In These New Times

A new paradigm for a post-imperial world

Hat Trick Letter: Jim Willie’s indispensable analysis of financial crisis

Posted by seumasach on April 20, 2010

Jim Willie


8th April, 2010

While the multitudes debate over whether an economic recovery is coming to the United States, signals sound loudly in harsh tones. While they point to the recent rise in the USDollar, signals sound loudly in harsh tones. Admittedly the signals are confusing, but they are important. The long-term bond yield for USTreasurys threatens the 4.0% mark. The crude oil price is close to threatening the $100 mark. Sleepy financial market anchors and mavens offer comment, but might miss altogether the significance of the signals. The signals clearly mean great strain on the credit markets still, and gradual decay of the major currencies led by the USDollar.

The hearings took place two weeks ago. The news of Andrew Maguire’s testimony on March 25th has circled the globe, nudging the same multitudes tending toward dormancy. Maguire is a metals trader from London, but watch somehow that his career takes a turn for the worse. He still walks and talks, but whistle blowers usually have short lives and shorter careers. Laws protect them, but the powerful syndicates control law enforcement. Maguire outlined the various mechanism of foul play in the gold market, and abused position of size by JPMorgan in particular. The monolith transmits its signals and enlists the support of a small army of traders who pile atop the price push tactics to the downside. Despite almost 20 years of complaints lodged with the Commodities Futures Trading Commission, JPMorgan continues to operate with such a high degree of impunity that their staff openly boasts about after their illicit profits are garnered. Maguire guided the CFTC, headed by Goldman Sachs alumnus Gary Gensler, through recent gold price manipulations before during and after a non-farm jobs report was issued. Maguire outlined in some detail how orders to short gold arrive in volume over 2500 contracts, designed to overwhelm the market, often when the market is thin. Reports are prevalent that the Big Four Banks often use naked short sales, without benefit of bullion posted as collateral. Their concentrated positions seem never scrutinized. Many claim they are executed with the implicit blessing of the USGovt and UKGovt. The trades are not intended to seek the optimal price, but appear to satisfy an ulterior motive. The defense of the major paper currencies is such a motive. The GATA warrior (aka El Cid) named Bill Murphy offered his testimony at the hearings, offering his usual razor sharp perspective. See the Gold Anti-Trust Action article on the unprecedented hearing (CLICK HERE), which has been covered by dozens of other web journals. Nowadays, in order to be treated to the actual news, one must rely upon the alternative locations from the internet, like Zero Hedge and their small platoon of Wall Street soldiers in service to the truth (CLICK HERE).

The US financial markets are slowly being revealed as a latticework of leveraged schemes.The gold market is the vulnerable linchpin for the USDollar and USTreasury markets. That is why gold is so important to be harnessed. Notice its cousin platinum is much higher in price, with similar dynamics. Hope has mixed with alarm and a dash of satisfaction, in the wake of the Maguire testimony about the CFTC lapses. The meeting organizers might have thought the hedge funds would be blamed for outsized illicit positions, but the blame was squarely place upon JPMorgan and the Big Four firms by both Maguire and Jeffrey Christian of the CPM Group. The exposure process is long and slow, however. The Goldman Sachs class is still in control of the USGovt purse, still guides funds to Wall Street after first feeding at the trough, still operates as a dominant urchin in too many markets. The CFTC news and testimony about the Gold market has circled the globe, finding the financial pages in London and Germany. Some believe the news is too hot and viral to be reported on the mainstream US press networks. Do not hold your breath for exposure in the United States, where the syndicate maintains controlling ownership of the press networks. The obedient US press might cover the story eventually, but only after almost the entire planet covers it. My Jackass article about the corrupted gold market last May 2009 made a splash, earned some accolades, but also invited some mockery by dim bulbs who have turned silent. Great risk has come to the gold market. The hitmen cometh to ply their trade. They are the new stronger vigilantes born of the bond vigilantes who were killed off by the JPMorgan Interest Rate Swap craftsmen years ago.

