayer is sitting on a large pile of mortgages that are 30-35% underwater.  That's a Taxpayer obligation if the homeowner decides to "strategically" default.  Once again Government intervention into the marketplace is going to end up in serious misallocation of Taxpayer money and huge losses for everyone involved - except the mortgage brokers...

A couple of news items caught my attention yesterday which have implications for the economy.  Phil Anschutz is putting his sports entertainment empire on the market:  LINK  I find the timing of this move interesting because I've noticed that historically Anschutz is one of the savviest market timers in terms of selling at peak valuations.  The value of sports entertainment assets is based on the ability to generate large broadcasting contracts, advertising revenues and all the other consumer-based spending associated with sports viewing (ticket sales, concessions, parking, team paraphernalia, etc).  For Anschutz to be selling now, he must have the view that consumer disposable income, and therefore the ability to generate the consumer spending vital to sports franchises, is going to go into decline.  It's something to keep in mind the next time you read or hear a bullish economic forecast.

Also yesterday American Airlines announced 11,000 layoffs related to its emergence from bankruptcy: LINK  The implications there for the economy are obvious.  It would be interesting to know if some of the employees who receive notice file for social security disability before they lose their job.  As we know, Obama has made that an easy option for many LINK  I'm sure the BLS will figure out a way to not include the 11,000 lost jobs in its monthly employment report.

Finally, non-US/European/British Central Bank buying of gold is becoming a widespread monthly occurrence.  South Korea, which has been buying gold now for at least a year,  has become the 40th largest in sovereign gold holdings LINK   In addition, the State Oil Fund of Azerbaijan announced the purchase of 10 tonnes of gold  LINK  I find this very interesting, especially when considered in light of the reports that China has started selling its oil in yuan, not U.S. dollars.

There's a structural paradigm shift going on and most people in this country are not only unaware of it, but will be blind-sided by it.  Those who position themselves in gold and silver (not GLD, SLV, etc), will benefit greatly from the dynamic described in the quote at the top...


  1. hi Dave,

    just a small comment regarding the new FNM program and specifically appraisers, in my experience appraisers for the mortgage oligopoly ie WFC, JPM etc are now sourced from a central database. ie the mortgage broker or realtor is not choosing the appraiser but the lender is choosing. in my experience post bailout and post robosigning debacle, they have been very conservative in terms of refi valuations. perhaps this new program will be an inflection pt such that the mortgage cartel will unleash the hounds and tell their appraisors to be aggressive.


  2. Veteran Russia bear Jim Rogers takes Moscow bank job

  3. Hi Dave, first time caller - long time listener!...from Helsinki (originally NZ) Top read and thanks for the many astute comments, also from many of the readers here. Saw this from Catherine Austin Fitts:

    "QE3 – Pay Attention If You Are in the Real Estate Market"

    1. Hi Helsinki! Thanks for the feedback and the link. Fitts is astute and plugged in. I had not necessarily connected the possibility that this QE could be the Fed's attempt to clear the fraudulent FNM mortgages.

  4. What Bear Stearns Whistleblowers told the SEC: New Details of RMBS Fraud & Cover Up

    Remember all those whistleblowers the monolines found in their RMBS fraud
    litigation against Bear Stearns and JP Morgan? The ones JPM’s lawyers tried to publicly out their names so they’d be afraid to testify in the monoline’s case. Well the bank’s dirty legal tactic didn’t work and newly released whistleblower testimony from people who worked for third-party due diligence firms, hired by Bear to get the mortgage security insurers to back their bonds, shows a whole another layer of orchestrated deceit. One so bold it borders on mafia like RICO actions.

    Filed in Connecticut state court at the end of August by monolines lawyers at Patterson Belknap is a motion to enforce a New York subpoena that calls for RMBS due dilly firm, Clayton Holdings, to turn over the historical loan review reports that were sent to Bear Stearns. The motion is on behalf of Ambac; the RMBS insurer who first brought the explosive fraud suit against Bear Stearns traders for stealing billions from their own clients. You know the one that led to JP Morgan, Bears’ successor, telling investors last quarter they now have at least $120 billion of possible mortgage security putback suits they could be forced to pay out. Well it looks like Abmac wants the public to know more of the dirt they have on Bear/JP Morgan because in exhibits with the motion they filed there’s some nasty whistleblower sworn testimony.

