Rough Economic Seas Ahead as the Storm Intensifies

The breadth and volume of the market has been narrow. We remain in a bearish posture on US financial assets that we took roughly around the market peak in October of 2007, and will stay guardedly bearish until the banking crisis is settled.

We are quite certain that it is not behind us yet, not by a long shot. There is another bigger shoe to drop, although that may not occur until the next president takes office, and the Republicans deliver the coupe de grace to the US public. We are also in an economic recession, and the length of the downturn could extend well into 2009 with the damage intensifying if the Fed fails to bring off its gambit of bailing out the banks without triggering a rather nastier bout of inflation, much worse than we are already experiencing.

The pundits' argument on Fox News is that there is "$3.5Trillion" cash on the sidelines, and that this money must go somewhere to seek a return, and the only logical place to get the best returns is in equities.

Oh really? Lets take a look at the actual returns for past year.




There is a significant amount of disinformation being tolerated in the corporate news media these days, and the integrity of many of our institutions are in question. Naive citizens become agitated by the emotional side issues, and we'll expect that to become worse as the national elections approach. Sometimes it borders on hysteria, even among normally intelligent people. This is fed in particular by some news channels, and it is probably best to avoid them as they are a form of pollution to the rational mind.

Signs of the times. We are experiencing a sea change, and traumatic disruptions may become more severe and frequent, especially for those unable to see past the change and understand it in context.

The experience is not dissimilar to other times of historic change and trauma. The experience of Germany and the US between the World Wars comes to mind. The character of the people will be tested. Let us hope we maintain a perspective, and come through this as gracefully as is possible.


'Permabear' Peter Schiff's Worst-Case Scenario
By Kirk Shinkle
May 30, 2008
US News and World Report


Economic punditry tends to fall broadly into glass-half-full or half-empty categories. Then there are those who see a cracked glass, teetering on the edge of a table just moments from a shattering fall. Enter Peter Schiff, the permabear president of brokerage Euro Pacific Capital and coauthor of last year's Crash Proof: How to Profit From the Coming Economic Collapse.

Schiff spent the past decade urging brokerage clients to jump ship from the American economy ahead of what he views as inevitable pain caused by a toxic cocktail of lax monetary policy, wayward spending, and tougher competition from all corners of the globe.

Even with some pain already felt as America's economy stumbles, Schiff saw nothing but downside in a recent chat with U.S. News. You'll want to buckle up for some characteristically apocalyptic talk from one of the gloomiest market watchers around. Excerpts:

Say something positive about the U.S. economy.
There's nothing good to say about our situation. The policies both the Fed and government are pursuing are making the situation worse. We've been getting a free ride on the global gravy train. Other countries are starting to reclaim their resources and goods, so as Americans are priced out of various markets, the rest of the world is going to enjoy the consumption of goods Americans had previously purchased. This is a natural consequence of this phony economy. If America had maintained a viable economy and continued to produce goods instead of merely consuming them, and if we had saved money instead of borrowing, our standard of living could rise with everybody else's. Instead, we gutted our manufacturing, let our infrastructure decay, and encouraged our citizens to borrow with reckless abandon.

So what are you doing about it?
I'm getting my clients' money outside of the United States as fast as they can send it to me. I've been recommending that to my clients for close to 10 years. You've got to own resources and energy. I was saying oil was going to $200 a barrel in 2002. I've been buying gold, silver, industrial metals, and all kinds of stocks. My main theme is the global economy will survive and the U.S. economy is a disaster. Everything is about how you benefit from the increased purchasing power and rising standard of living in the rest of the world.

OK, where are the best non-U.S. markets this year?
I still like Singapore, Hong Kong. Asian markets are the place to be. I like resource markets like Scandinavia. I'm spreading my chips around the world. I'm just avoiding the United States.

What are your best or worst calls through this downturn?
I've been bearish on bonds. U.S. bonds have lost a lot of real value but not nominal value. I still think that's going to be proven to be correct. While the housing bubble was inflating, I was telling people to rent. I was telling people to get out of tech stocks in 1998 and 1999. They kept rising, but then they collapsed, and I turned out to be right. The reality is I don't think I've been wrong on anything.

Most people disagree with that sort of pessimism. If you're staying in the United States, how do you invest?
If you want to be in U.S markets, you avoid anything connected with the American economy. You avoid retailers, the home builders, the financials—anything having to do with consumers buying something or paying back the money they borrowed. If you want to invest in U.S. markets, stick with exporters and resource companies. I've been saying that for five or six years; I haven't gotten anything wrong. We shorted subprime mortgages. I have clients that made 10 times their money. We've never sold an oil stock. We've never sold a gold stock.

Why don't you think soaring oil, grains, or commodities prices are the next bubble?
These prices do not constitute bubbles. They simply constitute the repricing of goods to reflect the diminished value of our money. The way you can tell there's not a bubble is that these markets are clearing. People are buying food and eating it. They're buying gasoline and using it. Speculators aren't buying gasoline and warehousing it in big facilities because they think the price is going to go up. At the same time, we've increased the supply of money dramatically, and the Fed is increasing it even faster now to deal with the bursting of the housing bubble. The only thing that can happen is for prices of commodities to rise to reflect the equilibrium of a greater supply of money. It's not even that oil prices are going up. Oil prices are staying the same. What's happening is the value of money is diminishing, so we need more units of currency to buy the same amount of oil or wheat or corn or whatever.

How about some predictions?
• I think the stock market is headed lower. Gold is going to be $1,200 to $1,500 by the end of the year. That puts the Dow at a less-than-10-to-1 price ratio to gold. Right now, it's about 13 to 1. That's another 30 percent drop in the real value of stocks by the end of the year if you price them in gold. The Dow was worth 43 ounces of gold in 2000. It'll get to 10 by the end of the year and continue to fall from there.

• Oil prices had a pretty big run and might not make more headway by the end of the year. But we could see $150 to $200 next year. I don't think oil will hit $250 because there will be enough destruction of demand in the United States to keep it from doubling. The big problem for us is if the Chinese substantially allow their currency to rise. It could increase at least fivefold against the dollar over the span of a year or two. That reduces the price of oil by 80 percent for 1.3 billion Chinese. Consumption would go through the roof, and that will drive prices through the roof for us.

• At a minimum, the dollar will lose another 40 to 50 percent of its value. I'm confident that by next year we'll see more aggressive movements to abandon the dollar by the [Persian] Gulf region and by the Asian bloc. That's where the stuff really hits the fan.

You're a Ron Paul adviser. He's out of contention, so who wins the election, and what happens then?
The Obama presidency will be like the Jimmy Carter presidency on steroids. I'm pretty sure it's Obama because the economy will be so bad into the election that as damaged a candidate as the guy is, I don't think a Republican could beat him. I think Ron Paul could've had a slim chance because he was different enough.

So how bad do you think this economy will get?
The other problem we'll have during those years is civil [unrest]. There will be a big increase in crime. People are going to be hungry. People are going to be cold. There's a sense of entitlement in this country, and when a lot of people used to having things suddenly don't, everybody looks for someone to blame.

Really?
We're going through a very rough period in our history. In many ways, it's going to be worse than the Depression.

The Dow Jones Industrial Average Deflated by Gold

Deflated by gold, the Dow Jones Industrial Average has been in a bear market since 2001.

US Dollar Long Term Chart with Commitments of Traders as of May 27 COB

US Dollar Weekly Chart with Moving Averages

Gold price to rise long term: China central bank official

SHANGHAI, May 29 - International gold prices are likely to rise further in the long term due to dollar depreciation, rising demand and global political and economic uncertainty, a researcher at China's central bank said.