Rumors are ripe that London has been selling gold contracts without much gold bullion in inventory since mid-December. They almost entirely settle long gold futures contracts with cash settlement, offering a 25% cash payoff. Gold bullion has been flying out the vaults and doorways at the London Bullion Market Assn for months, demanded by the Chinese and Arabs who no longer trust the London or New York gold merchants in control. The Jackass is a pure observer in the process of syndicate exposure, never wishing to hold detailed evidence. My work is to connect the dots and to identify the patterns revealed by them, then to say “I TOLD YOU SO” afterwards each time. The other controversial stories continue to find verification at some levels. Consider the tungsten gold bars, which some editors refuse even to touch. The gold bar lists are no longer consistent even at the US Federal Reserve. The Street Tracks SPDR (GLD) exchange traded fund also has no longer any consistent bar lists. The tungsten story broke out within the Hong Kong bank sector, where they reported several hundred tungsten fake gold bars. Tungsten gold substitutes were put on display at the W.C.Heraeus foundry, which is the world’s largest privately owned precious metals refiner and fabricator, located in Hanau Germany. The truly suspicious forensic analysts suspect that tungsten bars are located in the gold exchange inventory that so mysteriously seems constant. But let me not digress.

By far the area of the most treacherous forecasting is long-term USTreasury Bonds. It is both the largest financial market outside of currencies, and the most corrupted. Refer to the leveraged Interest Rate Swaps, monetization by printed money in hidden arsenals, counterfeit bonds (double the historical sales versus actual historical issuance), and gaming versus the stock market. Refer to the USTreasury hedges against the mortgage bond market, the foundation of the housing bubble itself, now stuffed in the USGovt mattress where disclosure of its stains is impossible. After the autumn 2008 demise of the US banking system, my forecast was for much higher prevailing interest rates. They did not come. All claims to remedy the banking sector might be better described as masked events to redirect trillion$ in official rescue packages without a hint of disclosure.

While the long-term USTBond yield has touched 4.0%, the upward thrust is hardly strong. The incredibly large USGovt debt issuance supply should have sent the long-term rate to 7% or 8% or 9% or 10%, but JPMorgan has a device made by the same foundry as the US Federal Reserve. While the USFed can print money at near zero cost, the JPMorgan shamans can put to work Interest Rate Swaps at near zero cost. The IRSwaps are instrumental in pushing down long-term interest rates, using powerful leverage, the short-term USTBill as the fulcrum. A Double Dip recession perception would go a long way to reducing the 10-year USTreasury Note yield, as demand would shift from stocks to bonds. Notice the significance of the 4.0% level. A huge reversal pattern is underway. The critical right side resistance level has been 3.9%, well defended. The left side critical resistance level has been 4.0% and 4.1% from late 2008. The trend is up, accentuated by the stochastix index since October. Watch a breakout above the important 4.0% level.

The chief nemesis of Gold is the USTreasury, both a US$ instrument and a traded paper security. THE NEMESIS USTREASURY BOND IS IN TROUBLE. Lately, something seems to have gone awry. The official USTreasury auctions have not turned out well. The direct bids and indirect bids and bound bond dealer participation and bid ratios and accounting all offer spell trouble. The USDept Treasury even has resorted to a new fictional ledger item called “Households” to hide their vast monetization. Recall USFed Chairman claimed to the USCongress that no bond monetization continues as policy, possibly a grand fib, just a prevarication. The Household item, so we are told, pertains to Fannie Mae and the oodles of Pension funds out there who buy up hundreds of billion$ worth of USTreasury paper. They are joined by armies of private bank CD investors. Hardly!! Fannie Mae is selling USTreasurys, if truth be known, since slower repayment of mortgages has reduced the need for hedges. The Fannie Mae convexity is a remarkable phenomenon, whereby they dump their USTBond hedges as rates rise, and as homeowners hold loans longer into maturity. The hedged protection offered by USTBonds, in offset to mortgage bonds in performance mode, would not be needed if the mortgage defaults continue. The defaults are still increasing. So Fannie Mae sells off huge blocks of USTreasurys. But they are the Household ledger item doing the buying.

Other factors are at work. The Greek Govt debt situation has brought about a serious decline in confidence for all government debt. It is becoming widely understood and accepted that sovereign debt receives high credit ratings not deserved. Before long, a huge list of corporate bonds will sport a lower yield than USTreasurys. Institutions are not lining up to purchase USTreasurys at auctions. The USGovt with its masters JPMorgan and the USFed are deeply committed to a gigantic private party of self-dealing. They are buying up between 50% and 75% of the auctioned bonds, but they are facing a dead end in a hall of mirrors. They have forced the primary bond dealers into a state of terminal constipation. Then the Chinese have been net sellers in the last few months. We were told just last year that the Chinese had no choice but to finance the USGovt debt. Again hardly!!