    What’s worse is when Clayton or Watterson Prime due dilly workers actually found the bad loans and coded them in the system (called CLAS for Clayton) their supervisors would change the coding to reflect the loans were ok. This enabled the Bear Stearns traders working under Tom Marano to hide the fact loans they’d bought, from the banks like Greenpoint or Countrywide, were garbage but still went into the security because allegedly Bear traders didn’t want to spend the time or money to go back to the originators and buy quality loans. If the courts find the whistleblower statements are true, it’s a clear violation of the monoline rmbs insurance contracts along with possible insurance fraud and violations of the Martin Act.

  5. Why The Cluff Deal Is A Game Changer In The Gold Industry:

  6. Talking about layoffs - BOA also laying of 16000 by year end.

    On other points - ( I am German so.....)

    The hypocrisy of the German's is astounding the Bundesbank and all! Their banking system is worse than many others in Europe.

    Then Bill Still and his anti Gold Standard videos. He hasn't figured out the cause and effect in this financial meltdown. He has some points which are accurate but the biggest ones he gets an "F".

    Firstly what asset does he thing will cover all the obligations in the world at the moment? What needs to be highlighted is that not only the elite have gold - what about the Indian women and Asian farmers etc etc.

    Secondly - He wants to decentralize the printing of currency without credit and outlaw the fractional system. Heck this would be marvelous for Gold and Silver. This would have been great if it weren't for the failing of the next point...

    What his biggest failing is that he hasn't considered "Human Nature". In all history the common denominator in all systems which ultimately fail, especially when it comes to money and ownership of things, is "HUMAN NATURE". Every war in history was as a result of this "wanting more". So I have lost it for Bill Still - it reminds me when I was younger and an idealist.

    Bill Still's video

  7. Just today there is this video from DRSchoon - and it supports my above point I made earlier regarding Bill Still and his ridiculous assertion about the gold standard and who should print paper money and who should control and outlaw the fractional system and the most important aspect and cause to all ills "HUMAN NATURE". Which Bill Still omitted. What he doesn't understand is that if we assumed that "HUMAN NATURE" and POWER would be trustworthy we wouldn't have a problem now in the first place. NADA, none. Get this into your head Bill!!!!!!! Fool me many a time and fooled again and again!!!!It is a history lesson of the world - human nature.

    1. The Corruption to Production Ratio:

      Look at African countries that collapse or that are run by corrupt leadership; their economies are dismal and you see the corrupt leaders living like kings. You have to look at the the “corruption-to-production ratio.” When you aren’t producing very much, and you have a very corrupt system, you see an economy that is in shambles. We have always had corruption in the United States, but we had checks and balances. And our production was so brilliant that the corruption basically didn’t matter that much because our corruption-to-production ratio was low. But in our lifetime, the corruption-to-production ratio has gotten out of whack. And so that’s why you’re seeing our economy basically being drained. And you are seeing fifty-one million people on food stamps right now, and you’re not seeing manufacturing coming back to create jobs for those people, which is our biggest problem.

  8. Tim Pawlenty to Head U.S. Bank Lobbying Group

    We always ultimately see where their loyalty lies when it comes to these guys. Can’t win the Presidency? No problem! Become a whore for the banksters that blew up the economy and now continue to parasitically suck the lifeblood out of it each and every day. I’ve said it before and I will say it again, there is almost no form of life at the moment lower that a United States politician.
    From Reuters:
    (Reuters) – Former Republican presidential hopeful Tim Pawlenty will become the head of the Financial Services Roundtable, a U.S. bank lobbying group that represents JP Morgan Chase & Co and Wells Fargo & Co, among other financial companies, the group said on Thursday.
    As the industry’s top lobbyist, he will play a major role in the industry’s efforts to make new Dodd-Frank rules, which Congress passed in 2010 in response to the 2007-2009 financial crisis, more favorable for Wall Street as regulators implement the law.

  9. Rethinking Robert Rubin
    Nassim Nicholas Taleb doesn’t know Rubin personally. He admits that his antipathy, like that of so many Rubin critics, is fueled by symbolism. “He represents everything that’s bad in America,” he says. “The evil in one person represented. When we write the history, he will be seen as the John Gotti of our era. He’s the Teflon Don of Wall Street.” Taleb wants systemic change to prevent what he terms the “Bob Rubin Problem”—the commingling of Wall Street interests and the public trust—“so people like him don’t exist.”

