Happy Friday! The Public Gets Tee'd Up For Slaughter - Again...

"It's the only place I can find any yield whatsoever with a reasonable risk," said Lee Hevner, an individual investor who said he started buying junk bonds this year for the first time.

Those will be famous last words.  That poor sot allowed his ignorant, greedy investment advisor talk him into putting 15% of $500k stash in junk bonds.  Hope he can afford to lose most of it.

Once again, courtesy of the Fed's zero interest rate policy (ZIRP) and the Government's catastrophic fiscal policies, the yield-starved individual investor has been flooding the high yield market with money in a desperate search for investment yields that have any shot at keeping up with the true cost of living.

Investors of all stripes have been diving into junk. Many of them are searching for investments that yield more than the meager rates offered by Treasuries and investment-grade corporate bonds. They are flooding into high-yield mutual funds and exchange-traded funds, market data show.

That quote is from this article from today's Wall St. Journal titled, "Junk Bonds Feed A Hungry Market."  Here's the LINK.  This desperate quest for more investment income has triggered a big wave of money flows in high yield bond funds and ETF's, which in turn has led to a huge issuance of new high yield bond deals.

Take it from a 9-year sell-side institutional junk bond market trader, the 7% average yield paid on junk bonds is not even close to being enough compensation for the enormous amount of credit risk embedded in the typical junk bond-issuing company.  Moreover, a lot of these deals are done in order to "dividend" money out of the company and into the pocket of the "sponsoring" private equity/leverage buyout firm which owns the company.  It's a way for the sponsor fund (like KKR or Bain Capital) to cash out on a big portion of the up-front equity capital used to engineer the buyout.  Trust me, it's not a good deal for junk bond investors.

In addition, the big Wall Street firms who underwrite and sell these deals take out enormous fees.  And the junk bond mutual fund money managers and pension fund managers get paid a lot money of "manage" this money.  On a risk/return basis, high yield bonds are a terrible risk for the individual investor, even to the extent that the individual's money is being put in a "diversified" fund of junk bonds.

And think about this:  for how much longer does anyone really believe that the Fed can engineer historically record low interest rates?   We know the economy is falling off of a cliff again.  So even if the recent default history in the high yield market has decreased, as the economy tanks many of these companies will run into a brick wall.  A spiking default rate combined with rapidly rising interest rates -this will happen as more money flees the dollar and a much higher yield is required to induce investors to buy the ever-increasing rate of U.S. Treasury debt issuance - will cause high yield bond prices to plummet.  If you have a 20% decline in the value of your high yield mutual fund, this will annihilate the 7% yield it currently throws off.  

In other words, the individual investor - forced into blindly grasping for current investment income - is being set up once again by the financial elitists and corrupt bankers to get slaughtered.  It's really just another mechanism for those on Wall Street to confiscate middle class wealth. 

It brings to mind the famous Will Rogers quote about being more concerned with the return OF his money than the return ON his money.  Those who understand the necessity of moving fiat currency based investments into physical gold and silver do not have to be concerned about either.

Have a great weekend!  Hope springs eternal as baseball season starts next week and every fan out there - including me - has renewed hope that their team will reach the World Series....

Tick Tock

Central banks in the emerging markets increasing their holdings of gold has been a big part of the bull market in the metal. At the end of last year, official net purchases of gold started to rise dramatically. In the third quarter of 2011, central banks added 148.8 tonnes to their gold stocks, more than double the entire amount of government buying in 2010, according to the World Gold Council. Interestingly, the Greek central bank has been slowly adding to its holdings of gold, which would be sort of handy, should they happen to decide to re-introduce the drachmas one day  

That quote is from Matthew Lynn, a London-based financial journalist.  Here's the LINK from Marketwatch.com.  The thesis of the article is based on comments from British Chancellor George Osborne, who stated the Britain needed to increase its "reserves," meaning that the Bank of England needs to begin stockpiling gold.

I bring this up because emerging market country Central Banks have been accumulating gold aggressively since 2010.  Not GLD, but physical gold sourced mainly in London and then - in many cases - delivered to facilities in the buying country.  The article linked cites the amount that has been reported to be purchased, but many of us who study this market strongly believe that countries like China have purposely understated the amount actually stockpiled.  It certainly wouldn't be the only case where a Government lies about economic/monetary numbers...

Now England is talking about accumulating physical gold.  At some point the ability of the paper fiat futures market to control the short term price of gold and silver will be eliminated by the sheer demand for physical gold/silver that is purchased and required to be physically delivered outside of New York/London bullion bank depositories.  These depositories, by the way, happen to be owned by the same bullion banks who make up by far the largest percentage of short interest open interest in New York Comex gold/silver futures and London forwards.

This brings me to the reason for the title of this post and the current open interest in Comex gold and silver futures.   The open interest report as of yesterday is as bullish as it has been since September 2009, which marked the beginning of the move that took gold from $950 to its 2011 peak of $1900.  I might add, for those of you who saw Jeffrey Christian's bearish remarks about gold yesterday, that Christian made the same bearish comments about gold at the September 2009 Denver Gold Show, right before gold made its 2-year run to just under $1900.  Wash, rinse, repeat.

Yesterday the Comex gold open interest dropped down to 407.3k contracts.  Because today is the final day of the "roll" period for the April gold contract, it will likely drop below 400,000.  The LAST time Comex gold open interest dropped below 400,000 contracts was 9/1/09, when it fell to 384,703.  The NEXT day it jumped up to 410,754 and gold began the move to its 2011 cyclical peak just below $1900.  During that run, open interest expanded to over  660,000 contracts. 

I call that move "cyclical" because, as veteran gold market participants know, the bullion banks use the Comex paper market as their manipulation tool.  They can't prevent ultimately the price of gold from going a lot higher over longer periods of time.  What they can do is short futures into the momentum-based hedge funds that charge into the market once the upside swing begins and then engineer an open interest liquidation which triggers hedge fund dumping, then shorting, and creates the heart-stopping price corrections.  The bullion banks use this selling to cover short positions established at much higher levels.  We have seen this cycle at least three times over the last 11 years - wash, rinse, repeat.

With open interest now back to late 2009 levels in gold and silver, we are on the cusp of another cyclical move higher.  It is quite probable that this move will take gold thru $2000 and up to at least $2500.  By virtue of the gold/silver ratio, that would imply a likely move for silver over $60.  I am throwing these levels out there conservatively.  Because the underlying fundamentals driving the price of gold and silver have strengthened significantly since the last cyclical peak, I am confident that we'll see gold and silver move to much higher levels on this next extended move. 

Here's the Comex open interest report as of yesterday's close:  LINK  Note that the silver open interest was actually up yesterday and that buying was concentrated in July and not May, the next front-month for silver.  That to me implies stronger-handed buying which will hang onto positions more readily than May buyers, who have to begin liquidating/rolling their holdings in about three weeks.  Silver o/i actually bottomed in December.  Everyone who trades this market agrees that the volatile price action in silver is the hallmark of an investment that is getting ready make a big move higher.

The bottom line is that the fundamentals AND technicals are now aligned such that they have created a high level of probability that the next cyclical move for gold and silver will happen soon.  I don't think it's coincidental that these factors are aligning with the likely announcement of the next big QE programs which will be initiated by the Fed, the ECB and the Bank of England.  It is now generally accepted that these programs have to occur in order to avoid systemic collapse...tick, tock...got gold?

Got Gold?

We have entered the most favourable era for gold prices in our lifetime, and the share prices of the great mining companies will eventually outperform bullion prices...central banks are printing money and creating liquidity beyond the forecasts of all but the most paranoid goldbugs a year ago - Don Coxe, Strategy Advisor BMO (Bank of Montreal) Financial Group

By now a lot of you have either heard about or read Bernanke's statements about gold in a speech he delivered at George Washington University.  The speech was part of a series of five speeches which are part of the Fed's new "transparency" policies.  Of course, what is communicated in Bernanke's speeches has nothing to do with removing the veil from any of the Fed policies and actions that matter or need some explanation.  But I digress. 

Originally I did not want to dignify Bernanke's statements about gold with a rebuttal because the material he presented and the statements he put forth were pretty much either outright lies or outright complete ignorance.  Bernanke, to try and defend his arguments, distorted historical facts, perverted all known economic laws which underlie monetary theory and completely misrepresented the historical function of gold as a direct currency (which it has been for most of the last 5,000 years) or as a device to "anchor" the surrogated paper currency.  By this I mean the paper money that is issued against gold reserves in order to make gold as money fungible for the purposes of commericialism.

Rather than reinvent the wheel, I am linking three very compelling rebuttals to Bernanke's speech.  These rebuttals correct Bernanke's incorrect statements of historical fact and they demolish the core of Bernanke's arguments.  Quite frankly, when I read through Bernanke's speech, I found myself wondering how Bernanke was ever awarded a degree in economics, let alone a professorship and then the Chair of the Federal Reserve.

The first piece is from Paul Brodsky, a well-known money manager who has previously issued some of the most compelling work available on the current undervaluation of gold, silver and mining stocks: 

Has anyone asked why so many powerful people are going out of their way to discredit an inert rock? We think it comes down to maintaining power and control over commercial economies...

I sourced Brodsky's rebuttal from zerohedge.com and it's long but worth spending time reading:  LINK.  The second piece is short and to the point.  This one is from James Turk, who is one of the few elders in the gold investing community from whom I read every word published:  LINK.

Finally, to round out the rebuttal commentary, I thought it would be appropriate to throw in Alan Greenspan's "Gold and Economic Freedom" essay, written in 1966 five years before Nixon closed the gold window.  If the first two pieces are aren't clear, this one will be crystal clear:  LINK.  For someone who professed faith in currency by Government/Central Bank fiat while he was running the Fed, Greenspan in that essay lays out why gold is the perfect anchor for a surrogated paper currency.  Anyone who wonders why gold has been used for 50 centuries for this purpose will for sure understand after reading Greenspan's essay.  Isn't it funny that the most accurate commentary that ever came from Greenspan occurred 25 years before he ascended to the Chairmanship of the Fed?  I'm still waiting for seminal, intelligent work from Bernanke.  Maybe he's better suited to be the Talmudic scholar he always aspired to be...

Housing And Economy Starting To Crash Hard

 Just reviewed March buyer clicks, Google’s analytics on all the sites we monitor – March is turning out to be the weakest month since last October re: Buyer interest  -                                          email from a Realtor in New Jersey to Zerohedge

For many reasons explained in earlier posts, I have been thinking that - contrary to the what is being reported in the mainstream media - the small bounce we have seen in housing was nothing more than a product of the historically record low interest rates, an easing of credit availability and - probably most significant - the implementation of Government-sponsored FHA low down-payment, low rate programs.

If you strip away the seaonal adjustments and other data manipulation methods used by the Government, National Association of Homebuilders and National Association of Realtors, the truth is that real organic single family home buyers are not buying homes.  I define "organic" as the buyers who are not distressed investment buyers.  In fact, even during the period when mass foreclosures were halted until the robo-signing fraud was settled, investment buyers represented typically 30-40% of all home sales.

Today the NAR's pending home sales index was released.  It declined .5% vs. a market expectation of a 1% increase  LINK.   Please note that the pending sales index represents contracts, not closings.  I can't find the number on the NAR website for the latest month released, but in January the cancellation rate was 33%.  Only 47% of all contracts signed even closed on time:  LINK  So even when the headline number appears to be positive and well-spun, the underlying "organic" number is abysmal.   As of the February release, the 3-month moving average of investors as a percent of total buyers was nearly 49%: 

Investors are still rushing into the market, with distressed sales making up a near-record 48.7 percent of sales in February on a three month moving average, according to a new report today from Campbell/Inside Mortgage Finance  - CNBC's Diana Olick, sourced from Zerohedge.com LINK

In addition, now that the robo-signing fraud case has been settled on favorable terms for the offending banks by the Obama Administration, foreclosure activity is already starting to pick back up:   LINK  So we will see an increase in supply as banks begin to ramp up foreclosures again.  To make matters worse, Obama has directed Fannie Mae and Freddie Mac to unload big blocks of their owned real estate (REO) LINK.   Investors are lining up as I write this to bid en masse on FNM/FRE REO.  These homes will likely end up dramatically increasing the size of the single-home rental pool, thereby putting even more pressure on home values as potential buyers choose to rent instead of buy. 

And make no mistake about it, FNM/FRE are unloading their bloated housing inventory in order to make room for more foreclosures.  A friend of mine told me about a HUD conference last fall at which a friend of his was part of the catering crew.  Apparently the conference was being conducted more like a sales pep-rally to try and stimulate HUD sales and move inventory in order to make room for the next foreclosure wave by the GSEs.    Do you really want to believe the housing inventory numbers being released lately by the Census Bureau and the NAR?  I have maintained all along that the "shadow" inventory is easily double to triple what is being reported by the Government and industry associations.

The fact is that the housing market may have "stabilized" for a brief period of time, but it was a combination of the factors in the first paragraph above that enabled the short respite from the collapse caused by the big bubble blown by Greenspan and the subsequent attempted resuscitation of the bubble by Bernanke.  If you want to know why the housing market will not recover for at least a decade, if ever, take a look at this chart sourced from Zerohedge:

(click on chart to enlarge)

That chart is brutal.  It shows the ratio of people who are actually employed to the total population.  Not only does it show a massive decrease in the number of people working and generating revenue support for Government spending and welfare, but it shows a rapidly declining base of people who could even consider buying a home.  That picture is a snapshot of the true dismal condition of the U.S. economy.

For everyone who is wondering why gold and silver made a big move this morning, Bernanke gave a speech this morning in which he re-opened the door for more QE, after seemingly closing that door at his recent testimony to Congress on the state of the economy and monetary policy. 

But the fact remains that all you have to do read through this post in order to understand that the Fed has no choice but to print money if it wants to prevent a full-scale banking and economic collapse in this country; and, more important, provide the liquidity needed to finance new Treasury bond issuance.  Got gold?

How Much Treasury Debt?

If this doesn't scare the shit out of you - and scare you out of paper dollars and into real assets like gold and silver - then you are either brain dead or you just don't care anymore.

Tim Geithner (along with Bernanke) was testifying before the House Committee on Government Oversight and Reform yesterday.  Congressman Trey Gowdy (R-SC) - in a display of forcing Geithner to answer a question directly that Ron Paul should take notes on - asked Geithner if he had only ONE more debt increase request that could possibly be made, how big would it be.

After trying to shuffle - very awkwardly, I might add - around answering the question, Geithner responded with, "It would be a lot - it would make you uncomfortable."  Here's the exchange, which I found spine-chilling:

Geithner: “That I’d have to get to you in writing, I can’t do it in my head though.” (note: in the background someone says "he can't put that in writing.")
Gowdy: “How about a round number?”
Geithner: “No idea….
Gowdy: “$20 trillion?”
Geithner: “I just can’t do it in my head.”
Gowdy: “$50 trillion?”
Geithner: “I don’t know..."
Gowdy: “A lot? Can we agree it would be a lot?”
Geithner: “It would be a lot. It would make you uncomfortable.”
 
Let that sink in for a moment.  Please note that Geithner did not try to dispute the $20/$50 trillion number that Congressman Gowdy threw out.  Here's the 3 minute video of the exchange, which I sourced from Ed Steer's Gold and Silver Daily:
 

 
Let me be very clear about one thing.  This is not a joke and this not some sort of absurd exaggeration.  This is where we are right now with the finances of our country.   The fact that the Government-reported economic numbers are fraudulent is finally getting acknowledgement in the mainstream media is one thing.  But you can't find any mention of the real spending and real debt numbers.  You have to dig for the Truth on that and it requires understanding - in general -  how Government accounting works and where the numbers are buried. 
 
The REAL direct Treasury/Taxpayer guaranteed debt number right now is at LEAST $25 trillion.  This includes the $16.2 Trillion current limit PLUS the $7 Trillion in FNM/FRE Goverment guaranteed debt PLUS the Treasury bonds sitting in the Social Security Trust ($2.5 trillion last time looked).  I have not included a lot of other small off-balance-sheet guarantees like GMAC (now called Ally) debt, Fed assets which are direct off-balance-sheet liabilities of the Treasury/Taxpayer and some other stuff.   I would bet real money that the REAL number is closer to $30 Trillion.
 
This does not include the GAAP accounting for the all of the future entitlement and welfare obligations.  The net present value of this - i.e. if the Government had to account for its numbers like a corporation does - is more like $100 Trillion.  That is not my estimate.  That is a number that comes from David Walker, the former chief of the Congressional Budget Office.  On a yearly GAAP accounting basis, the Government spending deficit is more like $5 trillion (see John Williams' Shadowstats.com).   The $100 trillion is how a corporation would have to account on its balance sheet for its future obligations given what is known about future spending escalations and future estimated funding of that spending.  That would be the number on the balance sheet reported in a corporation's 10Q/10K.
 
