Gold Daily and Silver Weekly Charts - the 'Five Point Palm Exploding Heart Technique' of Pai Mei.

"The failure was and is of the entire market and the rules upon which it is built. For the Liabilities side of each bank is connected to and to a large extent made up of the assets side of all the other banks. And the Assets side of every bank is tied to and, in large part, made from from the liabilities side of all the others. When people talk of ‘the Market’ it is an abstraction only. There is no even larger, daddy organization called ‘THE MARKET’.

To return for a moment to my original analogy each bank is a hugely unstable tank of water, built like an upside down pyramid constantly being strained by the huge in and out flow pipes that feed and drain it. In this analogy ‘The Market’ is just the abstract summation of all the flow in all the connecting pipes that is hurtling from one bank to another at any given instant.

So it is silly to somehow imagine the market is a huge reservoir of stability separate from the banks and other institutions themselves. It is simply the sum of them. So if each bank is stupid, greedy, unstable and blind to the risks of its own construction and functioning – then ‘The Market’ is simply the sum of all that stupidity, greed and disastrous design.

The market is not the cavalry. There is no cavalry."

Golem XIV, Propaganda War: Our Version - The Banker's Mexican Standoff

The implication is that the western financial system has already failed. The failure has just not yet been realized, while the system remains confident that it is still alive.

The massive insolvency will not affect us if we believe that the currency retains its value, and life can go on as before. Extend and pretend.

It is like the death blow called Dim Mak 點脈. The recipient takes the blow, and may walk away, and then collapse. This was parodied in the movie Kill Bill 2, as the 'Five Point Palm Exploding Heart Technique' of Pai Mei.

The liquidity seizure that gripped the markets was merely the shock of the bankers' realization that they and their peers were utterly insolvent. But with the assistance and encouragement of the Fed and the ECB they have stepped forward, one foot after another.

The emperors are not only naked, they are the walking dead.

When does a bubble finally end? When did the French realize that the Banque Générale of John Law was insolvent?

Men may go mad in a crowd, but they come to their senses slowly, one at a time.

The unavoidable fact is that the financial system is insolvent. Eventually it will have to be nationalized and then recreated. Those with a share in the system will receive some form of 'payout.'

It may be based on the decimalization of their holders, say 1 new dollar for every 100 or even 1000 dollars presented as in the case of the Russian ruble, or it may be a bit more arbitrary as in the manner of the bankruptcy of MF Global.

I am not sure I buy into this line of thinking, but it is an interesting thought experiment.

See you Sunday evening. Watch out for falling bankers.

SP 500 and NDX Futures Daily Charts - Triple Witching Calm Before Next Weeks CDS Auction

An exceptionally calm triple witching day. They took the market to the levels that they wanted and left them there.

I have now rolled over the futures charts to the new front month of June. So some of the levels may be a bit different.

The SP 500 futures finished just below 1400. There was a negative divergence in tech.

Have a pleasant weekend.

Lessons from a Master Investor

Throughout his career, Roy Neuberger was eager to share what he knew, including his "rules of investing":

1 Be flexible. It is imperative that you be willing to change your thoughts to meet new conditions.

2 Take your temperament into account. Recognize whether you are by nature very speculative or just the opposite.

3 Be broad-gauged. Diversify your investments, make sure that some of your principal is kept safe, and try to increase your income as well as your capital.

4 Always remember that there are many ways to skin a cat. Each [great investor] has been successful in his own way.

5 Be skeptical. To repeat a few well-worn useful phrases: Dig for yourself. Be from Missouri. If it sounds too good to be true, it probably is.

Episodes of Hyperinflation from Diocletian to Bernanke - How It Might Unfold Today

Both hyperinflation and protracted deflation are extraordinary economic events. And it is telling that they are much more common in the 20th century and after than in all preceding recorded history. Ah, the joys of modernity.

While prices can certainly increase based on fluctuations in supply and demand, by my definition 'a general price inflation is an increase in the money supply without a corresponding increase in real output causing an increase in general price levels.'

War and other natural disasters and dislocations can cause temporary bouts of severe inflation and deflation, but endogenous episodes of hyperinflation or deflation are almost always the result of policy error in a genuinely sovereign currency, that is, not contingent on an external entity. Although that policy error can be precipitated as a response to some external stimulus, very often unfunded war debts for example.

War is a spectacularly unproductive expenditure, and a nation that engages in continual wars is almost always brought to eventual economic ruin, if for nothing else than overreach.

Hyperinflation is generally considered to be an increase of over 50% in price levels based on a monetary phenomenon. This increase is caused by decisions on the part of the central bank to increase the money supply at a high rate leading to a loss in its value.

Although it is a low probability event I have said that a hyperinflation, since it is a policy decision, is certainly possible in the US dollar. I have spent quite a bit of time trying to assess the probabilities, and in order to do that, one must understand the actual mechanism by which it would occur. I had been unable to find that described elsewhere, except in the most general of terms and the piling on of anecdotal evidence.

Based on my own thinking, the most likely cause of it would be an inappropriate response to a threat to the banks because of an event in the derivatives market which is a major credit bubble, intricately interlocking almost all financial institutions.  Critical Mass: The Mispricing of Derivatives Risk and How the Financial World Ends.

I think there is sufficient room for doubt that the Fed, the President and the Congress would 'do the right thing' for the public rather than their crony capitalists when it comes down to it. They are caught in a credibility trap, and are unable to police or reform the system without indicting themselves.

