SP 500 March Futures Daily Chart

Starting to paddle a bit...slow rolling into the year end looking for some cool buds and a tasty wave.

This could get nasty, 'cause the VIX is driving on 'ludes.

Eric Sprott thinks the SP500 will retest the lows as the economic recovery does not materialize in the US.

I will keep an open mind about this forecast, but act slowly having been surprised in the past by the Fed's ability to throw caution to the wind and levitate the stock market from 2003 through 2007, while inflating an enormous housing bubble as a side effect.

Will there be a new asset bubble and carry trade? It is possible.



Nasdaq 100 March Futures

What Will the World Reserve Currency System Become? The Stakes Are Enormous

The deterioration of the dollar reserve currency regime is obvious.

If we have forecasted correctly, the world will look to some variation of the IMF's Special Drawing Rights as an eventual replacement for the US dollar. Therefore, the recomposition of the SDR next year will become a lightning rod for the global stresses created by an increasingly unstable and impractical system of global trade.

As you may recall, Russia and China have called for the inclusion of more currencies such as the rouble, the yuan, the Aussie and Canadian dollars, and gold and possibly silver into the mix. The BRIC's seem determined to break the western dominance of global monetary policy.

This may also explain some of the highly emotional,and we would say nonsensical, arguments attacking gold and silver by some of the house economists for the western Banks, and their camp followers and hand puppets in the universities, of late.

The bankers are appalled at the prospect of the new SDR including gold or silver in its new composition to be set in 2010. And so they are jawboning ahead of it. Any country can build its gold and silver reserves in the open market, and the big central bankers find it difficult to manipulate their supplies to their own advantage, despite years of desperate efforts to substitute paper for metal.

Bad enough that the basket may include currencies of non-G7 countries. As you will recall, the G7 was formed when Canada joined the Group of Six: US, Great Britain, France, Germany, Japan, and Italy. The power balances of the post World War II era are changing, and the shifts in trade and financial power reflect this.

In the interim, there will be regional currency arrangements and trading blocs as in the past. The strength and suitability of the new SDR regime will help to determine the disposition of these regional arrangements.

'Free trade' without a floating monetary exchange system is not possible. Otherwise there will be artificial subsidies and penalties among nations, as in all systems of price control. These lead inevitably to imbalances, bubbles, and crises.

The adjustments that are overdue for the dollar and renminbi in particular will make political progress difficult. But the greatest impediment to progress will be the Anglo-American banking cartel, which seeks to control the issue of money as a means of implementing policy and distributing wealth, especially with regard to the natural resources and labor of the developing nations.

Emirates Business Dubai
Do We Need a New Reserve Currency?
By Martin Wolf
Sunday, December 27, 2009

A new global currency should replace the US dollar as the international reserve currency, as the long-term deterioration of America's economy and the greenback is fuelling a "currency-regime crisis," says Martin Wolf, associate editor and chief economics commentator of the Financial Times.

Wolf, who has honorary doctorates from three universities, bases his argument in part on the Triffin dilemma, an economic paradox named after economist Robert Triffin. The paradox shows that the US dollar's role as a global reserve currency leads to a conflict between US national monetary policy and global monetary policy. It also points to fundamental imbalances in the balance of payments, particularly in the US current account.

Speaking at an event organised by the Singapore Institute of International Affairs, Wolf said Triffin believed that the host nation of a global reserve currency will inevitably run up a huge current account deficit that would consequently undermine the credibility of its currency and adversely impact the global economy. "You can't have an open globalised economy that relies for its ultimate liquidity on the currency of one country. That was his [Triffin's] argument. And, therefore, he said the Bretton Woods system would break, which it did. And exactly the same thing happened with Bretton Woods II, which is the system of pegging.

"So I agree with this. And I'm absolutely convinced now, in a way that I was not three or four years ago, that we cannot continue with a genuinely global economy which relies on national money, and that's not sold by just adding another couple (of currencies). It actually means having a global money."

Indeed, Wolf said he's in complete agreement with China Central Bank Governor Zhou Xiaochuan, who has argued for a new global currency "most credibly and convincingly."

"On the dollar, there is nothing to support this currency except the Chinese government and a few other governments that are prepared to buy it," said Wolf. "Anybody can look at the arithmetic of the fiscal deficit, the monetary policy, the external balance, which has improved but largely because of the recession -- the dollar is not adequately supported."