Worries about global inflation, a possible worldwide economic slowdown and geopolitical instability will also bolster the metal's price, Wang Yu, director of the gold and foreign exchange market division of the People's Bank of China, told an industry conference.

"My personal conclusion is that international gold prices will remain volatile in the short term, while from a long-term perspective there is a possibility for -- and room for -- prices to increase further," she said…

A New 'Decider' and Sugar Daddy in the Fed's Don Kohn

"Kohn said he hasn't decided whether securities firms should continue to gain access to loans from the central bank."

Will Don Kohn send a memo to Congress when he decides what they should do? Or has the Congress become irrelevant and private banks are now really running the country? Citizen Kohn

Time to send a message. Time to vote against EVERY Republican this fall. They set this up. They had a majority in both Houses of Congress and the Presidency. And they used it to lead us into wars for profit, and sold us out to the Wall Street financial interests.

Throw them all out, all incumbents who do not do the right thing for us.

Kohn Signals Wall Street May Get Permanent Access to Fed Loans
By Scott Lanman and Anthony Massucci

May 30 (Bloomberg) -- Federal Reserve Board Vice Chairman Donald Kohn raised the possibility of giving Wall Street securities firms permanent access to loans from the central bank, as long as regulators tighten oversight of the companies.

Kohn also advocated continuing Fed auctions of funds to commercial banks and loans of Treasuries to Wall Street dealers even after markets stabilize. Such channels would stay open ``either on a standby basis or operating at a very low level,'' he said in a speech in New York yesterday.

The remarks go beyond Fed Chairman Ben S. Bernanke, who has indicated the central bank would shut lending to investment banks when the credit crisis passes. Lawmakers and regulators are debating how to approach the supervision of investment banks in the aftermath of the Fed's rescue of Bear Stearns Cos. in March.

``If you are a bondholder in one of these Wall Street firms, you know you have a big `Sugar Daddy' now called the Federal Reserve that's going to back you up,'' said Jeff Pantages, chief investment officer of Alaska Permanent Capital Management in Anchorage, which oversees $1.8 billion in assets.

``But if you are a stockholder this kind of worries you'' because investment banks ``will be more highly regulated and won't be able to use leverage as much as'' before, he said. (Yeah, with the team of Clouseau and Magoo providing oversight service under contract to the private ratings agency Dewey, Cheatum and Howe - Jesse)

Kohn said he hasn't decided whether securities firms should continue to gain access to loans from the central bank. (it is not your money or your decision Mr. Kohn - Jesse)

More Extensive

``The more extensive the access, the greater the degree to which market discipline will be loosened and prudential regulation will need to be tightened,'' Kohn said in his speech to a conference hosted by the New York Fed. ``Unquestionably, regulation needs to respond to what we have learned about the importance of primary dealers and their vulnerabilities to liquidity pressures.''

In addition, central banks are considering arrangements to accept collateral from other countries denominated in other currencies, Kohn said. ``A number of issues need to be resolved,'' he said, adding that major central banks may agree on accepting a ``common pool of very safe collateral.''

Kohn didn't discuss the outlook for the economy or interest rates in his prepared remarks. Financial markets are still ``far from normal,'' he said, repeating a phrase other Fed officials have used.

Federal Deposit Insurance Corp. Chairman Sheila Bair called on May 28 for greater oversight of investment banks, including a formula for closing them in case of insolvency, in return for access to Fed loans.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said last month he plans to consider risk-monitoring rules aimed at avoiding government-backed bailouts.

`Permanent Basis'

The Fed should return to its normal practices ``as soon as that would be consistent with stable, well-functioning markets,'' Kohn said yesterday. ``Central banks should not allocate credit or be market markers on a permanent basis.''

Bernanke and his colleagues established the Term Auction Facility in December for cash loans to commercial banks, the Term Securities Lending Facility in March for loans of Treasuries to Wall Street dealers and the Primary Dealer Credit Facility in March for cash loans to the same securities firms.

In response to an audience question, Kohn said a shortage of Treasury securities is ``not one of the things I'm worried about.''

The Fed sought in March to prevent a financial-market meltdown by rescuing Bear Stearns from bankruptcy with a $13 billion temporary loan. It also opened up lending to the dealers in the first extension of credit to nonbanks since the Great Depression.

Fed `Not Sure'

``The Fed is feeling things out right now and is not sure how far it wants to go,'' said Robert Brusca, president of Fact & Opinion Economics in New York and former head of the New York Fed's international financial markets division.

The Fed said yesterday direct loans of cash to commercial banks through the traditional discount window rose to a daily average of $16 billion in the week ended May 28, while loans to primary dealers fell to $12.3 billion.

It's the first time since the Fed started lending to the dealers in March that commercial banks have borrowed more at the discount window in a week on average than the investment banks have borrowed from the PDCF. The PDCF was scheduled to last at least six months, though the Fed could extend it. That decision is a ``difficult and important question,'' Kohn said.

`Difficult Issues'

``The public authorities need to consider several difficult issues'' regarding Fed borrowing by primary dealers, Kohn said. The Fed could limit borrowing to times when the central bank deems financial-system stability to be at risk, or it could grant the firms the ``same sort of regular access enjoyed by commercial banks,'' he said.

``We need to ensure that supervisory guidance regarding liquidity risk management is consistent with'' dealers' access to Fed loans, he said.

Meanwhile, the Fed is ``working closely with the Securities and Exchange Commission to provide appropriate prudential oversight of primary dealers and their affiliates,'' Kohn said.

Bernanke said yesterday, repeating May 13 remarks, that ``once financial conditions become more normal, the extraordinary provision of liquidity by the Federal Reserve will no longer be needed.''

The Fed's new programs are ``designed to be self- liquidating as markets improve,'' Kohn said. They are set up so they are ``effective when markets are disrupted,'' yet ``uneconomic when markets are functioning well.''

`Important Innovation'

``The Federal Reserve's auction facilities have been an important innovation that we should not lose,'' Kohn said. ``They have been successful at reducing the stigma that can impede borrowing at the discount window in a crisis environment and might be very useful in dealing with future episodes of illiquidity in money markets.''

Kohn, 65, has more experience at the central bank than all other Fed governors. He served as a top adviser to former Chairman Alan Greenspan before his appointment to the board in 2002. He became vice chairman in 2006.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Anthony Massucci in New York at amassucc@bloomberg.net.

Last Updated: May 30, 2008 00:01 EDT

The Fed's Fisher Sees a 'Frightful Storm' Approaching

Fisher makes this prediction while the rest of the Fed and Treasury are sponsoring 'Take Your Family and Your Life Savings to the Beach" events. What is this, Jaws IV: the Fed Feeds Your Kids to the Shark to Give the Banks More Time to Do Some WaterSkiing?

Fed's Fisher sees 'frightful storm' brewing
By Alex Peacocke
May 29, 2008
Investment News

Dallas Federal Reserve Bank President Richard Fisher yesterday predicted a grim economic outlook for the United States and indicated that the Federal Reserve Board may be considering a change in monetary policy.

In remarks made to the Commonwealth Club of California in San Francisco last night, Mr. Fisher, a voting member of the Fed’s open market committee, predicted a “frightful storm” ahead for the U.S. economy.

He said that he expects “a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario,” if inflation expectations and developments continued to worsen.