    People like Rubin—brilliant, powerful, and fueled by certainty—will always exist. They’ll act selfishly and selflessly. They’ll advance whole societies and their own interests, and their paradoxes will be endlessly debated. “This is a guy who is as controlled as any human being I know,” says Sandy Lewis, who as an arbitrageur worked with Rubin at Goldman Sachs. “He’s pleasant company. He’s compulsively dishonest in a certain way, and compulsively honest in other ways.” Nobody’s perfect. But for $126 million, they ought to show up.

  10. The very painful end of the US anaesthetic is at the crossroads of the seven key factors of a double shock of the coming weeks
    Because it is indeed that. As we have underlined on many occasions in the GEAB, the United States has, since the beginning of this crisis, refused to face reality (5) by having increasing recourse to financial, monetary,… (and military) subterfuge to try and mitigate the consequences of the crisis. All this however is proving to be ineffective at the end of summer 2012, in spite of the trillions of Dollars thrown down what is proving to be a bottomless hole.

    The best proof is the Fed’s September 13th decision to maintain its Operation Twist programme of Treasury repurchases by adding to it an unlimited programme (in time and amount) of mortgage backed securities repurchases (40 Billion USD/per month) to try and revive the US property market and, through the latter, employment and consumption. The Fed is aware that this decision will cause a backlash and damaging consequences internationally. In fact it has been hesitating for months ahead of a new QE3 (6). But, in trying to avoid a socio-economic implosion and a stock exchange collapse on Wall Street ahead of the November 2012 elections (7) whilst trying to save its own credibility under heavy attack from the Republican camp, it chose “Psychological Easing” rather than “Quantitative Easing”.

    The Fed is increasingly becoming the key player in the US property market, thus persisting in confusing the problems of liquidity and solvency. US households don’t have any more money to buy or build houses (8). Mortgage interest rates won’t change anything here. Only Wall Street, for a certain time, will be able to continue surfing on record levels until one “beautiful morning” everything collapses due to a sudden awareness that the real economy is sinking into depression.

  11. English City of Bristol Launches its Own Local Currency
    Creators of the Bristol Pound claim that a local currency has the potential to significantly increase the amount of spending power in the region and ensure that it is channelled into local, independent businesses.

    Ciaran Mundy, co-founder of the Bristol Pound, told AFP last month: “Eighty percent of the money leaves the area if it is spent with a multinational – but 80pc stays if it is spent at a local trader.”

    “The perception of banking and money is that it’s a very ruthless system: people are out for what they can get,” he added. “This is about saying yes to something new. It’s tapping into a different set of values about money.”

  12. Word of the Day: Exchange-Traded Fund (ETF)

    David Kotok wrote a book on ETFs and spoke about them on our show recently. However, Kotok warns that investors should conduct serious research before purchasing shares in an ETF. We'll explain why shortly, but first, what exactly is an Exchange-Traded Fund (ETF)? Here's our definition:

    ETFs are a portfolio or basket of securities, which provide diversification like mutual funds, yet are unique in that they trade on an exchange just like a common company stock. They usually track an index, either holding the underlying stocks of the index or using derivatives to achieve the same returns as the index. And since an ETF is designed to track a specific market index, one can play an entire sector without being forced to stomach the volatility inherent in any one stock.

    For instance, investors can gain exposure to precious metals using ETFs. Specifically, Gold and gold miner ETFs have become increasingly popular. But if you buy shares in a gold ETF like the GLD for example, the largest gold ETF in the world, do you actually own gold? The answer is NO. You are effectively buying shares in a fund indexed to the gold market. This is not the same thing as buying physical gold bullion and storing it in allocated vaults, a key distinction.

    Also, in the case of GLD, the Trust does not insure its gold. Which means it may not have adequate sources of recovery if its gold is lost, damaged, stolen or destroyed. And this may surprise you when reading the prospectus as we have. According the prospectus for GLD:

    "The amount of gold represented by the Shares will continue to be reduced during the life of the Trust due to the sales of gold necessary to pay the Trust's expenses irrespective of whether the trading price of the Shares rises or falls in response to changes in the price of gold."


    "Gold held in the Trust's unallocated gold account and any Authorized Participant's unallocated gold account will not be segregated from the Custodian's assets. If the Custodian becomes insolvent, its assets may not be adequate to satisfy a claim by the Trust or any Authorized Participant."

    So if the custodian- in this case HSBC- runs into trouble, it may not be able to make good on your claim.