The US currently has a national debt in excess of $12 trillion or almost $40,000 per citizen, with a debt to GDP ratio of more than 85 per cent. In the July-September quarter, the US current account deficit rose sharply by 10.3 per cent from the previous quarter to $108 billion. In the past year, the US dollar index, which measures the performance of the greenback against a basket of currencies, has also fallen significantly.

Apart from the economic risks posed by the decline of the US dollar, China's devaluation of its currency is causing "a real problem" for Europe. The "very perverse currency adjustment" is highly destabilising for the euro zone economy and could create a crisis, said Wolf.

"There is nothing to prevent this, unless the Europeans decide they are going to intervene in the foreign currency market to buy dollars, and that would be over (European Central Bank president) Jean-Claude Trichet's dead body."

As there is "no chance" of European governments intervening in the foreign exchange markets to improve the competitiveness of the euro, it will result in major currencies such as the euro and Japan's yen becoming "very vulnerable."

"This is simply the American way of shifting the recession from them to their trading partners," said Wolf.

"What we need are global currency adjustments and it has to include the renminbi and global macro adjustments in those countries which make this less painful."

"In terms of the impact of this on the role of the US dollar as the currency of denomination for international transactions, basically I think it's become very unreasonable."

"Because the dollar, to my mind, given its underlying conditions, is no longer a credible long-term store of value," said Wolf. The decline of the US dollar underscores a phase of global power transition, with the balance of power moving from the US to Europe, China, and India, Wolf argues, adding that the greenback's loss of credibility as the dominant global reserve currency is part of this messy transition.

The Americans no longer have the means to save themselves, this is what I think people don't understand. There is no credible American policy," said Wolf. (The American policy has been to maintain the status quo and to confiscate wealth by exporting fraud in amounts that are beyond all reason. This is hardly acceptable to the rest of the world. It is remarkable how few US economists understand this for what it is. Are they so abysmally ignorant by choice or by training? Sometimes it is hard to tell. What can one expect from a group that could not acknowledge the enormous bubbles that have rocked their economy in the past ten years until the damage was done. They are as reprehensible as the doctors who helped to promulgate the psychiatric abuses in the gulag of the former Soviet Union. - Jesse)

"We need to discuss this globally in a harmonious way. It's not happening, so at the moment the euro zone is a prime victim and it will continue to be, and that will create very big problems for European-based manufacturers, and quite particularly those that are relatively vulnerable to global price effects.

"And it's a tremendous mess, a horrifying mess, and that's where we are. I'm sorry. And we've got to get through this transition as quickly as possible to a more stable global monetary system with a lesser reliance on the dollar. We're going to get there over the next 10 years; I'm sure of it. We're going to get there. The only question we have to decide is how we're going to get there."

Meanwhile, a trade skirmish between the US and China could ensue, if Beijing continues to devalue its currency to bolster export-driven economic growth at the expense of economic recovery in the US, said Wolf. (Not just the US, the rest of the world as well - Jesse)

He says China is working hard to defend the artificially low value of the renminbi in the hope that exports will pick up when external demand recovers. According to China's customs authorities, exports from January to November plunged by 18.8 per cent to $1.07 trillion from a year ago. However, according to the Royal Bank of Canada, export growth should pick up in the coming months and reach double-digits in early 2010.

China's efforts, Wolf said, will spark a "very vigorous, even vicious" reaction from the US as it's destabilising US efforts to engender an economic recovery.

Monetization: Treasury Adds $400 Billion in Bailouts for Fannie and Freddie

What's another $400 Billion in monetization so that Fannie and Freddie can keep buying up mortgage debt?

Timmy and Ben can resolve to distribute dollars even as they approach a virtual insolvency because they can create them, seemingly out of nothing. The payment obligation for their dollar debt is their own creation -- dollars. But they cannot hand out endless amounts of nature's wealth, things like oil, gold, grains, and silver except as they may possess them by industry, force, or fraud.

And that is what frustrates the statists and monetarists, why the western central bankers hate and fear the precious metals as monetary equivalents and alternative stores of wealth, and deploy their worldly power in proximity to sources of energy. Natural wealth defies their control, is a mirror to their excesses, and a stumbling block for the financial engineering that is the basis of their fractional reserve central banking and a desire for world government and ever-increasing power. Ponzi schemes must inherently continue to expand.

