Re: Fannie Mae: Inquiring Minds Would Like Know...

We know, more or less, how much money was taken from the Taxpayers and given to Goldman and other firms in order to monetize AIG's derivatives problems at 100 cents on the dollar.  And Geithner was responsible for that payout and why should he care - he skips out on paying taxes anyway. 

But most people are probably unaware that Fannie Mae was also one of the world's largest users of derivatives. I would love to know how much of the $60 billion Fannie Mae has purloined from the Taxpayers has gone to pay out Goldman, et al. There is no doubt in my mind that derivatives were more responsible for FNM's collapse than mortgage defaults. Would love to hear anyone's thoughts on this.

Did India Ignite A Global Central Bank Bidding War For Gold?

**All eyes are on China now (and to a lesser extent, Russia and the Arab Gulf States), to see how it will respond to the suprise news about India's large gold purchase, as it was largely expected that China would be the one to take on the IMF gold that is for sale**

William Pesek at Bloomberg News wrote an interesting commentary about the 200 ton IMF gold purchase by India.  It is interesting because one of the propositions asserted by long-time gold market analysts has been that eventually Central Banks globally would go from being net sellers of gold to being competitive net buyers as they seek refuge from the wealth destruction caused by fiat currency printing presses, specifically Bernanke's electronic printing press "that allows [the U.S.] to produce as many U.S. Dollars as it wishes at essentially no cost" (Banana Ben, 11/21/2002).

Pesek writes:  "A question no one can answer yet is whether India will touch off a bidding war among central banks...Traders are now betting on who will announce the next big purchase. Will it be China looking to employ its $2.3 trillion of reserves? What about Japan, which has the second-biggest pile of currency? Or Gulf states working to end dollar hegemony? And let’s not forget about Brazil and South Korea."  (here is the article link:  Pesek on India's Gold)

As discussed earlier this week, this purchase from India, combined with the renewed urgency exhibited by two of the world's largest gold mining companies to eliminate their gold hedges, points to a growing tightness in the global availability of gold bullion - exacerbated by the rapidly declining mining supply of gold.

An Indian official commented on India's gold acquisition:  “Gold as a proportion of our reserves is relatively small,” said R.H. Patil, chairman of National Securities Depository Ltd and Clearing Corp. of India Ltd. 'Gold is the ultimate currency. In fact, only gold came to our rescue during (the) 1991 crisis, so it makes sense that RBI should try to increase its gold holdings,' Patil said."

This same article noted that: "In the last one year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%" (LINK)

So there you have it.  India's move earlier this week may well set off a global scramble, not only by large mining companies closing out their hedge book to avoid the financial devastation of being short gold via production hedges (Anglogold dropped $688 million on its hedge since July), but more significantly, we will see Central Banks, especially eastern hemisphere and Gulf State CB's, engage in a competitive scramble to accumulate large chunks of gold and unload U.S. dollar reserves.

I would suggest that the U.S. Government is quickly losing its ability to continue engaging in its scheme to keep a lid on the price of gold in order to support the vailidity of the dollar.  Furthermore, as you can see from the chart below, the price of gold has the potential to move significantly higher in price, with the technical and fundamental factors perfectly aligned to fuel a big rise:

In over 23 years of experience in all aspects of the financial industry, including 15 on Wall Street, I have never seen an investment opportunity with the low risk/high return characteristics of gold (and silver).

India, American Barrick, Anglogold Ashanti: Gold Is Going Much, Much Higher

As the saying goes, "follow the money."  Three major players in the global gold market have engaged in highly scrutinized and very visible bullion transactions, sending the loud and clear message to the market that the price of gold is going to go significantly higher in price.  A more subtle message, and more significant, is the signal to the world that the supply of gold available to purchase in large quantities is quickly dwindling.

India is the world's largest consumer of gold (China will soon surpass), American Barrick (ABX) is the largest gold mining company in the world, Anglogold Ashanti (AU) is the world's 3rd largest gold mining company.  They are all buying as much gold as they can - India because that's what India does;  ABX and AU because, otherwise, those two companies will go bankrupt from their massive gold hedges.

