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Use the above link to subscribe to the paid research reports, which
include coverage of several smallcap companies
positioned to rise during the ongoing panicky attempt to sustain an
unsustainable system burdened by numerous imbalances aggravated by global
village forces. An historically unprecedented mess
has been created by compromised central bankers and inept economic advisors,
whose interference has irreversibly altered and damaged the world financial
system. Analysis features Gold, Crude Oil, USDollar,
Treasury bonds, and inter-market dynamics with the US Economy and US
Federal Reserve monetary policy.
As the financial markets
stare at the abyss, contemplate the cliff, suffering massive falls in
selective stocks, a review of ‘Cliff
Notes’ might be appropriate. The financial maelstrom is gathering force
and fury. The Bear Stearns story has a story behind it, as usual in the Grand
Manhattan Den, where violent financial battles give false appearances as
desperate measures are played out behind the scenes. The drama on Wall Street
will make history. These guys are killing each other, while they cooperate
with each other. Like crows, they killed and devoured one of their own.
BROKERAGE FIRMS
REEL
Bear Stearns was fed to the
wolves, an easy correct forecast from last early autumn. Denials nowadays
constitute confirmations, from mere mention. Their refusal in 1998 during the
LongTerm Capital Mgmt bailout to act like a Wall
Street team player was the hidden motive to carve them into pieces. One must
ask why last Friday it traded around the $30/share price all day long after
10am. The answer is easy, as they wanted to give insiders a chance to sell
most of the 186 million shares, a gift of $5 billion sure to anger many. My
view is that JPMorgan took its best assets at
discount, tossed much of the damaged assets into their Wall Street garbage
can, which is never emptied, never sees any balance sheet, blessed by the US
Federal Reserve, protected to new security laws. If Bear Stearns share
holders reject the JPM seizure takeover, then the gem Bear Stearns
headquarter building in Manhattan
can be bought by JPM for a song. Actually, JPM might have only started the
bidding process, sure to result in JPM upping their own
bid. BStearns has (or had) 14 thousand workers,
most having been paid in stock share bonuses in recent months. The economy in
New York City is
sure to be badly harmed, worse than already. Wall Street jobs account for 35%
of NYCity wages.
The other story not told is
that Bear Stearns was dissolved before the wrecked investment bank had a
chance to take advantage of the Term Security Lending Facility. It will
be made available by the USFed at the end of March.
The sleazy hogs on Wall Street wanted to remove one player at that window. The
other story not told is that a liquidation of Bear Stearns would inevitably
have resulted in a massive credit derivative meltdown. The consequences
cannot be estimated. The derivative upside down pyramid is mammoth.
No precedent exists for its partial unwind or dissolution. The pyramid holds
together the entire USTreasury complex, attached to
interest rate swaps, attached to credit default swaps of various types, and
so on. This pyramid is leveraged 70 to 1. The talk is funny though, since the
USFed has backstopped only $30 billion in Bear
Stearns securities. What about the other $800 to $1500 billion rancid bonds
floating within striking distance to Wall Street and major bank balance
sheets? In truth, we might later learn that Bear Stearns helped to bail
out JPMorgan, in helping to shore up its credit
derivatives, in providing some emergency collateral, soon to bust, to
prevent a JPMorgan failure!!! JPMorgan owns $7.778 trillion of credit derivatives, two
and half times as much as Citigroup, the same toxic stuff that crippled
Citigroup. JPMorgan skated on this one without
publicity.
The other story is that
Bear Stearns CEO Alan Schwartz assured just last week that all was well,
liquidity was adequate, and the company was in good shape. Enron CEO Ken Lay
said the same thing. And lest one forget, Enron and Bear Stearns have a
common denominator in JPMorgan being a key player
in the operations and agent during the demise of the two firms. JPM taught Enron everything they knew
about offshore special purpose entity firms, yet they escaped all legal
challenges by losing clients in court. When the USFed
frees JPM from liability on any losses from collateral submitted by Bear
Stearns, one has to giggle since the USFed is JPMorgan. Think consolidation of the best bond assets in JPMorgan’s hands. Think more damage and consolidation
upon the next victim, like Lehman Brothers. Think building the Fed Reserve
bank system. The Mussolini Fascist Business Model might be opening a new
chapter.