  13. Shandong Gold buys controlling share of Aussie miner

  14. Corporate Tax Loopholes = Corporate Socialism: Pulitzer Prize Winner David Cay Johnston

    "The scandal is the law," says David Cay Johnston, a Pulitzer Prize-winning reporter and author of "The Fine Print: How Big Companies Use 'Plain English' to Rob You Blind."

    He told The Daily Ticker: A 1909 law requires that companies not hold more cash than needed to reasonably run their business. If they don't re-invest the extra cash into the business or pay dividends, they face a 15% penalty tax unless they hold the extra funds offshore. That loophole was signed into law under President Ronald Reagan, and it allows companies like Microsoft (MSFT) and Hewlett-Packard (HPQ) to borrow against some of those foreign assets.

  15. Mad Republicans the key risk, Treasurer Wayne Swan warns

    WAYNE Swan has launched a blistering attack on US Republicans, declaring "cranks and crazies" have taken over part of the party and have come to represent the No 1 threat to the world's biggest economy.
    As the US presidential campaign enters its final weeks, the Treasurer used a speech in Sydney this morning to criticise the Republican Party's position on the US budget, warning that negotiations in the new year to prevent a "fiscal cliff" caused by a major withdrawal of government spending will be a key to the future direction of the global economy.
    "Let's be blunt and acknowledge the biggest threat to the world's biggest economy are the cranks and crazies that have taken over a part of the Republican Party," he told a Financial Services Council function.
    The speech comes ahead of Julia Gillard's trip to New York next week, where she will address the UN General Assembly and meet a range of world leaders.

  16. Drug giants fined $11bn for criminal wrongdoing
    Fines are not enough to reform drug industry, warn lawyers

    The global pharmaceutical industry has racked up fines of more than $11bn in the past three years for criminal wrongdoing, including withholding safety data and promoting drugs for use beyond their licensed conditions.
    In all, 26 companies, including eight of the 10 top players in the global industry, have been found to be acting dishonestly. The scale of the wrongdoing, revealed for the first time, has undermined public and professional trust in the industry and is holding back clinical progress, according to two papers published in today's New England Journal of Medicine. Leading lawyers have warned that the multibillion-dollar fines are not enough to change the industry's behaviour.

    Kevin Outterson, a lawyer at Boston University, says that despite the eye watering size of the fines they amount to a small proportion of the companies' total revenues and may be regarded as a "cost of doing business". The $3bn fine on GSK represents 10.8 per cent of its revenue while the $1.5bn fine imposed on Abbott Laboratories, for promoting a drug (Depakote) with inadequate evidence of its effectiveness, amounted to 12 per cent.

    Mr Outterson said: "Companies might well view such fines as a quite small percentage of their global revenue. If so, little has been done to change the system. The government merely recoups a portion of the financial fruit of firms' past misdeeds."
    He argues that penalties should be imposed on executives rather than the company as whole. He cites a Boston whistleblower attorney, Robert Thomas who observed that GSK had committed a $1bn crime and "no individual has been held responsible".

    sounds like a remedy for the banksters

  17. Wall Street Rolling Back Another Key Piece of Financial Reform

    Jefferson County, Alabama was the most famous case – the city of Birmingham went bankrupt after being bribed and goaded into taking on billions of dollars of toxic swap deals – but in fact it was just one of hundreds of similar examples of localities being duped into suicidal financial deals by rapacious banks and financial companies. The Denver school system, for instance, got clobbered when it opted for an exotic swap deal pushed by J.P. Morgan Chase (the same villain in Jefferson County, incidentally) and then-school superintendent/future U.S. Senator Michael Bennet, that ended up costing the school system tens of millions of dollars. As was the case in Jefferson County, the only way out of the deal involved a massive termination fee that might have been even more destructive than the deal itself.

    To deal with this problem, the Dodd-Frank Act among other things included a simple reform. It required the financial advisors of municipalities to do two things: register with the SEC, and accept a fiduciary duty to respect the best interests of the taxpayers they are advising.

    Sounds simple, right? But Wall Street couldn’t have that. After all, if companies are required to have a fiduciary responsibility to cities and towns, how in the world can they screw cities and towns? The idea was a veritable axe-blow to the banks’ municipal advisory businesses.

    So what did Wall Street lobbyists and trade groups like SIFMA (the Securities Industry and Financial Markets Association) do? Well, they did what they’ve been doing to Dodd-Frank generally: they Swiss-cheesed the law with a string of exemptions. The industry proposal that ended up being HR 2827 created several new loopholes for purveyors of swaps and other such financial products to cities and towns.

    Read more: