Sunday, March 30, 2008

Peter Schiff aka Dr. Doom keeps it simple

This piece from Peter Schiff (courtesy of is a short but sweet take on the blow-back Federal bailouts for failing investment banks will have on the American public and foreigners who joined in on the ABCP debacle.

Anyone who follows his writings or appearances on CBNC and Fox News will know, Peter Schiff has been calling for a global financial calamity for some time . I respect Mr. Schiff's conviction in the face of so much opposition. During the August 2007 plunge in markets Peter Schiff was dismissed by the mainstream media and other financial pundits for being too bearish.

Here is a clip of Mr. Schiff appearing on Fox News in November of 2007, classic stuff:

Now that many of his prognostications have come to fruition, his ongoing concerns for the future of American capital markets are still being disregarded by the mainstream, under the false assumption that the worst is done with and current stock prices already have discounted the possibility of a recession.

Bail me out Bennie

Peter Schiff
Mar 28, 2008

Now that the Fed and the Treasury Department have clumsily come to the rescue of the financial titans of Wall Street, it is now politically dangerous to resist similar pleas from just about everybody else. Populism is emerging as a dominant theme is this election year, and with so much largesse showered on Bear Stearns and JP Morgan Chase, politicians are demanding even more generous terms for consumers. In Washington, it seems that two wrongs apparently make a right. Another downside to corporate bailouts is that they provide the critics of free market capitalism with plenty of excuses to weigh down American economic vitality with even more unnecessary regulation.

In the first place, the current mess did not result from a failure of the free market, but from too much government interference. The real estate bubble, and the shaky securitized products it spawned, resulted from the Fed artificially setting interest rates too low. Had interest rates been allowed to find their market levels, rather than be set by government decree, the real estate bubble never would have been inflated in the first place.

In a nation short on savings and heavy with debt, the free market would naturally set interest rates quite high. With lots of demand for credit, but a limited supply of savings, the risk of lending and therefore the price of credit (interest rates) would be high. Although onerous to borrowers, high rates would have both encouraged saving and discouraged borrowing. In the end, these market forces would reduce interest rates and produce a more stable balance between savings and consumption. However, the Fed did not want American consumers to be subjected to free market discipline that might otherwise reign in their non-stop spending. After all, reckless consumption was falsely believed to be the engine of our prosperity.

So the Fed fixed the price of credit (interest rates) well below the rate that would have been set by the free market. This sent false economic signals to the market that more savings were available than actually existed, leading to an over-investment in housing. Also, by keeping the rate of interest below the rate of inflation, rampant speculation was encouraged, and the foundation was laid for the very type of mortgage financing that has now come back to bite us.

In the second place, no one on Wall Street should be bailed out. The effects of the bursting of the housing bubble should be dealt with by the market, despite the fact that the underlying bubble itself was a byproduct of government intervention.

Apart from the problems created by interfering with the market's attempts to restore balance and reallocate resources, bailouts create all sorts of moral hazards. After all, why should bailouts be limited to investment banks or overstretched homeowners? What about renters who also borrowed too much money? What about those behind on their credit cards, auto or student loans? Why shouldn't they get bailed out? How about small entrepreneurs whose start-up businesses failed -- should they get bailed out as well?

In market economies all sorts of people lose money, sometimes as a result of circumstances entirely beyond their control. While this is clearly not the case for most homeowners and mortgage lenders, some would obviously fall within that category. However, it is not up to government to rescue them. Even if some borrowers and lenders were lead astray by the false economic signals sent by the Fed, they are never-the-less responsible for any losses they might have incurred as a result of following them. The real danger is that while government interference is actually at fault, it's the free-market that ends up taking the blame.

Peter Schiff

Friday, March 28, 2008

Richard Russell's warning

I really enjoy Richard Russell's editorials, thanks to for this recent update.

March 25, 2008

The US has put itself in the
incredible position of fighting an expensive war with borrowed money. Even
without the war, the US is living on borrowed money. Our national debt is in the
process of surging well past the $9 trillion mark. The wonder is that the dollar
is viable at all.I note that none of the presidential candidates are even
talking about the debt -- or the $53 trillion in unfunded liabilities that we
are facing. In fact, I believe we have gone so far in our debt and deficit
situation that I just don't see how we're going to navigate out of it.

The dollar, it seems to me, is ultimately doomed. The only question is
timing, and here we're talking the impossible. It brings to mind Keynes' thesis
-- "The market can stay irrational longer than you can stay solvent." In other
words, even though the US dollar appears doomed, if you short the dollar, you
can very easily go broke before the dollar finally succumbs (in fact, the
oversold dollar may be in the process of advancing now).So what do we do? I've
been thinking about this for a long time, and I realize that there is no perfect
answer, no ideal defense.

For the first time in modern history there are
grave doubts about the very viability of our money. Even during the Great
Depression, nobody doubted the value of a dollar. The dollar was "as good as
gold." The only problem was -- nobody had dollars. Everybody was broke.
Deflation swept the land, and money was scarce. I could give you a list a yard
long of things I could buy in those days for a nickel. Talk about nickels, I
would use nickels to take the subway to school, and I would use seven nickels to
buy lunch. A movie cost three nickels. Nickels were useful, dimes were scarce
and dollars were treasures.

Today it's a different story. Today there
are too many dollars around -- but the world is questioning the viability of the
US dollar. I understand there are places (China, for instance) where people do
not want dollars. If they do receive dollars, they exchange them for another
currency as quickly as possible. The US has two sources of power besides our
exports. One is our huge military. And the second is the reserve status of our
dollar. If the dollar begins to lose its reserve status, we're in trouble. It
would mean that we couldn't borrow, or if we could continue to borrow, we'd have
to pay much higher interest rates. At some point, even higher interest rates
wouldn't do it. Once our creditors were afraid of taking in dollars, no level of
interest rates would convince them to lend to the US.OK, that's the longer term

The question I ask is -- what do you and I do about it? Here's
what I suggest. Divide your assets into three sectors. One third of the total
can be in a home preferably owned for cash, no mortgage. That means that you
really OWN your home. Another third of your assets can be in gold. The final
third should be in cash, and it can be in dollars or even partly in a foreign
currency. But frankly, over the longer-term I'm tempted to lump all fiat
currencies together, treat them all as a kind of junk. Because there's nothing
behind any fiat currency but the full faith and credit of the respective nation.