The XBD banker broker
dealer stock index had a horrible day on Monday, with some repair on Tuesday
and Wednesday. The XBD stock index fell 11% in a visit to hell and back,
rendering big technical damage to many component stocks, especially Lehman
Brothers. LEH fell by 19% on Monday. Goldman Sachs was down 10% early in the
day, closing down 4%. Citigroup lost another 7% after being down almost 10%,
UBS lost 11%, Morgan Stanley lost 8%, Merrill Lynch
lost 4% after being down 8%. The stock price action tells the wary
observer to expect a challenge or near death experience for Lehman Brothers,
possibly worse. Their portfolio is similar to Bear Stearns, only larger.
The mortgage bond damage will next shift to the prime adjustable mortgages,
so reckless in their innovation. They will crater this summer upon rate
reset, victims of their own written time bombs. Thus the deserved name of
Exploding ARMs. Even USFed
Chairman Bernanke acknowledged last week that 40%
of all mortgage defaults are prime, not subprime. On
two days, the XBD broker dealers recovered most of the loss. The broker
dealers play a significant role, to manage the execution of official policy,
full of the requisite manipulation and corruption of markets. See the
management of the credit derivative pyramid, the gold ambushes, the currency
interventions, the collusion with the debt ratings agencies, and even
possibly the intimidation of the monoline bond
insurers to serve as the bagholders in the
historically unprecedented international sale of fraudulent mortgage bonds. Can
anyone defend against my claim that the Untied States upper echelons
represent institutionalized and protected dishonesty???
My warning quip to the
idealists among us has been often used lately, when people salivate over the
prospect of chronic conmen suffering deep losses, enduring insolvency,
incapable of shame, yet almost certain to end up in some form of bankruptcy. My
stated line is “Beware when billionaires face bankruptcy, since they
make a phone call and change the rules. Often those rules conflict with your
strategy and plans.” This time the rules might be concerning
gathering wealth from strategies that oppose the defense
of a national financial integrity. This time those attempting to secure their
wealth and protect it from illicit national grabs and seizures might be labeled as unpatriotic. This time the system has been
virtually broken by decades of destructive inflation, of misspent funds, of
grand theft (see Fannie Mae and military contractors), of encouraged
abandonment of the manufacturing sector, of destructive emphasis of a war
economy footing, of irresponsible Medicare guarantees, of harmful demographic
shifts, and lately of incredibly deep bond fraud. The bond fraud episode is
the crowning finale of the US
banking system, with toxic outlets to most global banking centers.
One might wonder if it were planned.
REMINISCENT OF
GREAT DEPRESSION
When Bear Stearns was
dissolved and its assets rescued, the USFed and JPMorgan invoked a feature of banking policies not used
since the Great Depression. Too many other comparisons can be made to that
dreaded era. The bank insolvency is the biggest commonality. The ability to
print money, shovel printing press output from one room to another easily,
permit phony accounting of balance sheets, hide
within offshore subsidiaries, and extend the risk model to great heights,
these are new & better innovations not available 70 years ago. Well
tragically, these innovations are being unmasked as thin, flimsy, unable to
withstand storms, and possibly even fraudulent. As the stock market and
bond market suffer blow after blow, fail to stabilize, fail to recover, only
to endure more breakdown in the structure, memories come to the Great
Depression, when recoveries only led to deeper losses as the catastrophe
unfolded. This time around, another catastrophe is expected in a bank
system meltdown, a bond system total seizure, and a risk model system
dissolved.
Amidst all
this maelstrom, one must ask if wisdom prevailed during the Clinton
Administration to repeal the Glass Steagall Law
from the Great Depression era. That law created the Federal Deposit Insurance
Corp for insuring individual banks and depositors, up to $100k per account. The
law also blocked any attempt to merge banks, brokerage firms, and insurance
companies. The legislation intended to protect a meltdown to spread to all
critical structural elements of the financial system. With the Glass Steagall repeal, one has to wonder if some destruction
was planned, or else a major consolidation was the ultimate goal. My belief
is firm, that powers in Old Europe and London that control the USFed more than is publicly known are restoring power
back to Switzerland. They have resented the arrogant and reckless US
bankers for two generations.
By the way, the FDIC insures
bank accounts. But the SIPC guarantees participating
brokerage accounts up to a $500k limit, plus $100k on cash accounts. People
might soon hear more about their stock protection if giant financial
conglomerates go bust. Some stock accounts might be frozen, as the courts
sort it all out. When an SIPC member becomes insolvent, SIPC will ask the
court to appoint a trustee to supervise the liquidation of firm assets and to
process investor claims. Coverage of bank and brokerage accounts will be a
popular topic soon.