Recent increases in commodity prices already have investors concerned about swelling inflation, which Mr. Fisher described as “the most insidious enemy of capitalism.” (I thought that the Fed and the Bush Administration were the top contenders for the title - Jesse)

The Fed has already cut its funds rate three times this year, to 2%. Mr. Fisher’s predicted change in policy presumably would indicate a hike in interest rates at the next FOMC meeting, which is scheduled for June 24-25. (Oh yeah that will be great for the housing market and the economy, unless its one of those 'fake' increases that is only on paper while the Fed and Treasury keep shoveling out liquidity to the banks to play with. - Jesse)

Moody's Internal Studies Show Ambac and MBIA Already 'Junk'

The swaps marketplace is showing more accurate forecasts of defaults and credit problems than the 'official ratings' by Moody's.

Moody's is paid for their ratings by the companies that issue and sell the debt as products, the Wall Street banks aka the locus of corruption.

Recent events show that when companies don't get the ratings they want to get from ratings agencies like Fitch they fire them.

Anyone see a problem or a conflict of interest? Like a massive fraud that is going to cost a couple trillion dollars, and decimate banks from Hong Kong to Frankfurt?

Just business as usual in the Humpty Dumpty economy.

We heard anecdotally that even rather modest requests for deliverable silver from the COMEX are being met with offers of 'cash buyouts' for amounts considerably higher than the current market prices. The prices are what we say they are, until you actually demand the product? Surprise surprise the cupboard is bare?

Won't we be surprised when some debt and some companies go from AAA to Junk virtually overnight.

If we get a certain kind of exogenous event complete with convenient scapegoats the ratings agencies and corporate confessors and government bureaucrats will be piling downward revisions on top of it like there is no tomorrow. And for many holders of bonds and stocks there won't be. They will be broke.

We understand the concept of 'managing perceptions' but are the Fed and the Treasury running a financial system or a con game here? Is this another example of the Administration trying to achieve their ends through selective deception and propaganda? What the heck has happened to our integrity? Yikes!


Moody's Implied Ratings Lab Reveals Ambac, MBIA Turning to Junk
By David Evans

May 30 (Bloomberg) -- Moody's Investors Service has created a new unit that surprises even its own director.

The team from Moody's Analytics, which operates separately from Moody's ratings division, uses credit-default swap prices as an alternative system of grading debt. These so-called implied ratings often differ significantly from Moody's official grades.

The implied ratings frequently show that swap traders think debt is in more danger of defaulting than Moody's credit ratings signify. And here's the kicker: The swaps traders are usually right.

``When I first saw this product, my reaction was, `Goodness gracious, Moody's has got a product that is basically publicizing where the market disagrees with Moody's,''' says David Munves, managing director for credit strategy research at Moody's Analytics. The implied-ratings unit works in a corner of Moody's new world headquarters in lower Manhattan, across the street from Ground Zero.

``But these differences are out there,'' Munves says. ``We might as well capture and learn from it what we can.''

The credit quality of bond insurers, which have been at the center of the subprime storm, differ dramatically. The official ratings of these companies say the insurers are in great shape; the alternative ratings say they're in dire danger of defaulting on their debts.

MBIA Inc. and Ambac Assurance Insurance Inc., the two largest bond insurers, got themselves into trouble by veering away from the plain-vanilla business of insuring debt issued by municipalities and corporations. The insurers began selling credit-default swaps, which are a type of insurance, to banks eager to hedge their own risks from collateralized debt obligations.

Subprime Debt

Because many of those CDOs were bundles of debt laced with securitized subprime home loans and other asset-backed securities, the insurers might now shoulder tens of billions of dollars in losses.

Ambac and MBIA have raised billions of dollars of new capital so that Moody's and Standard & Poor's would keep top ratings for the bond insurers -- and the rating firms have done just that. (Moody's and Standard & Poor's are under extreme pressure to keep the AAA rating because of the potential damage to the holders of the bonds which Ambac and MBIA are 'insuring' even though the insurance is worthless. It is a farce, a sick joke, a symbol of the falseness of our monetary and financial system of words backed by nothing but words and political pressure. - Jesse)

Moody's implied-ratings group paints a completely different picture. Using the CDS market, Munves's unit rates both MBIA and Ambac Caa1. That's seven notches below junk and 15 below the official Moody's rating.

Swap traders see there's a huge risk that Ambac and MBIA will default, hedge fund adviser Tim Backshall says. He says swap traders don't trust S&P's and Moody's investment-grade ratings for the companies. (Yeah only the stupid public is believing Moody's and S&P these days - Jesse)

`Into Default'

``The only thing holding them at AAA is simply the model that the rating agencies claim they use to judge that capital and the fact they know that if they downgrade the companies, it'll push them into default,'' says Backshall, of Walnut Creek, California- based Credit Derivatives Research LLC. (Oh is this the model that they were shown to be 'adjusting' when they marked garbage debt as AAA when their clients were selling it to Europe? - Jesse)

The rating companies say their grades are correct. (Well that settles that. Who are you going to believe, the marketplace, the swap traders, or a few officials who have been shown to be completely wrong? - Jesse)

``Moody's will not refrain from taking a credit rating action based on the potential effect of the action,'' says company spokesman Anthony Mirenda. (Only if they get caught or the client who paid for the rating doesn't cough up the bucks - Jesse)

S&P spokesman Chris Atkins says, ``We make rating changes when we believe events warrant such action.'' (Events like disclosures of fraud? - Jesse)

Munves says that over one year, the implied ratings have been a more accurate predictor of defaults than Moody's ratings. The Moody's unit reports that implied ratings for one year have a 91 percent accuracy ratio compared with an 82 percent ratio for Moody's official ratings.

``The Moody's accuracy ratio is consistently lower,'' he says.

He says Moody's company debt ratings are designed to remain stable so they aren't influenced by short-term ripples, unlike the more volatile swap-implied ratings.

``The CDS market often ends up coming back towards Moody's rating,'' he says.

By the time the two ratings converge, though, a company's debt may already be in default -- and the investors who bought it may be out of luck. (Sounds like the general plan to us - Jesse)

Editor: Jonathan Neumann
To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net.

With Reckless Disregard for the Greater Good: the Crisis of American Capitalism

In our "Apertifs" section we have been a link to a video presentation by Kevin Phillips titled Bad Money: the Global Crisis of American Capitalism.

Its recommended viewing.

The cost of soaring public and private debt levels
Commentary: Examining Kevin Phillips' theories
By Peter Brimelow & Edwin S. Rubenstein
May 29, 2008

NEW YORK (MarketWatch) -- Is Kevin Phillips right that something funny is going on in the economy? Yes, although just how funny is less clear.

The numbers do suggest he's correct about one thing at least: public and private debt has indeed reached unprecedented levels.

Recently, we described Phillips' thesis, in his new book "Bad Money: Reckless Finance, Failed Politics, and the Global Finance of American Capital" that the U.S. economy has been run by a Washington-Wall Street mercantilist alliance for the benefit of the finance sector. See Column Here

Phillips doesn't flat-out predict that the resulting distortions will result in a crash. He says it's too early to say. But he meaningfully quotes a number of authorities, such as Yale economist Robert Shiller, to the effect that it will.

Phillips relies heavily on charts, which we like.

In this column, we look at one that is at the heart of his book: public and private debt as a fraction of Gross Domestic Product.

It looks like a barbell, with peak debt of 299% in 1933 falling to below 150% from the 1950-1980s, spiking again to a recent 353%. We've checked the numbers -- updating them to 2007 -- and he's right.