The viability of all fiat currencies is suspect. Nations will lie about
the worth of their money as long as they can get away with it. The US repeats
its "strong dollar" policy even while allowing the dollar to go down the drain.
My guess is that the trouble will start when the oil-producing nations start
quietly unloading their dollars. China will likely do the same. Gradually, the
word will emerge -- "the dollar is a doomed currency." Diversify as far as you
can, and get out of dollars as quietly as you can. In the meantime, I'm watching
the stock market carefully.

So far, following the initial rally from the
January lows, the Transports have acted well, and the rest of the markets and
averages have either been sinking or just "hanging on." Few investors have made
any money since the January lows. The best you could have done was to minimize
losses. It will be fascinating to see how the markets act over the coming weeks.

Personally, I'm out of the stock market, so my main interest is
academic. Well, that and I watch the markets for hints of things to come. I'll
breathe easier as long as one or both D-J Averages (Industrials or Transports)
hold above those blessed January lows. But if both the Industrials and the
Transports violate their January lows, I'll prepare for the worst -- and by the
"worst" I mean hard times.

A house is a place for you and your
family to live in. Gold is eternal wealth. Dollars are units of exchange. With a
few of those lowly dollars, you can buy a loaf of bread. I like to keep it
simple. A house, gold, cash -- what could be simpler?

Monday, March 24, 2008

10-year yeilds still basing, approaching upside breakout?

Here is my earlier chart of 10 year yeilds. Recent price action suggests they are still basing, STO and RSI-7 looking more positive. A break above the 50 day MA would be a stronger indication of a medium term breakout. (Though rumours of more bank failures could see another rush to treasuries)

Sunday, March 23, 2008

Gold Stocks vs. Gold ratio part 3: The breakdown?

Part 1 and 2 of my recent charts highlightin the Canadian gold shares/Gold ratio can be found here.

Todays chart shows the breakdown from the symetrical triangle, but the ratio closed just above the December 2007 low. If this holds a falling wedge patten would begin to unfold. I noticed some of the JR exploration shares on my watchlist held up fairly well during this blowoff. If gold holds in the high $800's to low $900's I believe the gold shares will begin basing before making their run upwards against the yellow metal.

Bob Moriarty, President of wrote this story today that is the most bullish Ive ever seen him, especially in light of recent warnings he made about a gold correction.

Buy with both hands

Bob Moriarty - Mar 24, 2008

When you are searching for information about investing, you are going to run
into two totally contrary forms of information.

There are those I call the "Cheerleaders" who specialize in telling you want
you want to hear. We all know who they are. They are quite popular because they
indulge all your fantasies. Whatever you want to hear, they tell you: Gold and
silver are going to go up every single day. There is no such thing as a
correction. If the price of gold or silver goes down, even for a day, it's
because of some mysterious group they never really identify or prove exist.
There's a cabal and it controls everything in your life. You can't make a bad
investment decision, if your stocks go down, it's because "THEY" made them go

I call them "Cheerleaders" for a simple reason; they stand on the sidelines
and howl at the moon. They aren't players, just cheerleaders. They specialize in
figuring out what you want to hear because that's what they are going to feed
back to you.

Then there are those who tell you not what you want to hear but what you need
to know. There are far fewer of these guys. They aren't nearly as popular as
those who tell you what you want to hear but they are the ones who will help you
make money. I think of it as the difference between signal and noise on a radio
transmitter. You need to hear the signal, that's the important part. You need to
learn to ignore the noise.

One of the ways I figure out which is which is to ask myself, when silver and
gold finally hit a major top, is this guy going to tell me to sell or is he
going to be braying "Buy" at the top of his voice? I was a commodities broker
for a very short time in 1984 and I saw the files of literally hundreds of
people who had made fortunes in late 1979 and in early 1980 only to lose every
penny because they wouldn't take profits. They were listening to the
cheerleaders and ignoring the players.

I spent ten days trying to warn people of an upcoming violent correction. It wasn't popular because it was so contrary to what people think. That's how and why I made it. When you can't buy a silver bar because the demand is so high, you are at a top. When do you expect to run out of silver bars? At a bottom?

We have had our violent correction. The number of gold contracts and silver contracts were at record highs. Before this correction ends, I expect to see those numbers cut, perhaps in half. Most of the damage has been done to gold and silver but another month or so of correction would be about right.

This is going to be a really weird prediction. Last week I nailed the biggest
and fastest gold and silver correction in history. It was the best call anyone
has made for 28 years on gold. This week I'm going to predict gold shares are
going to explode upwards starting immediately. ESPECIALLY the juniors.

Now that's a switch. But here's the logic behind it. If you look at the XAU
over gold, it shows a low in the ratio in May of 2005 and another last August.
From May of 2005 until the next high in Feb of 2006, the XAU climbed from about
78 to 155. From the low in August of last year to November, the XAU rocketed
from 125 to 190.

The juniors didn't participate in the rally since August. Many are the same
price they were in August. Some are lower. Jim Sinclair and John Embry believe
that hedge funds have shorted the juniors. I don't totally buy that. If there
was some giant short position, it should show up. And while short positions in
many juniors have gone up, they aren't much above 1%, which is nothing for a
NYSE stock. So I'll just say that I'm not totally convinced. But if they are
right, those same shorts now are going to have to cover. Gold could easily
correct for another couple of months and the gold shares and especially juniors
could rocket.

The lowest the XAU over gold ratio has been in three years is .183. I think
that's the lowest for five years but I can't prove it with my software. On
Thursday of last week, the ratio dropped to .183 and closed at .187. Thursday of
last week should have marked the single best day to be buying gold shares in the
last five years. There is nothing saying the ratio can't go lower but if it
does, it just means it's building up more pressure when it does explode.