3 SCARY GRAPHS:
BANKS, MONEY & HOUSEHOLDS
Some have asked in private
emails whether the bigger the bank, the safer their future. My answer is
simple. The bigger the bank, the more likely they are to hold a much riskier portfolio, and thus the more likely their failure. Most
big Wall Street banks and broker dealers, along with a scattering of major US
banks are in the same pickle, from owning too many mortgage bonds and related
credit derivatives leveraged from them, even being saddled with bonds
scheduled for interrupted private equity deals. Bank assets have
vanished. The neighborhood bank with branches of
operation only within a corner of their resident state is probably much more
insulated from the bond market debacle. They likely originated loans, own
some, but might have recycled most of them through Fannie Mae in order to
continue to earn fees on new loans. Some have asked if the USFed can make unlimited number of bank bailouts, can
refund on unlimited number of mortgage bonds submitted by banks. Well yes,
sure, but the accumulating risk to the USDollar is
being recognized and felt. The US$
decline is not done; it is going lower.
The US
banking system is teetering at the precipice, the brink of collapse. Almost
two years ago, in the Hat Trick Letter, my forecast was made crystal
clear, that the housing crisis and mortgage debacle would topple and destroy
the US
banking system, just like what happened to Japan
in the 1990 decade. The US
banking system cannot withstand insolvency like the stronger Japanese banking
system, which survived temporarily as vampire entities. Weekly events point
to wrecked mechanisms in the US
banking system. They will continue to worsen unfortunately. The financial
condition of institutions within the US
banking system has gone critical, with core assets gone negative. Total
deposits held, free of borrowed USFed reserves, have vanished. US banks have burned through their
entire capital core, melted down from disastrous mortgage portfolios, their
bonds, and related CDO leveraged bond derivatives. They must now rely upon
borrowed reserves from the USFed in order to
continue to function as lending institutions. They have turned heavily to the
USFed Term Auction Facility and now the Term
Security Lending Facility for resupplied capital. That
is not injected, donated, free money. It must be returned, or such is the
plan. With the TSLF, the USFed now extends loans
for AAA-rated mortgage bonds of private vintage, not just Fannie &
Freddie type. They expanded to $200 billion per month and 28 days in
duration, with a lowered 3.25% borrowing rate, and likely renewable feature. As
we know, many AAA bonds are crappy. So banks might be unloading some rancid
meat. The masters who control the USFed cannot be
happy.
The US
banks by early December had about $43 billion in total reserves. The
current statement by the Federal Reserve offers a daily average
‘Non-Borrowed Reserves’ at MINUS $20 billion. Worse, the Fed
Reserve estimates by early April that amount will be MINUS $60 billion. The US
banks are living off borrowed money, and time. Be prepared for some high
profile bank failures, a process already begun. Home loan defaults have combined
with falling home collateral valuation to destroy mortgage bonds and related
securities to the extent that banks have lost their entire capital. The
only way to recover from this situation is for banks to find a way to make a
lot of money really fast. The time has grown urgent to inflate rapidly, or
else face an unstoppable chain reaction of bond failures followed by bank
failures. Big banks do not have adequate loan loss reserves set aside. Money
and wealth will be destroyed either from falling home portfolios and mortgage
bond values, from reckless lending and much fraud at all levels.
The shocking reality is
that the banking system has gone from a 10% reserve requirement to a minus 5%
requirement. Still too much bank capital is in illiquid overvalued bonds. The
USFed is trying to increase the money supply faster
than banks can write down losses. Keep in mind what New York University
economics professor Nouriel Roubini
says, “For every dollar loss of capital, you reduce lending by ten
dollars.” The Shadow Govt Statistics folks do such great work in
removing deceptive games and gimmicks. They report the US$
money supply is growing at an annual 18.0% rate, March 2007 over March 2007.
The sitting Secy of Inflation Bernanke,
when pressed in Congress recently to comment on the monetary inflation gone
haywire, simply said they monitor the Consumer Price Inflation only. Wow!
Talk about riding a horse while sitting backwards on the saddle! What a hack! What a lousy cowboy!
Many
standing loans involve homeowners who owe a greater loan balance than the
home is worth, the home equity having evaporated. And home prices are heading
lower. Chronicling the Great American Tragedy, the New York Times
writes, “Not since the
Depression has a larger share of Americans owed more on their homes than they
are worth. With the collapse of the housing boom, nearly 8.8 million
homeowners, or 10.3% of the total are underwater. That is more
than double the percentage just a year ago.” To this date, USFed, Dept Treasury, and USGovt
efforts have not accomplished much toward reversing this trend. Tragically,
of mortgages originated from 2006 onward in recent vintage, 30% are now
burdened by negative equity. The ratio of under-water mortgages, those with
negative equity, the ‘Upside Down’ loans, for these more recent
loans is forecasted to rise to more than 50%. The mortgages of older vintage
are also rising in their negative equity ratio. They are catching up to the
newer vintage home loans. The national housing foundation is going
underwater. Contrast with falling home values, which might not stabilize in
2008 as the graph shows. Note two different scales describe the two series.