Phillips calls this "The Great American Debt Bubble". He says, somewhat melodramatically, that the financial media haven't been running it recently "Analogies to the 1920s would have been too disturbing."

This hurts our feelings. Early this year, we ran a chart of the unprecedented level of foreign holdings of federal debt, which is one part of America's dubious debt development, and is equally disturbing, especially because it suggests the dollar is very vulnerable. See Column Here

Phillips is also right that that the finance sector has been involved in this leveraging up more than any other sector -- because of securitization, derivatives and highly leveraged hedge funds.

He traces this finance sector debt expansion to easy money and to a series of bailouts orchestrated by the Federal Reserve, going back to the Arab rescue of Citibank in 1981.

Phillips also takes at face value colorful reports that the President's Working Group on Financial Markets, a public sector-private sector consultation group formed after the 1987 Crash, amounts to a "Plunge Protection Team" that has orchestrated systematic grooming of markets.

The objective: getting the system to swallow more debt and produce a bubble in the interests of Wall Street.

Much as we love charts, however, you have to be careful about them.

For example, the debt peak in 1933 was four years after the stock market crash. It may have been a symptom rather than a cause, reflecting the sharply contracting economy in the Depression.

In contrast, the economy has been growing as debt levels rose for most of this decade.

Conversely, credit controls and regulation may have artificially depressed debt levels during World War II and throughout the middle of the last century.

Is there a better way to look at America's debt dilemma? We prefer charting the interest burden rather than gross debt.

To see what we find, stay tuned for our next column

US Financial Markets Make a Mockery of Memorial Day

Today is the last day for the end of month 'window dressing' for May. The SP futures for June are now at 1407. What is provoking this rally? The 'better than expected' GDP number? What justifies this burst of optimistic buying?

The rally on the US equity markets, with the financial sector leading the way, is a distribution of stock in troubled companies to the 'greater fools' whose money is moving out of the US Treasury bonds and into US equities now that they are 'safe' based on analyst recommendations.

Most likely it is not the people themselves buying into this, but the managers of their pensions and savings, the managers of 'other people's money.' There are also huge tranches of public money being supplied by the Treasury and the Fed directly to the banks who are playing these markets actively. If you hold US dollars you are paying a price for this one way or the other.

This is a game being perpetrated by the Wall Street banks and the processes which have been corrupted by them, like the AAA rating being assigned to a barely solvent $3 stock like AMBAC because it is expedient to call worthlessness the highest of quality.

Its a disgrace. Its what is wrong with our country. Its the hallmark of the last two presidential administrations, to shift wealth from the many to insiders, to hand out pardons and tax cuts to the privileged few while the mass of people dumbly accept it while arguing over trivialities provoked by a corrupted press. This is exactly what Thomas Jefferson warned against.

Patriotism is not support for a "single great leader." We do not have Der Fuhrer or Il Duce or some Decider who is above the law, who rules us. We have elected representatives and a limited form of government by the people, for the people, and of the people. Elected representatives are answerable to the people, and the notion of an executive privilege to govern in secrecy is repugnant to our freedom.

If you do not understand the notion of the power residing in the will of the governed under a republic, if you dare to consider the US Constitution 'just a goddam piece of paper' and the president as someone above the law of the land, then you are not a patriot no matter how ostentatiously you drape yourself in the flag.



US and European debt markets flash new warning signals
By Ambrose Evans-Pritchard,
International Business Editor
UK Telegraph
6:40am BST 29/05/2008

The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.

Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.

But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn. (Don't be too concerned. The Treasury and the Fed have a plan to monetize the bad debts, bail out the banking system at the expense of the real economy, and make whores out of all holders of US dollar assets. Trust us on this one. - Jesse)

"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."

Lehman Brothers took writedowns of just $200m on its $6.5bn portfolio of sub-prime debt in the first quarter even though a quarter of the securities had "junk" ratings, typically worth a fraction of face value.

Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. "We believe we're entering Phase II. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come," he said.

The jump in corporate bankruptcies has not yet been picked up by the usual indicators, which tend to lag the market, lulling investors into a false sense of security. The true losses are already known to specialists in the business, said Mr Sels.

The Great Bond Crash of 2008, 2007, 2006, 2005....

As we forecast the great bond crash of 20xx is now underway.

Every year the bond puts in a top early in the year, and then crashes down to a low something in June or July as stock rotations are served up for the small spec, to take on the excess shares that Wall Street wishes to unload as part of its "sell in May and go away" gambit.

And there it is.

Sometimes an intentional shaking of markets can build up feedbacks to the natural frequency of a thing, as Nikolas Tesla demonstrated. If the Wall Street wiseguys keep shaking the national economy, we might be in for a real earth-shaking finish to the year.

Wall Street is an impediment, a drain, a parasite on the real economy.

The banks must be restrained.

Key Corp Increases Loan Loss Estimates One Month after Stating Earnings

KeyCorp raises forecast for loan losses
By John Spence
MarketWatch
9:50 a.m. EDT May 28, 2008

BOSTON (MarketWatch) -- Shares of KeyCorp came under early pressure Wednesday, retreating more than 10% after the regional bank increased its 2008 outlook for loan losses as a result of ongoing credit turmoil and housing-market weakness.

In a regulatory filing, the Cleveland-based company KEY) said it now anticipates net loan charge-offs in the range of 1% to 1.3% for the full year, up from its previous estimate of between 0.65% and 0.9% of average loans.

KeyCorp said it plans to deal "aggressively" with reducing exposure in its residential home-builder portfolio, and sees "elevated" net loan charge-offs in its education and home-improvement loan portfolios.

Several Wall Street analysts cut their profit estimates on KeyCorp in the wake of the news. Some were surprised that the revised outlook for loan losses came so soon after KeyCorp reported first-quarter results.

"While management had previously stated that these portfolios would drive higher loan losses, the major surprise is the degree to which management is increasing its guidance only a month after earnings, reflecting either misjudgment before or a significant deterioration in asset quality," wrote Deutsche Bank analyst Mike Mayo in an investor note. (We can expect to see a lot of these 'surprises' as the insiders continue to slowly sell off stock and bonds to the public. - Jesse)

KeyCorp's shares traded down $2.26 to stand at $19.69 in early action.

In April, KeyCorp reported first-quarter net income that fell 38% from the year-ago period as the company's provision for possible losses on bad loans rose by more than four times. At that time, the company raised its full-year loan-loss estimate to between 0.65% and 0.9%, up from a range of 0.6% to 0.7%.

John Spence is a reporter for MarketWatch in Boston.

NY Fed Creates an Elite 'Special Team' for the Investment Banks

Fed Keeps Watch on Wall St. -- From the Inside
By Neil Irwin
Staff writer
Washington Post
Tuesday, May 27, 2008

In the two months since the government rescue of Bear Stearns, the Federal Reserve has built on the fly a new system of monitoring investment banks, radically redefining the central bank's role overseeing Wall Street.

New York Fed employees are working inside major investment banks every day, alongside the Securities and Exchange Commission staff members who are the firms' main regulators. The Fed employees are trying to gather information the central bank can use to make sure the billions of dollars it is lending the investment firms, through a special emergency loan program enacted in March, are not being put at undue risk.

This new approach, which is still at a relatively small scale, offers a window into how the nation's system of regulating financial firms might evolve as policymakers sift through the financial wreckage of the past nine months.

The Bush administration has proposed that the Fed become an all-purpose guarantor of the financial system, with the power to poke its head into any company that poses risks -- not just the large commercial banks it now supervises. Congress is likely to consider legislation overhauling financial regulation next year.