This is reality people.  What is so completely horrifying about Geithner's statements - and complete kudos to Congressman Gowdy for pressing Geithner the way he did - is that Geithner, who is not known to be politically adept, was so flustered by the thought of getting caught in a lie that he really had no way to cover-up the truth.  The truth is not in what he said, the truth is in his lack of ability to refute the $20/$50 trillion number thrown at him by Gowdy.  The best he could come up with is that the number is so big "it would make you uncomfortable."  We know $16 trillion plus whatever is requested this fall is not big enough to make Congress or Obama "uncomfortable." 

This country is broke, it's insolvent and it's collapsing.  This is why the elitists - i.e. those who are in a position to steal everything not nailed down - are openly grabbing what they can.  THAT is what the MF Global felony was all about.  Obama knows a collapse is near.  This is why the war rhetoric is escalating, this is why Obama signed legislation authorizing the Government to seize all national resources for the purposes of military defense in the event of an "emergency."
 
Do not be scared off by the current correction going on in the precious metals.  By the time most of the people in this country understand why gold and silver are superior currencies to paper fiat dollars, the exchange price of dollars to bullion will make that exchange nearly impossible in any meaningful way for most.  The current correction is somewhat mild compared to the correction experienced in 2008.  At some point, probably sooner than most are willing to believe, the price of gold and silver will shoot up very quickly.  By then it will be too late for most people watching to afford the true flight safety of owning gold and silver rather than paper assets and money sitting in potentially Government controlled accounts.

Yaaaaa Baby - The GOLD Standard

YA GOTTA BE A COLT BEFORE YOU CAN BE A BRONCO

Throwing Cold Water On The Hot Air Coming From DC (Oval Office/Fed)

We've heard Obama and his handlers, plus the majority of Fed officials, issue statements recently which state the economy is recovering, employment is recovering, housing is recovering, etc.  And they offer the highly manipulated Government and industry-council generated data as evidence.  Note that it is now becoming widely acknowledged and accepted - even by some mainstream media promoters - that the Government data is not credible.

Let's look at today's housing starts data for February, released by the Department of Commerce:  LINK.  The headlines that stream across mention that February's numbers were down slightly from 3-yr highs last month.  What they don't mention are that the numbers reported are "seasonally adjusted annualized" numbers.  In other words, the numbers are statistically manipulated using a formula that is a highly guarded secret and then the numbers are projected forward for the year, or "annualized."  The numbers are as fictitious as the Easter Bunny. 

Now let's look at the "not seasonally adjusted" one month data for the month of February.  And note that these numbers are "preliminary."  Last month's one-month not seasonally adjusted  "preliminaries" were revised lower.  On a preliminary basis for February, only 48k homes were started, and only 31k of these were single-family homes.  Even more interestingly, only 28.6k single-family homes were completed.  This data diverges significantly from the headline-reported 698,000 annualized starts that is being reported everywhere, doesn't it?

Considering that the Government via FHA is promoting 3% down payment mortgages to buy a home, these housing start numbers suck.  I just heard the ad on the radio yesterday by a mortgage broker promoting the program on the local sports radio show.

Let's step away from the murky cesspool of Government-reported data and I'll relate a reality report from a friend of mine who works just below the CFO at a Fortune 200 company that provides component parts and services to original equipment manufacturers globally.  About 70% of its sales are derived domestically.  My friend told me about five months ago that their business in China had slowed down considerably.  Shortly after that, China's economic slowdown was being widely reported.  Two days ago when I saw him, he told me that their U.S. book of business was "dead."  For the record, I do not trade in the stock of this company and have no interest in doing so.  My point is to illustrate that the true state of the economy in this country, despite Obama/Bernanke assurances to the contrary, is dismal.  The reason he and I talk about this stuff rather than discussing John Isner beating Djokovich last weekend is that he understands that there is a big disconnect between what gets reported in the general media and what is really going on organically in the system.

Goldman Sachs agrees with me on this and bear in mind that they are going off of the publicly reported headline data, not the actual data that you have to sift through in order to dig up:  LINK  The truth of the matter is that the economy never really did show true, real-inflation-adjusted growth after the financial collapse in 2008.  And the Fed is going to have to roll out another big QE program at some point in the next few months or risk Obama's Presidency, which is something I'm sure Bernanke cares about a lot more than whether or not all the unemployed who are not considered part of the labor force can feed their families...