After a short and brutal correction, gold will resume its climb. Gold and
silver have not peaked. They are money and when all currencies fail, they will
be the last man standing. We will go back to a gold standard not because anyone
wants to but because there will be no other alternatives. Whatever country goes
to a gold standard first will have the new world's reserve currency.

Buying gold stocks in the middle of a gold correction may seem a bit contrary
but contrarians make money. Gold moved from $650 to $1030 without moving the
juniors. If it can do that, it can move from $1030 lower and still have a gold
share boom. I'm a buyer and you should be buying with both hands. You are
always playing the odds and the odds favor a 50% move higher in the next six
months. That is what has happened every other time the ratio got so off

Mar 24, 2008

Bob Moriarty

Saturday, March 22, 2008

Transcript of Don Coxe Weekly Webcast (March 20th, 2008)

Thanks to for posting a transcript of Don Coxe's weekly web cast which can be found here.

For those wondering if a bottom has been put in for the financials, other than a technical bounce off the January lows, Don Coxe argues the write downs and rescues by the Fed are just beginning.

He is maintaining his long-held stance that commodities will do well in the long run as reserves in the ground of usable material will begin to assert their value over "man-made" goods and services.

Mr. Coxe feels the recent correction in gold and base metals was part of a washing out of newer speculative entrants to the market along with hedge funds answering margin calls. Most telling was his contention that $200 a barrel oil would be self-defeating; crippling the global economy while $1400 Gold would be indicative of economic uncertainty but not hamper global growth.

After the recent plunge in commodities, especially gold, I find solace in the macro perspective that Don Coxe takes and these moments of weakness test a gold bull's will.

Looking to add to my gold position if we bounce off the $860 level on strong volume.
If $860 fails to hold, Ill look a move towards the 200 MA where strong support lies from a technical and valuation perspective (via increased jewelry demand). I wonder how the gold stocks will hold up during any more gold weakness. Don seems to believe the valuations in gold stocks will be coming soon, I hope he's right.


Friday, March 21, 2008

Nouriel Roubini claims in this latest piece "The Worst Financial Crisis Since the Great Depression is Getting Worse":

It is now clear that the US and global financial markets are experiencing their worst financial crisis since the Great Depression. And in spite of desperate and radical actions by the Fed this crisis is getting worse. A brief equity rally after the rescue of Bear Stearns, the 75bps Fed Funds and the announcement of new radical and unorthodox lending facilities (allowing non bank primary dealers access to the Fed discount window) has already completely fizzled today with US equities plunging over 2% while the severe crunch in money markets and credit market is becoming much worse.

Let me now flesh out how the crisis is becoming more severe and increasing the risk of the mother of all financial meltdowns…

First note that in spite of the most radical change in Fed policy since the Great Depression – i.e. the extension of the Fed’s lender of last resort support to non bank primary dealers and the announced swap of up to $400 bn of safe Treasuries for toxic agency and private label MBS again make available also to non bank primary dealers – the panic in money markets and interbank markets is now seriously worsening: today the yield on 3 month Treasuries plunged to 0.56, a level not seen since the 1950s; the TED spread (the difference between dollar Libor and 3 month T-bills) increased 32 basis points to 1.98 percentage points; swap spreads widened again; while the VIX spiked to a level close to 30; even off-the-run long dated Treasuries are becoming illiquid (as in the 1998 LTCM crisis). The situation in money markets is scary as there is a generalized flight to safety with investors avoiding everything but the most liquid and safe government bonds.

In the meanwhile the liquidity and credit crunch in the agency debt and MBS market is worsening in spite of all the Fed recent easing actions and in spite of the Fed decision to swap Treasuries for hundreds of billions of agency and private label MBS: the difference in yields for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10- year government notes widened again both yesterday and today. So the radical decision of the Fed to prop the agency and non-agency MBS market with $400 bn of swaps has done very little to affect the liquidity and spreads of these markets. This is no wonder as Fannie and Freddie are – on a mark to market basis – effectively insolvent and the widening in their debt and MBS spreads reflect the worsening credit outlook for their assets, not just a situation of illiquidity.

Today we are facing a massive margin call on highly leveraged US capital markets and a massive de-leveraging of the financial system following fire sales of marked to market assets in vastly illiquid money markets, credit markets and derivatives markets. We are thus close to the last steps of my 12 Steps to a Financial Disaster. Each of these 12 steps is now underway and the only question is not whether such steps will take place but rather how severe they will be and how big the losses will be. We are now observing – with the Bear Stearns episode as well as with the collapse of the SIVs, the losses on money market funds and the collapse of hedge funds and highly leveraged funds – the beginning of a generalized run on the shadow financial system.

And - as discussed in my 12 Steps to a Financial Disaster - the financial losses are now spreading from subprime to near prime and prime mortgages, to commercial real estate loans, to consumer debt (credit cards, auto loans, student loans), to leveraged loans, to muni bonds and writedowns from the impairment of the monolines' insurance, to corporate loans and bonds whose defaults will surge soon, to the massive losses in the CDS markets.

The Fed response to this run has been to provide the Bear Stearns bailout and provide both liquidity and swap of illiquid and toxic assets for safe Treasuries to the non-bank primary dealers. But these radical and risky actions of the Fed - as the collateral for this lending is now toxic – are not achieving their goals: in the short run the risk of a run on a Lehman may have been reduced; but what is happening in the money markets and in the agency markets shows that the Fed can only affect partially liquidity premia, not credit premia; and spreads are widening for a wide range of money markets and credit markets because of widening credit spreads driven by sharply rising counterparty risk.

The lack of trust of financial institutions in their counterparties is surging in spite of all the Fed actions as panic is setting in money markets and credit markets. Thus, providing access to a dozen broker dealers who are primary dealers does nothing to ease the credit risk and liquidity/rollover risk of thousands of US and global institutions that are part of the shadow financial system. In a mark to market world many of these highly leveraged institutions – including large broker dealers other than Bear Stearns – are effectively bankrupt and no Fed action can rescue them. And the run on the shadow financial system has barely started.