They say fiat, let it be done, according to our will. But natural wealth does not always respond as they wish, and its silence is a profound repudiation.

The full extent of their power to command and control the liquidity flow of the world will be tested in 2010.

".....Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck."

Demand For US Fixed Income Has To Increase Elevenfold... Or Else - ZeroHedge

And this, meine Damen und Herren. Mesdames et Messieurs, may result in higher interest rates and a taxing drag on the productive economy. Which economies specifically and to what extent depends on how well the Fed and the Treasury can shift the pain of their excesses to the rest of the world. But it is not what one might call deflationary, and an impulse for the US dollar as a stable store of wealth, unless by force or fraud.

AP
Treasury removes cap for Fannie and Freddie aid
By J.W. Elphinstone, AP Real Estate Writer
December 25, 2009

NEW YORK – The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac. ("Its" ATM card? Don't you mean the holders of US dollars? - Jesse)

The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years.

Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter.

By making the change before year-end, Treasury sidestepped the need for an OK from a bailout-weary Congress.

While most analysts say the companies are unlikely to use the full $400 billion, Treasury officials said they decided to lift the caps to eliminate any uncertainty among investors about the government's commitments. But the timing of the announcement on a traditionally slow news day raised eyebrows.

"The companies are nowhere close to using the $400 billion they had before, so why do this now?" said Bert Ely, a banking consultant in Alexandria, Va. "It's possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets."

Fannie Mae and Freddie Mac provide vital liquidity to the mortgage industry by purchasing home loans from lenders and selling them to investors. Together, they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages. Without government aid, the firms would have gone broke, leaving millions of people unable to get a mortgage.

The biggest headwind facing the housing recovery has been the rise in foreclosures as unemployment remains high. The two companies, facing mounting losses from mortgage defaults, were taken over by the government in September 2008 under the authority of a law Congress passed in the summer of 2008.

So far the government has provided $60 billion to Fannie Mae and $51 billion to Freddie Mac. The assistance is being provided in exchange for preferred stock paying a 10 percent dividend. The Bush administration first pledged up to $100 billion in support for each company, an amount that was doubled to $200 billion for each by the Obama administration in February.

Treasury officials will provide an updated estimate for Fannie and Freddie losses in February when President Barack Obama sends his 2011 budget to Congress. Though the administration has yet to disclose its long-term plans for the two companies, they are unlikely to return to their former power and influence.

The news followed an announcement Thursday that the CEOs of Fannie and Freddie could get paid as much as $6 million for 2009, despite the companies' dismal performances this year.

Fannie's CEO, Michael Williams, and Freddie CEO Charles "Ed" Haldeman Jr. each will receive $900,000 in salary, $3.1 million in deferred payments next year and another $2 million if they meet certain performance goals, according to filings with the Securities and Exchange Commission.

The pay packages were approved by the Treasury Department and the Federal Housing Finance Agency, which regulates Fannie and Freddie....

Reading for the Market Holiday - plus ça change, plus c'est la même chose

"At length corruption, like a general flood,
Did deluge all, and avarice creeping on,
Spread, like a low-born mist, and hid the sun.
Statesmen and patriots plied alike the stocks,
Peeress and butler shared alike the box;
And judges jobbed, and bishops bit the town,
And mighty dukes packed cards for half-a-crown:
Britain was sunk in lucre's sordid charms."

—Pope

THE SOUTH-SEA COMPANY was originated by the celebrated Harley, Earl of Oxford, in the year 1711, with the view of restoring public credit, which had suffered by the dismissal of the Whig ministry, and of providing for the discharge of the army and navy debentures, and other parts of the floating debt, amounting to nearly ten millions sterling. A company of merchants, at that time without a name, took this debt upon themselves, and the government agreed to secure them, for a certain period, the interest of six per cent. To provide for this interest, amounting to 600,000l. per annum, the duties upon wines, vinegar, India goods, wrought silks, tobacco, whale-fins, and some other articles, were rendered permanent. The monopoly of the trade to the South Seas was granted, and the company, being incorporated by Act of Parliament, assumed the title by which it has ever since been known. The minister took great credit to himself for his share in this transaction, and the scheme was always called by his flatterers "the Earl of Oxford's masterpiece...."

The South Sea Bubble, Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, Chapter 2