"Bear Stearns has forced an issue that we should have been thinking about anyway," said Douglas Elmendorf, a senior fellow at the Brookings Institution. "The issue isn't just that the Fed did this thing in March. It's that the Fed did what it did in March because investment banks posed risks to the overall financial system and the economy."

But it also creates risks. With the Fed having made emergency funds available to investment banks, lenders and those who work with them might become complacent about risks, expecting a government bailout if anything goes wrong. That could destabilize the financial system further.

"Once the Fed starts investigating and looking at the risks that they're taking, the market could back off and say, 'Well, the Fed's in there, so there can't be much risk,' " said Peter J. Wallison, who studies financial regulation at the American Enterprise Institute. (Those would also be known as 'famous last words' - Jesse)

The Fed currently lacks the legal authority to order investment banks to strengthen risk control systems or change their accounting for exposure to complicated derivatives. The SEC has those powers, though its historical mission has been to ensure that investors are protected, not to protect the integrity of the financial system as a whole.

On March 16, the Fed backed the emergency acquisition of Bear Stearns by putting $30 billion (since changed to $29 billion) in public funds at risk and opened an emergency lending window that last week lent $14.2 billion to investment firms.

Both actions, meant to prevent panic from causing a cascade of failures that could have had a catastrophic impact on markets and the world economy, defied 90 years of precedent, insinuating the central bank into the workings of Wall Street as never before.

Fed leaders concluded that they would have to step up their involvement in Wall Street, if only to make sure that those loans were likely to be paid back. So it insisted that banks, in exchange for the new lending, open up about the details of their operations -- a deal that the investment firms readily agreed to.

They have not, however, reached any firm conclusions about what form the ultimate regulation of the financial system ought to take and are not presuming that the improvised system established in the past two months will expand and become permanent once Congress acts.

In the meantime, a special unit has been created in the New York Fed, answering directly to President Timothy F. Geithner. Information about its operations is closely held by Geithner and other senior employees in New York, such that even Federal Reserve governors and presidents of other regional Fed banks know little about what the new unit is doing.

The unit is composed of individuals from the bank supervision staff, whose normal work is to regulate commercial banks; the markets group, which monitors the behavior of all sorts of financial markets watching out for threats to their functioning; and the legal department.

The Fed staffers accompany SEC regulators in frequent visits to the major investment banks Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers. They typically speak to risk managers, auditors, comptrollers and sometimes senior executives.

"What they're doing is not so much regulation, telling the banks what to do, as the Fed is saying, 'I'm lending you money, I'm doing my due diligence,' " said Ernest Patrikis, a partner at law firm Pillsbury Winthrop Shaw Pittman and a former senior official at the New York Fed.

In the past, collaboration between the Fed and the SEC has been more haphazard. Officials of the two organizations would frequently talk on the phone and meet every few weeks to discuss risks being taken by Wall Street firms, over lunch in the cafeteria at the vault-like headquarters of the New York Fed, for example, or on a balcony there overlooking the narrow streets of lower Manhattan.

As concern grew about the risks taken by hedge funds in 2006, Fed officials and their SEC counterparts had a series of discussions in which each side explained to the other how the institutions they directly supervise -- commercial banks for the Fed and investment banks for the SEC -- measure and manage the risks they are taking by lending to hedge funds.

Now, the interaction is more constant. The SEC is crafting a formal memorandum of understanding that lays out their roles, but it is in an early stage. It will mainly seek to formalize the information-sharing and cooperation that is occurring already, SEC officials have said.

"The collaboration is wide open," said Robert L.D. Colby, deputy director of the SEC's market regulation division. "We're essentially operating as if we're all within one agency. We are telling them what we know and how we think, and they're reflecting back what they know and want to learn. You don't always ask the same questions, and sometimes you get information the other might not have picked up."

Banks Anxious to Dump Debt Threaten Monolines Solvency

It looks like bad debt tends to flow downhill, from the banks to the monolines, with the facilities of the NY FED in charge of wiping up.

At the end of the day, at the end of the line, are all the holders of US dollars. If you are holding dollars, you are holding the bag. The dollar is the limit of the Fed's ability to absorb losses in the greatest transfer of wealth in modern history, from the many to the few.

A DEBT END FOR BANKS
Insurers Face Defaults
By MARK DeCAMBRE

May 27, 2008 -- Battered investment banks trying to dump billions in soured mortgage securities are being challenged by struggling insurance companies that claim such efforts could cause them further pain.

It's a battle that pits large financial firms like UBS, Merrill Lynch and Citigroup against insurers MBIA, Ambac and others. These insurers, which the industry refers to as "monolines," provide specialty insurance used to protect investors from losses on various types of debt securities.

At issue is a type of protection that banks have obtained against defaults that is now preventing them from purging portions of their holdings of arcane mortgage securities known as collateralized debt obligations.

Under the terms of this protection, the banks need approval from the monolines in order to unwind these securities - and obtaining that OK is proving difficult in some cases.

For the past several months as the credit crunch has pummeled mortgages and other forms of debt, a lot of collateral used to form CDOs has triggered defaults due to rating agency downgrades. As a result, if the banks begin dumping these problem securities, financial guarantors would be forced to pay default claims almost immediately - a tall order for companies whose financial future is already murky.

Typically, monolines pay out claims on losses over a period of 20 or 30 years, but the types of sales that the banks are looking to score would accelerate those payments and further hammer companies already hurting.

The banks appear to recognize that the insurers are unlikely to be able to cough up the cash needed to pay off these losses.

That has led to discussions about whether to waive claims payments in exchange for cash or warrants in certain publicly traded monoline companies.

"Clearly, liquidation into this market is tough but holding on long term might not be your best case," said Joe Messineo, who runs a New York-based structured finance consulting firm. "Not many people envisioned the magnitude of this would come down to documents."

None of the monolines embroiled in this battle returned calls for comment. Neither did the banks.

Although there are hardly any buyers for CDO paper, the banks would be able to unwind the CDOs and essentially purchase the assets that comprise the complex debt structures - a move that might allow them to better assess the value of the assets and at least eliminate the fees associated with holding onto the debt as CDOs.

mark.decambre@nypost.com

Pigs Fly, Paris Hilton Takes the Veil, and HSBC CEO Calls for Higher Rates and More Regulation

HSBC CEO calls for higher rates to fight inflation
27 May, 2008, 1714 hrs IST,
REUTERS

HONG KONG: The chief executive of Europe's biggest lender on Tuesday called on central bankers to raise interest rates in order to combat inflation, and said more regulation may be needed in the wake of the credit crunch.

Michael Geoghegan, group chief executive at London-based HSBC Holdings, also said he expects it will take three years for the bank to turn around its HSBC Finance unit in the United States.

The consumer finance business, previously called Household International, was one of the earliest casualties of the subprime mortgage meltdown in the United States.

Geoghegan said central banks were not yet committed to taming inflation, and predicted U.S. interest rates would rise after the U.S. presidential election in November.

"Inflation is a long-term problem because there is no long-term will to solve it," Geoghegan said in a speech.

In a number of economies, central banks have either cut interest rates or kept them low to support growth at a time when lending between banks has stalled and housing markets around the world have plummeted.

However, energy and food prices have surged, feeding inflation and crimping consumer spending. For example, since a flood of homeowners defaulting on their mortgages snowballed into a credit crisis last summer, U.S. consumer inflation has risen from an annual rate of 2 percent to 3.9 percent in April.

Geoghegan also said the industry's investment banking model would need to be changed over time to avoid a repeat of the past year's credit crunch.