As most of you know by now, India's Central Bank announced yesterday that it bought 200 of the 403 tons of gold that the IMF is selling.  They paid $1045/ounce.  An IMF official said the transaction would be paid for by India in hard currency, not IMF Special Drawing Rights, which means India is most likely using U.S. dollar reserves to pay for the purchase.  This is a massive move out of dollars for India ($6.7 billion U.S. dollars).  India would not be engaging in this high profile transaction if it thought that it could easily purchase an eqivalent amount at an equivalent price quietly and privately. India is, to be sure, quite cognizant of the fact that this purchase sends a bullish signal to the market.  One can only conclude that this move signals to the world that the physical supply of gold in large quantities is getting tight, a view that has been presented on this blog and by other informed sources.

American Barrick announced yesterday that it bought back 1 million ounces of gold in October, that it might complete its hedge buyback program before the 12 month window it set in September and that global mine production will continue to decline.  After the 1 million ounces purchased in October, ABX estimates that the value of the remaining hedge that needs to be closed-out is $2.1 billion. The calculation assumes $1050/ounce gold.  Ever since ABX announced its plan to close out its hedge book, the Company has aggressively worked on buying back gold to cover its hedges as the price of gold moves higher. Since September, ABX has issued $4 billion in stock and $1.25 billion in debt for this purpose. It is patently clear to anyone analyzing ABX's activity that managment is becoming increasingly concerned with the manageability of their gold short and the risk of facing the liability of much higher prices in the near future.

Anglogold Ashanti announced yesterday (11/2) that it may accelerate the closing of its hedgebook.  The Company announced that the hedge was down to 4.3 million ounces.  The original timetable for closing the hedge was 2014, a date the Company set just recently in July.  Since that time, the price of gold has gone up around $160/oz.   This means that AU has dropped another $688 million (roughly) on its gold hedge.  To put the size AU's hedge in perspective, 4.3 million ounces translates into about 122 tons.  More than half the amount India purchased from the IMF.  Unless the IMF agrees to sell AU some of the remaining 203 tons that it is selling, AU has a big problem.  It should be clear to everyone that AU faces a huge challenge to buy back its gold hedge without significantly driving up the price of gold and incurring huge financial damage. 

As signalled by India, ABX, AU and some big funds in the U.S., the long-anticipated scramble by Central Banks and large investors to accumulate gold is now underway.  When I first began researching the gold market back in late 2001, I examined some ideas offered by Jim Dines in his subscription newsletter (The Dines Letter).  One of the themes was that Central Banks globally would shift from being net sellers of gold to being net buyers and that the race to buy gold by these enitities would get quite competitive, as the available supply persistently declined and the price inexorably rose.  Please keep in mind that these same Central Banks had been key suppliers to the market over the past 10+ years.  To back up this thesis with an example, the European Central Bank System had been selling 500 tons per year since 1999, up until last year.  This year, as the price of gold has continued its ascent, the ECB selling has slowed to a trickle and a few of the member banks (Germany, for one) have announced that they are done selling gold. Some ECB banks have actually purchased gold recently.

I suggested last week that it wouldn't be a good idea to wait much past Halloween if you were thinking about buying gold.  The actions announced by China, Barrick and Anglogold have added considerable urgency to that suggestion.  Gold is going to go MUCH higher in price.  Period.

Is CNBC's Steve Liesman Retarded?

I always thought his brains must have fallen out of his head with hair.  For whatever reason, Liesman once again shows his complete lack of knowledge about economics as he shows himself to be the strawman for the Fed:



Video link courtesy of http://www.clusterstock.com/

This one's for you, Steve:

We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw...from T.S. Eliot's, "The Hollow Men"

De-bunking Nouriel Roubini

Someone asked an excellent question in the comment section of my previous post regarding Nouriel Roubini's shoot-from-the-hip comment getting headlines today that the unwinding of the dollar carry-trade will cause the dollar to spike.  The short answer is that any spikes in the U.S. dollar index will be short-lived and shallow, as the dollar has a long way to go before it finds a spot to land which reflects the reality behind the U.S. financial system and the ever-increasing supply of dollars being produced by Bernanke.

Having said that, here are my thoughts:  The dollar carry-trade is a relatively new development fueled by zero percent Fed Funds and a rapidly expanding supply of dollars. Before we speculate on the effects of the dollar carry trade unwinding, let's figure out what events would precipitate the unwinding of the dollar carry trade. The yen carry trade lasted for several years. In fact, to a degree, its still going on relative to other currencies, just not dollars, since both the U.S. and Japan have zero interest policies implemented by their respective central banks.