Claiming the Bear Stearns was not bailed out because the current shareholders got only $2 per share is disingenuous: this was a massive bailout as the Fed put $30 billion of cheap credits in the pot: without this massive financial support not only the shareholders would have been wiped out 100% as they deserved to (rather than keeping the option value that the government support will recover in due time the value of their shares); but also many of the creditors of Bear Stearns would have experienced massive losses as Bear was insolvent and unable to pay such creditors with its impaired assets. Instead the $30 bn Fed support represents a major subsidy for JPMorgan and a major bailout of Bear’s creditors.

Effectively the Fed has taken on its balance sheet the entire credit risk of $30 of toxic securities held by Bear Stearns. So, this Fed bail out is an explicit case of using the disastrous Japanese model of a “convoy system” (healthier banks taking over zombie banks with the help of lots of public money) that led to a decade of economic and financial stagnation. A market solution to this crisis does not exist; those who believe in such markets solutions are deluding themselves as markets left alone will melt down and enter into the mother of all meltdowns, margin calls, cascading collapse of asset prices, massive credit crunch and liquidity seizure and severe economic recession.

We are facing now the risk of the mother of all financial crises and meltdowns. Moral hazard can be realistically address by wiping out reckless investors and lenders, having the government buying assets that need to be restructured at low prices closer to their fundamental value and limiting the mortgage debt reduction to truly deserving borrowers who were victims of predatory lending practices. But radical and coherent policy action needs to be taken urgently and without further delay as there is now the risk that the US will experience its most severe recession in decades and that the US and global financial system may melt down.

I will flesh out in more detail in the near future the logic and specific elements of this radical plan to resolve this most severe and dangerous financial crisis.


Thursday, March 20, 2008

Bond Yeilds Bottoming??

As the flight to safety continues I have been watching bond yeilds closely.
This chart highlights a potential bottom that is forming in Treasuries and as they say at my favourite trading blog

"bottoms arent a point so much as they are a process"

lets take a look at my case for the process unfolding:

Next week is a critical pivot point for these technical developments.

Mish Shedlock sums it up in his recent post regarding the case for deflation:

Recap Of Fed Sponsored Facilities:

The TAF (Term Auction Facility) failed to
restore liquidity.

The TSLF (Term Securities Lending Facility) failed to
restore liquidity.

(Primary Dealer Credit Facility) will be the next "facility" to fail.

Clearly the bond market does not believe the TAF, the TSLF, or the PDCF are going to solve the liquidity problem. I don't either because the problem is not liquidity and can't be solved by liquidity. Treasuries Are Safer Than CashI had an email exchange with a reader yesterday who said "Deflationists don't generally believe in buying gold, because they believe cash is king".

The same person was also questioning a statement I made about cash losing value in deflation. Let's take a look at these ideas starting with cash.While cash may be king, and I have made that statement many times myself, it is only king if it cannot be defaulted on. Cash in the bank, above the FDIC limit, can indeed be defaulted on.

Also note that money markets are at risk if they are invested in mortgage backed securities instead of treasuries.The only guaranteed safe way to hold cash is in amounts below the FDIC limit. Above the FDIC limit, cash is not king and cannot safely be held as cash but must instead be parked in US Treasuries. Realization of this simple fact is likely behind the huge rally on the short end of the curve.

How Cash Can Lose In Deflation?

Cash may be worth less in term of other currencies.
Cash may be worth less in terms of gold.
Cash (above the FDIC limit) can be defaulted on.

The first two points above are in relative terms of course. As for gold, there are many deflationists who believe gold is money and money will do well in deflation. I am one of them.

However, I have also said that gold would likely correct because leverage in hedge funds would have to be unwound and some of that leverage is in gold. Also there are many who have piled into gold for the “wrong” reason. The wrong reason is inflation.

Unlike cash in the bank or US Treasuries, gold is the only currency
that is no one’s liability. Government decree alone cannot stop gold from being money. Gold’s role as money has held throughout history.Long term the US dollar is headed to zero, so is the Yen, and so is the Euro. All fiat currencies eventually go to zero. Gold will never go to zero.However, the long term is a long time. The dollar is not headed to zero tomorrow, nor is the Yen, nor is the Euro. Right now, a flight to the safety of treasuries is underway as leverage elsewhere is forced out of the system. This is just what one would expect to see happen as deflation picks up steam.

Mike "Mish" Shedlock

Wednesday, March 19, 2008

Nouriel Roubini and the Shawdow Financial System

This latest missive from Mr. Nouriel Roubini highlights the currents risks facing the banking sector. Nouriel is one of my favourite writers and the threats to the "shadow" sector of the capital markets is where the real beef lies in the current Federal Reserve bail-outs of Bear Sterns:

A Generalized Run on the Shadow Financial System

Nouriel Roubini | Mar 17, 2008

Since the onset of the liquidity and credit crunch last summer this column has been arguing that monetary policy would be impotent to address such a crunch because, in part, of the existence of a non-bank “shadow financial system”. This system is composed of conduits, SIVs, investment banks/broker dealers, money market funds, hedge funds and other non bank financial institutions.

All these institutions look similar to banks because they are highly leveraged and borrow short and in liquid ways and invest or lend long and in illiquid ways. This shadow financial system is, like banks, subject not only to credit and market risk but also to rollover or liquidity risk, i.e. the risk deriving from having a large stock of short term liabilities (relative to liquid assets) that may not roll over if creditors decide to withdraw their credits to these institutions.

Unlike banks this shadow financial system does not have access to the lender of last resort support of the central bank as these are not depository institutions regulated by the central banks. What we are now observing – with the case of Bear Stearns and the recent disaster among SIVs, conduits, run on a number of hedge funds and money market funds is a generalized liquidity run on this shadow financial system.

The response of the Fed to this run has been radical and in the form of the extension of the lender of last resort support to non bank financial institutions. Specifically, the new $200 bn term facility allows primary dealers – many of which are non banks – to swap their toxic mortgage backed securities for US Treasuries; second, the Fed provided emergency support to Bear Stearns and following the purchase of Bear Stearns by JPMorgan, is now providing a $30 bn plus support to JPMorgan to help the rescue of Bear Stearns; finally, now the Fed is allowing primary dealers to access the Fed discount window at the same terms as banks.