The long-term USTreasury Bond yields will not go out of control high, at least not until JPMorgan no longer has staff at its many posts. The yields might rise a little more, enough to spark a response. They have a new trick in their repertoire. They talk up the optimism and pacts to rescue the Greek Govt debt, so that volume on auctions rises significantly, enough for Wall Street firms to sell into the rally, joined by well financed hedge funds. Notice how the Greek 10-year Govt bond yield has risen to 7.19% this week, the highest ever. The other ploy used by the USDept Treasury and USFed is an old one. THEY CAUSE A STOCK DECLINE IN ORDER TO PRODUCE FRESH USTREASURY DEMAND. If the financial news networks report the economic recovery suffers from extraordinary lethargy or dysentery, then the bond demand will grow notably. Even sporadic reports of a return to recession would greatly aid the USTreasurys.

Thus the USGovt has a strong vested interest to promote recessions, which they have shown themselves expert in producing. They must after all enable demand to keep the USTreasury Bond bubble alive at near 0%. Bring to the table the nonsensical contradictory story of a jobless recovery. It should elicit much more laughter, like claims of prevalent chastity at a house of ill repute. A quick shift to a temporary recession would be easy.

The USDept Agriculture has reported this week that 39.4 million Americans, the most ever, received food stamps in January. They are participants in the jobless recovery. They are legion, whose recipient numbers are 22% from a year earlier. The total number of Americans receiving the subsidy has reached a record for 14 consecutive months. If one wishes for a whiff of reality, check the February and March reports within the paid Hat Trick Letter. Details on the powerful recession are provided, including home foreclosures, Fannie Mae default and delinquency rates, bankruptcies, municipal bond craters, tax revenue declines, and state budget shortfall crises. Such destruction must be the dark side of the recovery process. It is increasingly difficult to conceal the deterioration and lopsided nature of the USEconomy. It is irreparably imbalanced and lacks an adequate industrial base, something the elite cast of economists fail to notice. It suffers from debt saturation, which explains why new debt offered in aid rescues cannot succeed in producing much of any benefits.

Despite the fact that USTBond yields will not go out of control on the upside, what might be growing much worse is the fires in the JPMorgan credit derivative workshop. As long-term rates rise, the Interest Rate Swap contract turns hostile, electric, and viral. Enter leverage in support of trillion$ in debt securities. Huge hidden credit derivative losses at JPMorgan, at Fannie Mae, and at American Intl Group must be dealt with. If the accounting were properly reported from basement labs, the new US$ creation might be much more than a measly $200 billion per month seen in the USTreasury issuance. The toll for credit derivative fires might be a few trillion$ per month!!! The truth would kill the USDollar and send gold skyward.

The dynamics of the Competing Currency War are truly amazing and fascinating. When the Euro currency shows fundamental weakness, if not turmoil within the union, the USDollar benefits. Nevermind the $1.5 trillion deficit in 2009 and the similar $1.4 trillion deficit in 2010 that the USGovt must drag along. The USDollar has risen by about 10% against the Euro currency since November. Some properly call the FOREX market a reverse beauty pageant whereby the least ugly contender wins. The region with the least wrecked finances can boast of a rising currency. We are in Chapter 2 to the Dollar Death Dance. The first chapter occurred in autumn 2008 when Lehman Brothers was killed, when Fannie Mae was nationalized, and when the dead AIG corpse was adopted by the USGovt, the favored home of dead giants. The demand from credit derivative payouts for ruined corporate bonds and destroyed mortgage bonds actually lifted the USDollar valuation. Payouts for Credit Default Swaps, those bizarre insurance contracts against collateralized bonds, took place and did so in US$ denomination. The demand for the US$ zoomed. Uncle Sam danced hard, but it was a dead man that danced.

The second chapter is centered upon the Greek Govt debt. Unfortunately for Europe, but fortunately for the USGovt, the second chapter has many pages yet to be written, from Spain, from Italy, and from Portugal. The Irish pages have already been written, crumpled sheets written on IMF letterhead. This note came today by an email from an Irish friend.“Just heard from a good friend in Ireland that the austerity measures adopted by the Dublin government are causing untold hardship. He thinks there will be an uprising among the people that could get very nasty indeed.” Outsized staggering Irish bank losses have been reported. The IMF fix is in and the harm should perpetuate. But the Greek tragedy plays out slowly. Hope rises but is dashed. Aid is announced only to be illusory. Support is shown but not sincere. Bickering has turned ugly, evidence of no rescue even remotely possible.