"I'm not a great fan of regulation ... but there will be a need to look at the model in that area," he said, adding that banks should focus on lending and investment advisers on advising clients, although he did not call for any specific measures.

"The investment banking model is flawed," Geoghegan said. "If banks aren't strong, they should be restructured or taken over," he added.

HSBC, which Geoghegan said has no plans for a share buyback, has managed to weather the credit crisis that erupted last summer better than many of its peers thanks to a significant presence in emerging markets in Asia and the Middle East.

In the first quarter of this year, the lender booked a bad debt charge related to its U.S. consumer finance business of $3.2 billion, less than the $4.6 billion in the previous quarter but double the level of the first quarter in 2007.

Geoghegan, speaking to reporters following an informal shareholders' meeting in Hong Kong, declined to project any further provision to cover subprime losses, but added that 80 percent of customers in the U.S. finance unit are still paying their mortgage bills. (Wow only a 20 percent default rate? That a glass half full description - Jesse)

Earlier this month, the bank said first quarter profit was higher than a year ago despite some $5 billion in write-downs and charges related to bad debts.

HSBC, whose shares were down 0.44 percent in London trade on Tuesday after closing 0.31 percent higher in Hong Kong, is due to report its first-half results on Aug 4.

Gold, Oil, and the US Dollar

The Efficiency of Self-Regulation

This is the type of self-regulation that 'free market' true believers like Alan Greenspan argue is the most efficient and effective.

Attorneys of the class action variety take note.

Holders of this CDO and others should hit the exits in a 'free market' response. Aren't 'free markets' wonderful (after the fact)? Perhaps we can declare Manhattan south of Houston Street a 'free market zone' and have 'free streets,' free of all police presence and response. Oh, going out to lunch? Have a good day.

BlackRock CDO Seeks to Drop Fitch Rating After Downgrade Threat
By Neil Unmack

May 27 (Bloomberg) -- BlackRock Financial Management Inc., part of the largest publicly traded U.S. fund company, plans to drop Fitch Ratings from one of its collateralized debt obligations after the firm threatened to cut the deal.

BlackRock's Omega Capital unit asked bondholders to agree to ask Fitch to withdraw its ratings on its Palladium CDO II sold by BNP Paribas SA, it said in a Regulatory News Service statement. The move would leave the CDO with one rating from Standard & Poor's.

New York-based Fitch last week said it may cut Palladium's ratings by as many as four levels after it changed the way it grades CDOs pooling company debt. Fitch's review could threaten downgrades on almost half of top-rated CDOs backed by derivatives. The firm is reassessing its ratings to reflect higher default risks.

CDOs group bonds, loans or credit-default swaps, channeling the income to investors in portions of varying risk and credit ratings.

To contact the reporter on this story: Neil Unmack in London nunmack@bloomberg.net

Last Updated: May 27, 2008 07:41 EDT

Memorial Day 2008 - Remember All Those Who Have Died in the Madness of Hatred and War

We come here to remember those who were killed, those who survived and those changed forever.
May all who leave here know the impact of violence.
May this memorial offer comfort, strength, peace, hope and serenity.
Oklahoma City National Memorial




Et lacrimatus est Iesus.

And Jesus wept.

UBS Says More Mortgage Losses

No wonder UBS Selling Shares at 31% Discount to Market

UBS Falls After Bank Says More Losses From Mortgages Possible
By Elena Logutenkova


May 26 (Bloomberg) -- UBS AG, the European bank hardest hit by the U.S. subprime contagion, fell as much as 3.7 percent in Swiss trading after saying it may face more losses from mortgage securities.

UBS declined 94 centimes, or 3.1 percent, to 29 Swiss francs by 11:28 a.m. in Zurich, the biggest slump among the 59 companies on the Bloomberg Europe Banks and Financial Services Index. UBS has dropped 42 percent this year, cutting its market value to 63.3 billion francs ($61.7 billion).

The bank, in the prospectus for its $15.6 billion rights offer published after markets closed on May 23, said its losses on non-U.S. residential and commercial real-estate securities last year and in the first quarter of 2008 ``could increase in the future.'' UBS is also evaluating whether to limit or discontinue one or more of its U.S. reference-linked note programs, which ``could result in a charge to income,'' it said.

``UBS will have to fight against negative news flow for at least several more quarters,'' said Rolf Biland, who helps manage about $3.1 billion, including UBS shares, as chief investment officer at VZ Vermoegenszentrum in Zurich. ``The U.K. housing market is almost as overheated as in the U.S., and could lead to losses for banks.''

UBS is seeking to replenish capital after about $38 billion in writedowns related to the U.S. subprime crisis. The bank still has more than $45 billion in U.S. mortgage-related assets, $8.6 billion in leveraged finance commitments and $10.4 billion in U.S. student loans on its books.

The company hasn't said how much it holds in non-U.S. mortgage securities. UBS's net exposure to reference-linked notes was $8.9 billion at the end of March. The bank had created 10 such programs, which sold bonds referenced to a pool of asset-backed securities held by the bank, with a face value of $16.9 billion.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net;

Chart Updates in the Babson Style For Market Close 23 May 2008

As a reminder all US markets will be closed on 26 May 2008 for the Memorial Day observance.

Derivatives Market Grows to $596 Trillion in a Financial Tower of Babel

Derivatives Market Grows to $596 Trillion on Hedging
By Abigail Moses


May 22 (Bloomberg) -- The market for derivatives expanded at the fastest pace in at least a decade last year as the global credit crisis spurred trading in contracts used to hedge against losses, according to the Bank for International Settlements.

Derivatives, including those based on debt, currencies, commodities, stocks and interest rates, expanded 44 percent from the previous year to $596 trillion, the Basel, Switzerland-based bank said in a report today. The amount of credit-default swaps protecting investors against losses on bonds and loans more than doubled to cover a notional $58 trillion of debt.

``The credit crisis supported growth'' of the market, Naohiko Baba, an analyst at BIS who co-wrote the report, said in an interview. ``Fixed-income markets experienced big turmoil so had more hedging needs.''

Investors turned to derivatives to bet that the $383 billion of credit losses and writedowns at banks and securities firms since the start of 2007 would push the world economy into recession. The cost of protecting corporate debt against default jumped as much as 670 percent last year, according to the Markit ITraxx Europe Crossover index. (This sounds so much like 'portfolio insurance' of the 1980's - Jesse)

The increase in the cost of credit-default swaps quadrupled the amount of money investors have at stake in the contracts to $2 trillion from $470 billion, the BIS said. The amount at risk in the entire derivatives market is $15 trillion, according to the BIS, which was formed in 1930 to monitor financial markets and regulate banks.

Price Increase

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates or the weather.

The data on the BIS report are based on contracts traded outside of exchanges in the over-the-counter market.

Interest-rate derivatives remained the largest part of the market, expanding 35 percent to $393 trillion outstanding last year, the report said.

Foreign exchange derivatives grew by 40 percent to $49 trillion as the credit crisis triggered the highest volatility in the seven most-traded currencies in almost eight years, based JPMorgan Chase & Co. data.

The amount of equity derivatives outstanding expanded 14 percent in 2007 to $8.5 trillion.

Commodity derivatives expanded by 26.5 percent as the price of gold and oil reached records. Contracts based on gold rose the most in the second half, by 40 percent to $595 billion. Crude oil rose to a record above $135 a barrel in New York yesterday after U.S. stockpiles unexpectedly dropped.