This is the most radical change and expansions of Fed powers and functions since the Great Depression: essentially the Fed now can lend unlimited amounts to non bank highly leveraged institutions that it does not regulate. The Fed is treating this run on the shadow financial system as a liquidity run but the Fed has no idea of whether such institutions are insolvent. As JPMorgan paid only about $200 million for Bear Stearns – and only after the Fed promised a $30 billlion loan – this was a clear case where this non bank financial institution was insolvent.

The Fed has no idea of which other primary dealers may be insolvent as it does not supervise and regulate those primary dealers that are not banks. But it is treating this crisis – the most severe financial crisis in the US since the Great Depression – as if it was purely a liquidity crisis. By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbate moral hazard distortions. Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts. This is a most radical action and a signal of how severe the crisis of the banking system and non-bank shadow financial system is. This is the worst US financial crisis since the Great Depression and the Fed is treating it as if it was only a liquidity crisis. But this is not just a liquidity crisis; it is rather a credit and insolvency crisis. And it is not the job of the Fed to bail out insolvent non bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages

Sunday, March 16, 2008

Gold Miners vs. Gold part 2

My first chart showing the Canadian Gold Miners ETF vs. Bullion Ratio on March 4th, 2008 highlighted the growing body of evidence that Gold Shares (more specifically Canadian Miners) appear to be bottoming and ready to break out from their 2 year lag relative to Gold Bullion.

Ive posted an update of this same ratio for March 14th, 2008 below.

With the Federal Reserve likely to announce further rate cuts this coming Tuesday and Gold Closing above $1000 for the first time, the mining shares have yet to reflect any sort of speculative fever. I would not be surprised to see the metal hold firm while the shares suffer alongside any serious market downturn over the next few weeks, but I would also expect the miners to recover fast and make new highs towards the end of the year and this ratio should show some marked improvement.

If this will translate into a run up in the Junior Mining sector has yet to be seen, if banks remain landlocked over solvency issues then the financing for new projects may remain tight until Bonds begin to reflect inflation concerns and the flood of money will exit in search of hard assets.

Update/ 6:52 PM:

This editorial posted below from Bob Moriarity, president of echos my sentiments regarding the ratio of gold mining shares to the metal. The rest is a series of dire warnings that I can only watch in wonder if they should ever come true. These truly are interesting times.

A Time for Caution, Update 1

Bob Moriarty
Mar 17, 2008

I wrote a piece 10 days ago suggesting caution on the part of my readers. Gold and silver are at bullish extremes; the dollar is at a bearish extreme. In any normal time, we would expect to see a correction, probably violent. I still believe we will have a correction shortly but we may no longer control anything. While the metals and the dollar are showing extremes of emotion, the shares of mining companies still seem to be very bullish based on my read of the XAU over gold.

My readers are smart enough to realize we are not in normal times. We are in a Domino Depression where we can expect two or three hedge funds to collapse every day, banks to go under on a regular basis. Northern Rock collapsed last fall, I for one, cannot understand how the rest of the banking system has not failed.

It's starting again; we are in uncharted waters where no one quite understands where we are; we've never been here before. Bear Sterns crashed on Friday last. On Monday March 17th, President Bush meets with the infamous Plunge Protection Team. The alternatives are everything from a Bank Holiday to a nuclear attack on Iran to Bush declaring a "National Emergency" and naming himself Fuhrer.

One of the very real alternatives is Weimar style inflation. That's what the government would like to do; it's a question of if the rest of the world will go along with it. All it would take for a total and immediate failure would be for China or Russia or Japan or Saudi Arabia to dump the dollar.

It's a time for caution. We SHOULD have a violent correction in gold and silver and the dollar based on emotion and government intervention but we could see $3,000 gold in a week or the start of a living nightmare brought to you by the Gang of Fools in Washington. No one knows.

I'm tempted to say the government's ability to deceive is far greater than I ever imagined and the stupidity of Americans equally unimagined. We may well coast into Armageddon at a nice measured rate or we could see a freeze-up next week. The time will come when there is a total freeze-up in the banking system and all the banks will close. I just don't know if it's next week or not.

It's a time to be cautious. We are not entering a recession; it's a full-blown Domino Depression. It's not a time to be in CDs or Real Estate or speculating in the stock market. You need to own real things of some real value. Our world is changing at an ever-increasing rate. Own some physical gold and pay attention to what is going on.

Mar 16, 2008
Bob Moriarty
President: 321gold

Friday, March 14, 2008

US Dollar Intervention Madness

This recent entry by Mike "Mish" Shedlock highlights the forthcoming madness in currency markets. Mish's blog is among the most informative, well sourced and thoughtful diatribes on capital markets and the madness of central banking.


U.S. Dollar Intervention Madness

Paulson is once again talking the talk about the strong dollar. "We've taken quite a clear position on this in saying that a strong dollar is in our nation's interest".Paulson can talk all he wants and it won't matter one iota until Bernanke starts walking the walk. If Bernanke was concerned about the falling dollar all he has to do is raise interest rates. But everyone knows the next move is lower.

Intervention Watch

The slumping dollar has Morgan Stanley, Goldman On Intervention Watch.
"We're on an intervention watch," Stephen Jen, Morgan Stanley's London-based head of foreign-exchange research, said in a telephone interview. "While I don't think we have reached the threshold yet, the argument in favor of it is gradually becoming compelling.""The dollar's fall will worry other markets, which are so fragile right now," Jim O'Neill, chief economist at Goldman Sachs said in a telephone interview. "Intervention will definitely be on the minds of policy makers."Any action by the G-7 would be the first since its governments united in September 2000 to boost a falling euro. The dollar sank as low as 79.75 yen in 1995 to prompt a rescue then.Since 2002, the G-7 has focused on lobbying China to stop meddling to weaken the yuan while leaving itself with some room to maneuver by noting its aversion to "excess volatility and excessive movements in exchange rates."A Compelling CaseThe idea there is a "compelling case" for currency intervention is complete silliness. However, a very compelling case can be made for
Abolishment of the Fed.

Peter Bofinger, adviser to ECB, says Time For The ECB To Start Buying Dollars.