When do you think the Fed will raise rates to a level which exceeds the rates in other countries? My bet is that it will be a lot longer than anyone realizes. Based on this, I think the more interesting question is "how insane will the dollar carry-trade get?" The yen carry trade financed a multi-trillion dollar bubbles in hedge funds, derivatives, the real estate/mortgage market, and the Treasury bond market. Using that as your measuring tape relative to the dollar, the starting pitchers for the dollar carry trade have yet to finish warming up and take the mound.

When do you think the Fed will stop expanding the money supply (the real money supply, not MZM or M2)? I would suggest that if the Fed starts to withdraw liquidity and raise rates, the U.S. financial system will fold up faster than a circus tent in a hurricane and Bernanke will lose his job - as will Obama and the current stable of bank-financed Congressmen.

I think Roubini says a lot of outrageous things either to grab attention or because he doesn't fully understand finance. Probably a bit of both.  I don't really pay attention to his commentary because I believe it's nothing more than superficial analysis cloaked in headline-grabbing hype and an accent that makes him sound well-educated.

Pending Home Sales Dissected

The big jump in pending home sales was greeted by the stock market and the clowns on CNBC with great fanfare.  What is more interesting is that the mainstream media neglects to mention the high cancellation rates which tend to undermine headline numbers.  A "pending sale" is a signed contract, contingent on financing.  As per a comment from a real estate professional in one of my chat rooms:  "For the past 9 months, appraisers have been appraising far under those agreements, on average.  Banks won't lend beyond appraisal.  Contract dissolves.  The real estate industry does not report this fact."  Anothger real estate professional confirmed this with:  "Pending sales can be a leading indicator, but not in the real estate market we are in now.  Prices are still not even close to [market] clearing prices.  F$%king banks are holding back foreclosed inventory.  If they did release, another big drop.  But we are also running out of ready, willing and able buyers at the low end."

So there you have it, from the horses' mouths.  The industry loves to report a "soft" statistic like "pending" sales, but how about the percent of contracts that fall through because the financing failed.  Based on the latest numbers reported by new homebuilders, cancellation rates are still running in the 20% range. The two observations above reinforce my thesis that the "bounce" in housing over the past few months has largely been the result of a last minute rush into homes by first timers looking to take advantage of the tax credit.  I would also assert that, based on the past couple weeks' mortgage applications index, home sales are about to take a cliff-dive.

Anectdotally, over the past couple weeks, myself and others are seeing "for sale/for rent" signs popping up all over Denver like spring weeds.  Not only that, the homes in the over $500k segment do not seem to be moving at all.  As for rents, if I could break the lease on my townhome, I would be able to move into an even higher quality townhome on an even more desirable block, with mountain views, for less than I'm paying currently.  Rents are falling fast - home prices will follow.

If you MUST buy a home because you can't stand the down payment burning a hole in your pocket and you want to take advantage of FHA subprime lending standards, at least wait until after the holidays.  Foreclosures will be flooding the market, desperate sellers will be listing their homes and prices are going to plummet again.  At the very least, please ignore the mainstream media headlines and imbeciles on CNBC/CNN/FOX Business/Bloomberg.

Ron Paul's Audit The Fed Bill Has "Been Gutted" By Bank of America's Puppet in Congress

Remember in September when Barney Frank got in front of t.v. cameras and told the world that his House Finance Committee would vote on Ron Paul's Bill in October? It's November 1 and no vote. Now we know why.

The Federal Reserve has spent millions, employing Alan Grayson's "K Street hooker,"  lobbying to get this Bill destroyed (the woman about whom Grayson calls "a K Street Hooker is the former Enron chief lobbyist hired by the Fed to fight an audit bill - K Street is the street in DC where many lobbying firms are headquartered).

Mel Watt, the corrupt puppet from North Carolina, undoubtedly with Barney Frank's corrupt blessing, has accomplished the castration of Ron Paul's Bill, which has over 75% support from the U.S. population.

From a Bloomberg News phone interview with Congressman Ron Paul: .

The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today...Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated “just about everything” while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee.

Keith Kelly, a spokesman for Watt, declined to comment and said Watt wasn’t immediately available for an interview. Watt’s district includes Charlotte, headquarters of Bank of America Corp., the biggest U.S. lender.

Here's the article link:  Barney Frank and Friends Bend Us Over Again

"They are buying us with our own money" - Cormac McCarthy, "No Country For Old Men"