To contact the reporter on this story: Abigail Moses in London Amoses5@bloomberg.net

Last Updated: May 22, 2008 07:06 EDT

US Dollar Weekly Chart with Commitments of Traders as of 20 May 2008

Weekly Dollar with the Commitments of Traders

Weekly Dollar with the Moving Averages

Eeny, Meeny, Miny, Moe...

Who will be the next to go?

ABN AMRO
Banco Espirito Santo
Bank of America
Barclays Capital
JPMorgan Chase
BNP Paribas
Calyon Financial
Citigroup
CIBC World Markets
Credit Suisse
Deutsche Bank
Dresdner Kleinwort
Fidelity Investments
Fortis
Goldman Sachs
Interactive Brokers
Jefferies & Company
JPMorgan Chase
Lehman Brothers
Merrill Lynch
Morgan Stanley
Nordea
NewEdge Group
RBS
RBC Capital Markets
Rabobank
Scotia Capital
SEB
Triad Securities
UBS

Comparison of Four Precious Metal Investment Vehicles to Spot Gold

Performance from 2007


Performance from mid 2007


Performance from the beginning of 2008

Silver Price Manipulation through 'Naked Shorting'

The CFTC and the exchanges are protecting the silver short interest for now with smoke and mirrors, obfuscation and delivery limits.

We'd ask a further question. Why were players like AIG, an insurance company, major players in the silver markets on the short side? What does that have to do with hedging? Or is this just another loophole scam like taking out life insurance policies on your employees to obtain claims for tax free death benefits? Was the silver short gimmick that obvious of a feedbag for well-heeled and well-informed insiders?

And how can you justify delivery limits but contend there is no need for any limits on the amount of short position an individual company can hold? Limits on buying the physical product but no limits on selling of the product on paper? Now, is that obvious moral hazard, or what?

It is an absolute disgrace and one of the worst examples of croney capitalism corrupting the public markets that we have seen in some time. All silver producing countries are being cheated by this, and should take action to keep all their products off exchanges that allow this price manipulation. It is a pricing cartel.

At some point it will be a bloodbath for the shorts, although we expect the exchanges and regulators to change the rules to bail them out. The real economy may see painful shortages and higher prices. This type of manipulation provides incentives for commodity countries to break the back of the dollar cartel and monetize their own assets such like silver and gold.

We heard that China is now the second largest gold producing country right after South Africa. They also have a tremendous capacity for producing silver. And they have huge reserves of dollars. What a setup! Our economic vulnerability is astounding.

But at the end of the day, this is just another symptom of our sick economy, with regulation by honest oversight for the public benefit as the cure.

Silver Price Manipulation
David Morgan

This week I must address the latest Commodity and Futures Trading Commission (CTFC) findings that, "The U.S. commodities regulatory body found no evidence that silver prices had been manipulated downward by short sellers after re-examining long-term and recent allegations of misconduct."

I was asked by Dow Jones to comment on the CFTC findings. The first point I stated was: "It is not possible to manipulate the trend in a market, but it is possible to 'manage' the price within silver's uptrend." I went on to state that the price of silver can be managed, within certain boundaries, through short selling. I believe silver would be far higher if not for selling of vast amounts of silver that doesn't exist, or "naked shorts."

Now some I know well in the industry build a case that all or almost all of the silver sold short on the exchange is not sold naked but indeed is true hedging, primarily by base metals mining companies. This at the surface level may appear to be correct, until it is realized that almost all of the real physical silver that is delivered to end users (primarily to industrial consumers) is accomplished by means of over-the-counter (OTC) contracts known as "forwards." This is not accomplished in the futures market!

My point is simple: If the true sale of physical silver is done in an unregulated market based upon private contracts, then what is the purpose of the futures market? Why did the London Bullion Management Association trade nearly 30 billion ounces of silver last year? Why did the futures and options exchanges trade almost 60 billion ounces of silver last year?

Let's get a bit real here. If the total silver supply is roughly one billion ounces and we can measure NINETY times that amount being "traded" on the reporting exchanges, does it not beg the question why?

Further remember, there is a whole vast amount of silver "trading" going on in the OTC market that does not report at all. It could easily be as large as the reporting exchanges.

Let's be conservative here and state only 10 billion ounces of silver is dealt in the OTC market. So when I state naked sales and can prove perhaps ONE HUNDRED TIMES the amount of silver exists on paper than exists in the physical world, you must question the logic of "hedging." The derivatives markets are alive and well in both silver and gold, and there is roughly one hundred ounces "claimed" on paper for every physical ounce of silver.

So, ask a very basic question: How is the price of silver set? As if there is less than half a billion ounces of physical silver? Or is the price acting as if there is a hundred times as much silver? For those who don't know, this is a rhetorical question! Think fractional reserve banking system, which keeps about one percent of the total in reserve, because what depositor is going to cash in on their demand deposits? One percent is what the bank needs to keep the present day scheme going. In the case of banking, more "money" can be created by a computer keystroke. But real silver, well...that will pose a problem.

Another question that has always bothered me is, Why does the CFTC set a limit of 7.5 million ounces of silver as the most that can be taken off the exchange in a given delivery month? If you look back and see the Comex inventory level change when Warren Buffett made his purchase, you will notice a huge off take of physical silver from the Comex. This cannot happen again; the rules state there is a limit on the amount of physical silver that can be taken off the exchange.

So, for the umpteenth time, I will answer the following question: "Why doesn't some big investor come along and just buy up the remaining silver?" Answer: It cannot be done. There are delivery limits now! Let me repeat!! It cannot be done, there are delivery limits NOW!!

Oh, you might ask, "Is there any limit to the amount of silver that can be sold on paper?" Well, the main purpose of this missive is to prove that there is no limit to the amount of paper silver that can be created!


DAVID MORGAN, the founder of the Silver Investor, has studied the silver market for over thirty years. To learn more about Mr. Morgan and to become a subscriber to his free newsletter, http://www.silver-investor.com/

U.S. Congress could ban speculators from commodities
Bloomberg News
Wednesday, May 21, 2008

WASHINGTON: The chairman of a Senate oversight committee has said he is considering legislation to place limits on large institutional investors in commodities markets, which have posted record prices this year in agricultural products and oil. (Hey how about some limits on those institutional silver shorts Joe? - Jesse)

The legislation would be aimed at speculators and other investors who use commodities as a way to hedge against swings in other investment instruments like stocks and the dollar, said Joseph Lieberman, chairman of the Senate Homeland Security and Government Affairs Committee, at a hearing Tuesday.

Crude oil reached $132.25 a barrel Wednesday, the highest price ever, and it has almost doubled in the past 12 months. Wheat, corn, soybeans and rice have all set record highs this year on the Chicago Board of Trade, spurring food inflation. The Reuters/Jefferies CRB index of 19 commodities surged 31 percent in the year that ended April 30.

"We may need to limit the opportunity people have to maximize their profits because a lot of the rest of us are paying through the nose, including some who can't afford it," said Lieberman, Independent of Connecticut.

The plunging value of the dollar, the U.S. housing crisis and widespread problems in the banking sector have led investors away from traditional instruments and toward commodities, witnesses said. (Oh, do you just want to limit the PUBLIC'S ability to diversity? Please explain Jose - Jesse)

Jeffrey Harris, chief economist for the Commodity Futures Trading Commission, told the committee it was clear that there were more institutional investors in commodities. He said they have not systematically driven up prices. (His friends call him "Mr. Fibs" - Jesse)

Prices "are being driven by powerful fundamental market forces and the laws of supply and demand," Harris said.