"The uncontrolled increase of the euro rate vis-a-vis the dollar threatens
employment growth in the euro area,"
said Peter Bofinger, one of Germany's
so-called "five wise men" appointed to advise the government on
economic matters. He told that the ECB had an obligation to oversee
growth, and that it had to act now--alone if necessary--to stop the euro from
rising further.But although the European Central Bank has so far refused to
budge from its own key rate of 4.0%, citing its primary goal of fighting
inflation, Bofinger argued that the bank still had the power to tame the euro's
rise. He said the ECB could intervene in the foreign exchange markets to buy
more dollars, preferably in conjunction with other central banks like the
Federal Reserve or the Bank of Japan.

Anyone promoting currency intervention as an economic policy is a fool not a wise man.
Furthermore it should be blatantly obvious that Currency Intervention does not work and as long as the US keeps spending money it does not have on things it does not need and cannot afford, the dollar is going to be weak. If Paulson does not know that he should be fired. If he does know that he should have the integrity to come out and say it.If the US wants a stronger dollar all it has to do is eliminate the budget deficit. If it wants lower oil prices all it has to do is eliminate the deficit, get out of Iraq, and stop wasting oil on needless military missions.It's that simple but sadly no one in either party other than Ron Paul is willing to make those kind of statements. Instead the silly talk goes on and on.

Bloomberg is reporting Dollar Falls to Record Versus Euro, Near Decade Low Against Yen.

The Dollar Index traded on ICE Futures in New York, which compares the
currency to those of six trading partners, fell to a record low of 71.731 today.
The decline in the world's reserve currency pushed gold above $1,000 an ounce
for the first time yesterday as investors sought shelter in the metal."With
stocks falling, traders are rushing into yen- buying
," said Takeshi Tokita,
vice president of foreign- exchange sales at Mizuho Corporate Bank in Tokyo, a
unit of Japan's second-largest publicly traded lender by assets. "There are
some rumors hedge funds and banks will go into bankruptcy
."Carry Trade
UnwindsA rising Yen is synonymous with an unwinding of the carry trade. A rising
Yen and has also consistently tracked the $SPX in inverse fashion for over a

I have called for a stronger Yen and got it. However, I sure did not get an expected rise in the dollar vs. the Euro. One of the reasons is Trichet has been incredibly stubborn in refusing to cut rates while Bernanke has been in an absolute state of panic cutting that is not doing one bit of good.I do not know how much longer Trichet can hold out given that the German banking system like its US counterpart, is in shambles and property bubbles are imploding in various parts of Europe.But heaven help us if central bankers try to address horrid US fiscal and monetary policies with currency intervention.

Currency intervention cannot work, and failed attempts will simply add further stress to the extremely fragile system.It's important to remember: Crashes do not occur in overbought conditions, they occur in oversold conditions. While not specifically calling for a crash here, these are the kinds of situations in which one can easily occur.

Mike "Mish" Shedlock

Wednesday, March 12, 2008

Al-Qaeda is a concept, not an actual mafia-like organization

This video, part #3 in a 3-part series explores the creation of the concept of a global terrorist network: Al-Qaeda. Having watched numerous takes on the topic, this series dubbed "The power of Nightmares" is by far one of the most concise accounts of how global governments capitalize on our fears, with claims to protect the citizenry from shadowy groups seeking to advance agendas for a global Islamic caliphate.

A fantastic and in-depth study of the subject is Jason Burke's 2005 book
Al-Qaeda: The True Story of Radical Islam. Jason Burke is a Journalist for The Observer, and an overview of his work can be found in this 2003 article "What is Al-Qaeda?". Terrorism is by no means a threat we should ignore- But the use of a palatable and tangible target for us to fear; a global network with a definable structure and a sinister yet charismatic leader at it's helm has allowed governments to convince us that our safety is more important than our freedom.

I hope you enjoy both the video and the book as they helped shape my views not just on geo-political events but the capital
markets themselves. (which is probally why I like gold)

Tuesday, March 11, 2008

Nouriel Roubini and the Systemic Meltdown

This piece from Nouriel Roubini's blog provides an indepth analysis of the current risks facing investors and a great overview of other analysts opinions regarding the growing dramatics in capital markets.

Its long but well worth the read, Mr. Roubini, author of
Bailouts or Bail-Ins: Responding to Financial Crises in Emerging Markets made many of his most bearish calls years ago when euphoria was high and such opinions were unpopular:

The Rising Risk of a Financial Meltdown and the Escalating Losses in the Financial

Nouriel Roubini Mar 10, 2008

Given the growing turmoil in financial, credit and equity markets my 12 steps scenario to a systemic financial meltdown is becoming more likely by the day; and my estimate that financial losses could end up being at least $1 trillion dollars – considered as an extreme worst case scenario a few weeks ago – is now being endorsed by an increasing number of serious analysts.

Let us consider the details of these seriously worsening financial conditions…

Serious concerns about a systemic financial crisis or a meltdown have been recently expressed by a number of very distinguished observers and analysts. Larry Summers recently warned that “we are facing the most serious combination of macroeconomic and financial stresses that the U.S. has faced in a generation--and possibly, much longer than that"; he then added the country has "never been in more need of serious economic thinking than we are now"; he warned that "the current estimates of mortgage losses are $400 billion…Those estimates are substantially optimistic."; and then argued that "It's a grave mistake to believe in the self-equilibrating properties of economies in the face of large shocks…Markets balance fear and greed. And when fear takes over, the capacity for self-stabilization is not one that can be relied upon."

Similar concerns about a systemic financial crisis/meltdown have also been echoed today – in a series of op-eds – by Clive Crook in the FT (“In the grip of implacable subprime forces”), Paul Krugman in the NYT (“Mr. Geithner came as close as a Fed official can to saying that we’re in the midst of a financial meltdown”), and Wolfgang Munchau in the FT (“Central banks cannot stop this contagion”).