I have even entertained the thought that a few of the Banks have used their own precarious positions as leverage, a sort of soft extortion, or mutually assured destruction, to fundamentally do as they please. I am not alone in this. Mr. Max Keiser calls them 'financial terrorists,' and in his highly expressive way he may be right.    That was certainly evident in the passage of the TARP.

I would be prepared to say that most of the very powerful businessmen and politicians I have met, with a few notable exceptions, are not very nice people, and as they would themselves proudly attest, not ordinarily human. They tend to the emotional and spiritual depth of salamanders, or gekkos to borrow a meme. Hard to say where they might fit on Maslow's hierarchy. On par with toasters?

It is funny how often a society confuses the accumulation of wealth and power with wisdom and virtue, when history shows it to be most often quite the opposite.

I have often wondered at their propensity to collect beautiful things. Did J P Morgan really enjoy his wonderful collection of manuscripts? Did William Randolph Hearst rise to ecstasy with his art collection? I am sure that I understand Mr. Dennis Kozlowski's enjoyment of his $15,000 umbrella stand. I do have children you know.

Here is a list of some of the more famous episodes of hyperinflation throughout history.

Episodes of Hyperinflation - San Jose State University

Here is my own list of of Serious Inflations Since WW II.

For the specific feel of a hyperinflation, there are few better books than When Money Dies: The Nightmare of the Weimar Collapse by Adam Fergusson. This is a link to an online copy of the book.

Some Common Fallacies About Inflation and Deflation is also worth reading if for nothing else than to find out 'what works' best in such circumstances as a hyperinflation.

And lastly there are my own recollections of a country on the cusp of a hyperinflationary episode, Moscow Memories of 1997.

If there is such a hyperinflationary episode in the US, it will almost certainly be a massive theft of wealth, under cover of some false flag episode or similar story, blaming it on China or Iran, or some natural disaster, for example.

The Fed and the monied interests are unlikely to voluntarily accept responsibility for the disaster, for the same reasons that they are unwilling to engage in genuine reform. The way that the theft of customer funds at MF Global was handled may give you some idea of how it might unfold, except on a much larger scale. You would be fortunate to tithe only ten percent to the monetary powers, the dark rulers of this world, and spiritual wickedness in high places. Their only response is 'more.'

One Half of Italy's New Sales Tax Receipts Go Directly to Morgan Stanley in New York

Complex derivatives deal from the 1990s backfires on Italy.

Bankers win.  The people pay.

One of my less scrupulous bosses once told me, "The way I like to win a race is to punch the other guy in the stomach and then yell, 'Let's race.'"

And I replied, "Well that may be all well and good, but if the guy you punch is Italian or Greek, I would not stop running at the finish line."

He was a Irish lad,  who having enjoyed a temporary run of luck, was left terribly over his head, pretty much in everything.  And as you might suspect, he ended badly, and took a lot of his type, whom he had gathered into his contrivances, down with him.  Its the little things that make life worth living.

No wonder the American derivatives dealers are leaving Europe.   They are probably just a few steps ahead of the pitchforks and torches.  Europeans keep a ledger of wrongs that never expires until the debts are paid.

The bad news is that they are coming home.

These Wall Street hooligans remind me of an old acquaintance of German descent, (nice fellow although a bit cheap, confirmed bachelor, good card player, but an unbearable drunk), who had been banned from so many pubs around his modest country home that we used to have to go over forty kilometers to get a drawn beer on the weekend. It got so bad that he finally gave up drinking altogether, just to save on gas. Found a nice woman, or rather I think she discovered him, and got married at fifty. Found his happiness. True story.

Bloomberg
Italy Said to Pay Morgan Stanley $3.4 Billion
By Nicholas Dunbar and Elisa Martinuzzi
Mar 16, 2012 10:10 AM ET

When Morgan Stanley (MS) said in January it had cut its “net exposure” to Italy by $3.4 billion, it didn’t tell investors that the nation paid that entire amount to the bank to exit a bet on interest rates.

Italy, the second-most indebted nation in the European Union, paid the money to unwind derivative contracts from the 1990s that had backfired, said a person with direct knowledge of the Treasury’s payment. It was cheaper for Italy to cancel the transactions rather than to renew, said the person, who declined to be identified because the terms were private.

The cost, equal to half the amount to be raised by Italy’s sales tax increase this year, underscores the risk derivatives countries use to reduce borrowing costs and guard against swings in interest rates and currencies can sour and generate losses for taxpayers. Italy, with record debt of $2.5 trillion, has lost more than $31 billion on its derivatives at current market values, according to data compiled by the Bloomberg Brief Risk newsletter from regulatory filings.

“These losses demonstrate the speculative nature of these deals and the supremacy of finance over government,” said Italian senator Elio Lannutti, chairman of the consumer group Adusbef.

The transaction may prompt regulators to push for greater transparency and regulation of how governments use derivatives, said the head of the European Parliament panel that deals with market rules.

“This latest revelation shows that we need to know a lot more,” Sharon Bowles, chairwoman of the economic and monetary affairs committee, said in an interview today. “I’m reluctant to have quite as many exemptions for central banks and countries” from transaction-reporting rules, she said.

Morgan Stanley said in a Jan. 19 filing with the U.S. Securities and Exchange Commission that it “executed certain derivatives restructuring amendments which settled on January 3, 2012” and reduced its Italian exposure by $3.4 billion.

Mary Claire Delaney, a spokeswoman for the New York-based firm, declined to comment further. Officials at the Italian treasury in Rome declined to comment on the contracts...