Michael Masters, a portfolio manager for Masters Capital Management, told the lawmakers that investors were buying up commodities and holding their positions, creating an artificial premium. Assets allocated to commodity index trading strategies rose to $260 billion as of March, from $13 billion at the end of 2003, he said.

Senator Claire McCaskill, Democrat of Missouri, said the CFTC might be failing to adequately regulate this speculative investing and tighter regulations might be needed.

"The people of America are about to pick up pitchforks" as rising food costs pinch consumer budgets, she said.

The U.S. Department of Agriculture said Monday that it expected food prices to rise as much as 5.5 percent this year, up from an earlier forecast of 5 percent and the fastest increase since 1989.

Harris of the CFTC cautioned against a hasty reaction to recent volatility in commodity markets. "Diminishing the ability of futures markets to serve their hedging and price-discovery functions would likely have negative consequences for commerce in commodities and ultimately for the nation's economy," he said.

But Masters, of Masters Capital Management, said the CFTC was turning a blind eye toward market-distorting speculation.

"Institutional investors are one of, if not the primary, factors affecting commodities today," he told the committee. "As money pours into the markets, two things happen concurrently: the markets expand and prices rise." (too much hot money with no place to go we guess - how about increasing margin requirements? Naw, Greenie said that won't work - Jesse)

A report released Wednesday by Greenwich Associates argued that surging commodity prices reflect rising involvement of speculative investors. (like the 10,000 hedge funds and the big wall street 'banks' - Jesse)

Greenwich, a research firm, said a third of those investors had been in the markets for less than three years. Goldman Sachs Group and Morgan Stanley top the rankings of derivatives dealers, followed by Barclays Capital Group and JPMorgan Chase.

Masters proposed that the government prohibit commodity index investing as a vehicle for pension funds, curtail swaps trading and reclassify some positions to distinguish between legitimate physical hedgers and speculators.

UBS Sells Shares at 31% Discount to the Market 'to Improve Appearances'

Think the retail investor is pricing these bank stocks efficiently? This reminds us quite a bit of the tech bubble startups with their various tiers of venture funding. The last man in was able to carve out the value that remained, and the earlier funding common shareholders could wait for hell to freeze over before seeing any return on capital.

UBS to Sell Shares at 31% Discount in Rights Offer
By Elena Logutenkova and Warren Giles

May 22 (Bloomberg) -- UBS AG, the bank with the biggest net losses from the subprime crisis, plans to sell new shares at a 31 percent discount to yesterday's closing price to raise 15.5 billion Swiss francs ($15.1 billion) in new capital.

The shares will be sold at 21 francs each and investors are entitled to 7 new shares for each 20 held, the Zurich-based bank said today in a statement. The discount compares with a 46 percent markdown offered by Royal Bank of Scotland Group Plc in April and a 48 percent discount in Bradford & Bingley Plc's capital increase this month.

UBS, which already got a 13 billion-franc capital injection this year, aims to repair the balance sheet after about $38 billion in subprime-related writedowns and 25.4 billion francs in net losses since July. Banks worldwide have raised about $270 billion to shore up capital.

``The amount raised is slightly higher than the 15 billion francs originally indicated,'' said Peter Thorne, a London-based analyst at Helvea with an ``accumulate'' rating on the stock. ``Lots of UBS investors are in it because they thought it was a safe financial growth stock and in the last few months it's become a recovery basket case, so a lot of them won't take up the offer.''

UBS fell 18 centimes, or 0.6 percent, to 30.46 francs at 11:31 a.m. in Swiss trading, giving it a market value of 66.3 billion francs. The bank has gained 11 percent since the rights issue was announced on April 1. It's still down 59 percent over the past 12 months....

Urged to Split

Credit Agricole SA, France's third-biggest bank, said last week it plans to raise 5.9 billion euros ($9.3 billion) in a rights offer to replenish capital after first-quarter profit fell 66 percent.

UBS got shareholder approval for its rights offering at the April 23 annual meeting, which also saw Chairman Marcel Ospel step down and his replacement, Peter Kurer, elected to the board. Switzerland's biggest bank is resisting proposals from shareholders, including former UBS president Luqman Arnold, to split off the investment-banking unit and sell divisions such as asset management and Brazil's Pactual to raise capital.

The offer is fully underwritten by JPMorgan, Morgan Stanley, BNP Paribas SA and Goldman Sachs Group Inc., UBS said. The banks will get an underwriting fee of 1.65 percent of gross proceeds, which UBS expects at about 16 billion francs.

``We expect to upgrade'' UBS's earnings per share estimate because the issue price is higher than the minimum 12 francs approved, wrote JPMorgan Chase & Co. analysts including Kian Abouhossein in a note to investors today. JPMorgan has an ``overweight'' recommendation on the stock.

UBS said earlier this month it expects the core Tier 1 capital ratio to increase to 11.8 percent from 6.9 percent at the end of March, after the rights offer and the bank's April sale of 1.6 billion francs in hybrid bonds.

UBS plans to publish a prospectus for the share sale on May 23. It will be selling 760.3 million new shares in the rights offer, which are due to start trading on June 13.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net; Warren Giles in Geneva at wgiles@bloomberg.net

May 23, 2008
UBS Moves to Raise $15 Billion
By DAVID JOLLY

PARIS — The Swiss banking giant, UBS, said Thursday that it would raise more than $15 billion by issuing sharply discounted shares as it tried to restore capital depleted by losses on mortgage securities.

The capital increase marks the second time that UBS has had to raise funds since the credit markets tightened last year with the collapse of the American subprime housing market. In February, the bank raised 13 billion Swiss francs, or $12.6 billion, in capital from the Government of Singapore Investment Corporation and an unidentified Middle Eastern investor.

The crisis has hit UBS harder than any other European financial institution. It posted a net loss of $10.9 billion in the first quarter. It also wrote down $19 billion of asset-backed securities in the quarter, bringing its total write-downs to about $38 billion since the credit markets began to tighten last summer.

Banks globally have written off more than $330 billion in losses since last summer and regulators have strongly encouraged them to shore up their capital.

UBS said it expected the rights issue to raise 15.97 billion francs, or $15.5 billion. It is issuing 760 million new shares at 21 francs each, 31 percent below the Wednesday closing price of 30.64 francs.

The discount percent was broadly in line with market expectations, though the capital increase was about $1 billion larger than analysts had predicted. The capital increases have become necessary as UBS's shareholders equity fell to 16.4 billion francs at the end of March from 51.3 billion francs a year earlier.

UBS has been moving aggressively to shore up its balance sheet. On Wednesday, it said it had moved a portfolio of $15 billion in distressed assets to a new structured investment vehicle to be run by BlackRock, an asset management company. The bank loaned BlackRock more than $11 billion to take on those debts, and remains on the hook if losses exceed $3.75 billion, but it was able to move some of that debt off its balance sheet.

“Appearances are very important in financial stocks,” said Peter Thorne, a banking analyst at Helvea in London. “And if that gives the market and investors and regulators confidence, then it's got to be done.” ("It is better to LOOK good than to BE good." Fernando Lamas School of Financial Management - Jesse)

UBS also said this month that it would eliminate 5,500 jobs to cut costs and further reduce risk exposure in the United States, but it was also trying to restore investor confidence in its asset- and wealth-management businesses.

UBS said the rights issue had been fully underwritten by a syndicate of banks led by JPMorgan, Morgan Stanley, BNP Paribas and Goldman Sachs.

Shareholders will have the right to purchase 7 new shares for each 20 they already own.