As for the losses from this financial crisis – that I estimated to be at least $1 trillion and possibly much higher – George Magnus of UBS (the wise analyst who coined the “Minsky Moment” term) agrees with the view that they will end up being about $1 trillion. Mortgage losses alone are now estimated – in the excellent paper by Greenlaw, Hatzius, Kayshap and Shin – to be $400 billion rather than original estimates of $100 to $200 billion. And the $400 billion estimate for mortgage losses does not include the losses from commercial real estate loans, from consumer credit (credit cards, auto loans, student loans), losses on muni bonds and ABS instruments from monoline downgrades, losses on leveraged loans, losses on corporate loans and defaulting corporate bonds, losses on credit default swaps, and losses on agency debt. Also, a recent analysis by UBS estimates the losses in the financial system to be at least $600 billion; but it is not clear how much this study includes the potential losses in a variety of non-mortgage credit markets. Also Clive Crook argued in the FT today that “as house prices continue to fall – leaving as many as 20m in negative equity, on some estimates – the lenders’ losses could exceed even Mr Roubini’s estimates”.

The very thoughtful Martin Wolf – who masterly summarized my systemic crisis scenario in a recent column of his in the FT – then went on in his next column to argue that this may be a worse case scenario. But he then acknowledged that a $1 trillion dollar loss – and related potential fiscal bailout cost of rescuing the financial system - is possible but would be manageable as it would represent only a 7% of GDP fiscal bailout cost. Following my extensive reply that losses may be much larger than 7% of GDP and that a financial system that privatizes gains but socializes losses is seriously flawed Martin Wolf replied that “I think Nouriel’s post is so important that I plan to devote a column to it in the not too distant future”. One can thus look forward to another thoughtful and insightful contribution by Martin Wolf to this debate.

In the meanwhile conditions in financial markets have significantly worsened in all dimensions compared to the time I wrote my 12 step scenario a month ago: stock markets are falling day after day; margin calls are hitting hedge funds and highly leveraged institutions; highly leveraged private equity firms are in serious trouble; more large mortgage lenders are going belly up; credit derivatives spreads for corporate bonds are widening even for high grade bonds; even the super safe agency debt spreads are now widening; the muni bonds, TOB and ARS markets are in a seizure; the liquidity crunch is back with a vengeance forcing the Fed to sharply increase the size of its liquidity operations; but since such widening spreads in interbank rates are now representing more credit premia rather than liquidity premia monetary injections are likely to become increasingly impotent in addressing such widening spreads. Market observers are now using terms such as the markets are becoming “utterly unhinged”, the financial system is “broken” and “everybody's in de-levering mode'' to describe the rising panic in financial markets.

The recklessness of a highly leveraged financial system is epitomized by the Carlyle Group bond fund (Carlyle Capital Corp.) that failed this week to meet its margin calls and is now on the verge of bankruptcy. Think of the chutzpah of such a private equity firm that – well into the current financial turmoil – raised about a paltry $600 million of investors’ equity and leveraged it about 32 times to make over $21 billion of investments in agency (GSE) AAA mortgage debt. Of course the only way to make a high and risky return on AAA debt that had originally very low spreads relative to US Treasury was to lever the initial investment by a reckless 32 times. Too bad that the massive losses that even GSEs are experiencing on their portfolios have recently led to a significant widening of such spreads and massive default on this highly risky scheme (or scam?). Only fools would be shocked that such agency debt spreads have widened: in August of 2006 this column warned that the coming housing bust would not spare even Fannie and Freddie as they would experience massive losses on their portfolios of mortgage related assets. At that time – August of 2006 – when the housing and subprime bust had barely started this column warned:

the coming housing bust may lead to a more severe financial and banking crisis than the S&L crisis of the 1980s. The recent increased financial problems of H&R Block and other sub-prime lending institutions may thus be the proverbial canary in the mine – or tip of the iceberg - and signal the more severe financial distress that many housing lenders will face when the current housing slump turns into a broader and uglier housing bust that will be associated with a broader economic recession. You can then have millions of households with falling wealth, reduced real incomes and lost jobs being unable to service their mortgages and defaulting on them; mortgage delinquencies and foreclosures sharply rising; the beginning of a credit crunch as lending standards are suddenly and sharply tightened with the increased probability of defaults; and finally mortgage lending institutions - with increased losses and saddled with foreclosed properties whose value is falling and that are worth much less than the initial mortgages – that increasingly experience financial distress and risk going bust.

One cannot even exclude systemic risk consequences if the housing bust combined with a recession leads to a bust of the mortgage backed securities (MBS) market and triggers severe losses for the two huge GSEs, Fannie Mae and Freddie Mac. Then, the ugly scenario that Greenspan worried about may come true: the implicit moral hazard coming from the activities of GSEs - that are formally private but that act as if they were large too-big-to-fail public institutions given the market perception that the US Treasury would bail them out in case of a systemic housing and financial distress – becomes explicit. Then, the implicit liabilities from implicit GSEs bailout-expectations lead to a financial and fiscal crisis. If this systemic risk scenario were to occur, the $200 billion fiscal cost to the US tax-payer of bailing-out and cleaning-up the S&Ls may look like spare change compared to the trillions of dollars of implicit liabilities that a more severe home lending industry financial crisis and a GSEs crisis would lead to.

The main, still unexplored issue, is where the risk from mortgages is concentrated: among the sub-prime lenders)…or among commercial banks or among hedge funds and other financial intermediaries that purchased mortgage backed securities(MBSs) or among the GSEs (Fannie and Freddie)? Commercial banks claims that they have transferred a lot of their mortgage risk to other financial intermediaries – such as asset managers, hedge funds or insurance companies – who purchased large amounts of MBSs. But banks have still lots of mortgages on their books and, on top of it they have tons of consumer debt exposure (credit cards, auto loans, consumer credit) that may go really bad in a recession. If part of the housing risk has been off-loaded to hedge funds, the risk is not just of some of these hedge funds going bust but also their prime brokers (i.e. large investment banks) getting into trouble; counterparty risk will become serious once the hot potato of mortgage risk is pushed from one counterparty to the other. And finally, a large part of the housing risk is also in the hands of Fannie and Freddie. How much are the GSEs at risk is a complex issue… Either way, a serious housing bust followed by an economy-wide recession implies serious financial risks for the entire financial system, not just risks for the real side of the economy. A systemic risk episode triggered by a housing bust cannot be ruled out”

To repeat: those are words that were written here in August of 2006. And now that the systemic financial crisis that some of us warned about in the summer of 2006 is in full swing the Fed cannot does not seem to be able to do any better than effectively bailing out those reckless investors and private equity firms that levered a paltry equity position 32 times (!) to make the most risky investments in agency debt. This is a bailout as the recent decision by the Fed to increase size of its liquidity injections (via TAF and other operations) to $200 billion will imply that financial institutions will be able to sell to the Fed agency debt (as well as other much more toxic ABS instruments) and get Fed liquidity in exchange for it.