The latest data on home foreclosures, delinquencies, late payments,
existing home inventory, new home inventory, and median home value does not
indicate in any manner whatsoever that the housing market has even remotely
stabilized. More mortgage bond pain and bank writeoffs
are to be expected by anyone not hindered by rose colored
glasses, banker public relations motives, or USGovt
mental handicaps. California
and Florida continue
to bear more than their share of national foreclosures. The two states
accounted for 30% of mortgages entering the foreclosure process. Arizona and Nevada
are sure to increase sharply in the next couple quarters. The big new
twist is voluntary foreclosures, abandonment of homes and their loans, in
direct response to running under-water with home equity gone, perhaps
negative. People are choosing not to service debt on a deflating failed
asset.
CENTRAL BANK
INTERVENTION NEXT
As the USDollar
continues to reel, to decline to low levels never seen before, support does
not exist. Clearly, some form of central bank intervention is next. However,
in order for such extraordinary action to be effective and not futile,
monetary policy must be coordinated and cooperative. The major central banks
must work together to support the USDollar. They
must cut official interest rates in concert with the USFed.
That means the Euro Central Bank must agree to an official cut in its rigid
interest rate. They might employ an interim rate cut. Even a 25 basis point
cut would be significant. They must publicly state that they are defending
against a rising euro currency, and that price inflation will be a risk to
stomach. The planned goal would be to end the US$
decline. The extra benefit would be seen in the bond market and banking
system, from added liquidity and soon housing price stability. Without
dispute, the underlying problem is the housing crisis and price declines in
collateral.
My attention is squarely
focused on the Euro Central Bank, which has the greatest potential to quickly
change the awful sentiment plaguing the USDollar. The
USFed just cut interest rates again by 75 basis
points. The USDollar had moved down in anticipation
of this latest cut. The Bank of Canada has cut twice its interest rate. The
Bank of England has also cut its official rate, only once, and surely will
again. The Bank of Japan is talking about a rate cut. But the Europeans are
dominated by the Germans, who want no rate cut at all. The Germans warned of
the precise problems seen right now, do not wish to fix a problem with more
of the same actions that produced the problem, and resent having to foot the
bill during the aftermath of these problems.
The gold price will not
stop at the $1000 milestone. The silver price will not stop at the $20
milestone, and will vastly outperform gold. The crude oil price might go
below the $100 milestone briefly, but will return and shoot past the century
mark. No no no!!! All are heading much
higher, because the banking problem is not to be soon fixed, the bond problem
is not to be soon fixed, the economy is not to be soon fixed, household
distress is not to be soon fixed. Maybe none can be fixed, even as money
thrown at the problem accelerates parabolically. The
limited power of USFed solutions, and limited
arsenal of devices to treat the problem, will ensure that monetary inflation
will be the main tool. Still, adding liquidity in rescues, repairs, and
bailouts is not seen as the cause of the problem. It still is seen as the
immediate solution. SUCH IS THE HERESY THAT HAS DESTROYED THE US BANKING
SYSTEM. They operate under an objective to revitalize the housing market, and
stop its price decline. They must enable the bank system to become solvent.
All that administered inflation means much more gains to gold, silver, and
even crude oil. Bigger problems than rising gold, silver, and crude oil come
if Consumer Price Inflation starts to grow without bounds. The USTreasury Bond market will suffer heart attacks, the
beneficiary being gold, silver, and crude oil!!!
Remarkably, when the USFed was about to predictably cut the official interest
rate again, gold mysteriously got hit on Monday. On the day of the rate cut
Tuesday and the following day Wednesday, gold got hit again and the USDollar rallied. The Boyz were
busy. The smackdown of gold under $950 and of
silver under $19 only managed to remove and cleanse these two important
metals markets of their overbought situation. The Boyz
have cleared the path for gold to reach $1100 and for silver to reach $26. Nothing
has been solved yet on most critical battle fronts. The bigger moves up are
yet to come!
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By : Jim Willie CB
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Jim Willie CB is the editor
of the “HAT TRICK LETTER”
Jim Willie CB is
a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics.
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