The beneficiary, we are told, of the Euro currency distress, is the USDollar. If the US$ exchange rate indeed was improving with tangible ancillary benefits, then a confirmation would come with gold and the crude oil prices. Gold holds its own, refusing to falter. But the crude oil price has just broken above the $80 mark. It threatens the $90 mark and is a clear lock to hit $100 and cause global shock waves. If the US$ is on the mend, on the rise, gaining ground versus other major currencies, then the crude oil price should be moving toward $50, and not toward $90. What we see demonstrates the broken nature of the major currencies in general, and the USDollar in particular. If the USDollar was returning to health, a breakout in the crude oil price would never happen.

The consequence is not pleasant of a rising crude oil price. The entire commercial sector of the USEconomy has a cost structure tied to energy costs. The natural gas price is indeed subdued. But crude oil is widely used in the futures markets to hedge against the USDollar. The demand for such hedges has increased. The light sweet Saudi crude oil is no longer available to meet WTIC crude oil contract demands. The rise in the crude oil price for Europeans using the Euro currency is even more pronounced, brought to view in previous articles. The collection of major currencies is under siege, deeply damaged, and subjected to constant debasement. The ongoing credit crisis and strong recession requires a governmental response on all continents. In Europe, the Untied States, Great Britain, and Japan, the printing of new untethered money continues at an astonishing pace. All major currencies are together in a long slow downward descent. One key item of proof is the West Texas Intermediate Crude oil price shown above. When it hits $100 per barrel, listen to the absurd explanations given by the mainstream press and financial arenas. You will not hear any argument that all major currencies are mortally damaged. You will not hear any arguments that the central bank franchise system of monetary management has faltered in spectacular fashion. You might even hear that the jobless recovery is strong enough to withstand the greater pressures of higher energy costs.

Give a hat tip to James Turk of Gold Money. He wrote in December that the gold low for 2010 would occur in the first quarter with a $1075 price, and a possible impulse low of $1050. We saw it almost exactly, but the year has nine more months to slug through. The 1Q2010 has been put to rest, the quarter ended last week. The March futures contracts are also put to rest, enough to clear a possible path to a higher price for both gold and silver. The gold price chart has a pennant pattern embedded that hints of a slow release to a higher price. It should start slowly and gain momentum once above the enclosed pattern. The news of the gold price rigging has had a positive effect on the psychology of this gold market. The endless monetary growth and federal government deficit explosion adds power to the gold price. Actually, the flip perspective is more accurate. The major currencies are all being diluted in value, while gold remains almost fixed in value. Seen from the currency point of view, gold is rising. Notice the uptrend in the MACD, which addresses the moving averages and the support offered. The long-term trend is still up, seen in the 200-day MA. The consolidation could be at an end. One thing is for certain. The gold community has been put to sleep. All claims of a gold price plunge to $900 were baseless, but were given plenty of airtime. To have a falling gold price when trillion$ of new money is created and dispersed into the ether is pure nonsense, the part & parcel of wrong-footed tenets. Such invalid notions rely upon the discredited deflation argument that circulated.

The gold price is slowly moving up. Its psychological basis is gaining firm strength. The recognition of damaged major currencies is gaining broader acceptance. The deep compromise of central banks is being more widely understood. The solutions offered to Europe are not only vacant, but they expose the Untied States and Great Britain to comparisons of equal vulnerability and similar fundamental wreckage. The gold price has made its lows in year 2010. The next important level is $1150. The resumed Quantitative Easing programs in the US and London will soon be given more publicity, more monetary debauchery via rampant dilution. All talk of an Exit Strategy is pure diversion, grossly insincere. The USGovt cannot afford to pay higher borrowing costs, nor can the USFed afford to dump its bloated balance sheet on the credit market. Doing so would reveal that there is almost no market for what they hold in leveraged toxic mortgage bonds. Doing so would result in mortgage rates rising another 1% to 2% quickly. Such will not happen! Instead, mortgage rates will rise 1% on their own without an Exit Strategy, without USFed liquidation of worthless bonds.

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