So now the Fed has effectively entered into the business of propping up a market – and reckless investors – whose spreads are widening for good fundamental reasons (as such GSE are now experiencing mounting multi-billion dollar losses on their portfolios). No wonder that some observers are starting to talk about a covert partial nationalization of the US banking system. Then the explicit partial nationalization of this financial system may only become the next step of this financial meltdown.

Tuesday morning update: The just announced new Fed facility - the the Term Securities Lending Facility that will to lend up to $200 billion of Treasury securities in exchange for debt including agency and private mortgage-backed securities - confirms that the Fed has now entered into the business of artificially propping up the agency debt market and the residential MBS market. With credit risk for GSEs recently rising for fundamental reasons the manipulation of this market just increases moral hazard and saddles the Fed with meaningful credit risk.

Monday, March 10, 2008

Don Coxe: Basic Points February 2008

Don Coxe's February 2008 issue of Basic Points can be found here.

This is a must read for macro economic analysis.

Saturday, March 8, 2008

Don Coxe February 2008 Conference Call

Don Coxe's February 25, 2008 webcast can be found here.
Don Coxe has been bullish on base and precious metals for several years now and is one of the best market forecasters in the industry.

Thursday, March 6, 2008

This daily report from DV Techtalk is a great overview of the markets from a tehcnical analysis perspective.

Don Vialoux, the site's author is a great market technician and a regular contributor to the National Post.

Wednesday, March 5, 2008

Washington Mutual ensures top exec's pay protected from sub-prime losses

This story from Reuters highlights how far gone US banks really are, when time and resources are squandered to ensure bonus packages for management are protected from sub-prime fall out.
The board's committee said in light of the challenging business environment and the need to evaluate performance across a wide range of factors it will take a three-step approach to rewarding its executives including subjectively evaluating company performance in credit risk management.
Subjective evaluation of company performance as opposed to objective evaluation of crippling losses related to Wamu's core thrift lending practices in the mortgage markets?

Surprisingly not everyone is suffering from the sub-prime fiasco:
In January, Seattle-based Washington Mutual said it awarded CEO Kerry Killinger 3.2 million stock options for 2008 to provide a "strong incentive to restore shareholder value".
WaMu's share price sank 70 percent in 2007 as mortgage losses soared
What incentive is needed to convince a CEO to restore shareholder value if their rewards may exclude the poor performing aspects of their business... that account for the lion's share of the share price losses to date?

Tuesday, March 4, 2008

Gold Mining Shares vs. Gold Bullion Ratio

Here's a 3 year chart of the of the Canadian Mining shares vs. Gold. Its been in free fall the past 2 years but there are signs that a major trend change is underway
  • Notice the positive divergence between the ratio itself and the RSI-7 and MACD.
  • The ratio has broken upwards from its year long down-trend.
  • The 50 MA having remained below the 200 MA for almost one year looks to turn upwards ready to cross back above.
This could portend the much anticipated rise of the mining shares against the metal which has hurt gold bugs the past 2 years, especially in the JR Mining space.

Bankrupcy Filings up 15% in February

here's an interesting report from Reuter's:
Julie Vorman

it highlights the onslaught of bankrupcy filings in February:

WASHINGTON (Reuters) - American consumers' bankruptcy filings jumped 15 percent in February from the previous month and a steeper rise is looming because of the subprime mortgage crisis, the American Bankruptcy Institute said on Monday.

Consumer bankruptcy filings in February totaled 76,120, up from 66,050 recorded in January, the non-partisan bankruptcy research group said. The February number was 37 percent higher than in the same month a year ago, according to the institute.

"February's bankruptcy spike -- the highest single month since the 2005 (bankruptcy) law changes -- forecasts the start of more to come for the balance of 2008," said Samuel Gerdano, ABI executive director.

"It is probably too early to attribute the current trend to the mortgage crisis. But if it continues -- as it is certainly expected to with adjustable rate mortgages resetting -- it could add to the bankruptcy rate," Gerdano said in an interview.

The institute is forecasting more than 1 million consumer bankruptcies in 2008, compared with about 800,000 in 2007, due mostly to household debt. But the 2008 estimate could go even higher "if this contagion affecting the home mortgage market continues," Gerdano said.

Last week, Senate Republicans blocked a Democratic-written bill that would change federal bankruptcy laws to curb rising home foreclosures.

The legislation, which lawmakers said might be reconsidered in coming days, would let bankruptcy judges reduce mortgage amounts to reflect the current fair value of the home in Chapter 13 bankruptcy proceedings. The White House threatened to veto the bill, calling it too costly.

In a Chapter 13 bankruptcy, a consumer typically must budget some future earnings to repay unsecured creditors. However, secured debt -- such as a home mortgage -- cannot be modified under current Chapter 13 law, Gerdano said.

"Here the scenario is a restriction in the flow of credit to troubled businesses," Gerdano said. "In recent years, there was almost excess liquidity, which propped up a number of businesses and let them stave off a day of reckoning."

(Reporting by Julie Vorman; Editing by Jan Paschal)

Monday, March 3, 2008

so it begins JGLOBAL

Ive put off starting a blog for some time, more than anything it seemed self-indulgent. Once I found out what "self-indulgent" meant, I reconsidered.

I think I read much faster than most people, apply that to an interest in geo-politics and
capital markets, theres no limit to the amount of insightful commentary on the net.

Im still trying to figure this out, but I hope to begin posting some stories of interest to me
and hopefully to you.