SP 500 December Futures Intra-Day And General Comments

The market is playing around with these consolidation patterns that start off with a dire overnight trade, that gives way to an intra-day rally and a squeezing of the shorts.

Artificial to be sure, but likely to continue until something happens to stop it. It is unlikely that the government will intervene ahead of an election and in a fragile economy to stop the inflation of an obvious bubble. To the contrary, they are most likely deeply complicit.

This provides emphasis to our caution of waiting for a downturn to develop rather than trying to get in ahead of it. You will just feed the speculative increase.

The more the Fed and Treasury debase the global fiat currency, the higher gold and silver will rise.

"The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title."

If the model of the former Soviet Union (empire) holds, at some point the oligarchs will start seizing hard and income producing assets for themselves using their command of fraudulent paper and a corrupt system of governance. This may already be underway when the Congress gave in to the Bankers' threats and passed TARP. I have heard that Wall Street will be taking about 8 percent of M1 as its bonus this year, despite being bailed out at enormous costs, both explicit and hidden, to the American public. Bernanke is transferring over a trillion dollars in interest earnings from savers, institutions, and retirees to Wall Street through this quantitative easing without reform and restructuring.

At some point this may erupt into a crisis with a resolution, but in the meantime it will continue to spread slowly like a wasting disease, concentrating more real wealth and assets in the hands of the politically well-connected few.

Obama is more like a business friendly Herbert Hoover than a reforming Franklin Roosevelt, and this lack of will and a vision forged by determined accomplishment against suffering, moral courage and certitude if you will, is his tragic flaw and America's misfortune.

Gold and SP 500 and NDX December Futures Daily Charts

Climbing a trellis of support and resistance...

Richard Russell last night on gold…

"Today I am taking the same stand regarding the gold bull market. The gold bull market will not end with a fizzle and a whimper. It will end with intense speculation and widespread interest from the funds and the public. We haven't seen that kind of activity yet, but I'm convinced that a period of wild speculation in gold lies somewhere ahead.

This is why I continue to beg my subscribers to load up with gold. As I see it, we are nearing a period of intense speculation that will be beyond anything seen before by the last three generations of Americans. Ironically, more money made in the final explosion in gold than was made during the first two phases combined.

Great bull market are seen maybe once or twice in a lifetime. The current "stealth" gold bull market has sneaked up on most Americans. The very phrase, "gold bull market" is sneered at by most analysts today. In fact, most of the comments on gold today come in the form of warnings; "Gold is too high." "Gold is in a bubble." "Gold will sink back below 1000." "Gold is a fool's play."

Nonsense. Gold is moving ever-closer to it's climactic speculative third phase. The negative comments about gold will only serve to make the gold bull market that much stronger. In this business, there is nothing more powerful than a primary bull market that has been denigrated, spat at, and held back for years.

And that's the end of my "lecture" about the fabulous gold bull market…"

"...the world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payment on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title."

Bill Dudley Administers QE II to Wall Street While Ben Advises (And Timmy Helps)

Pulp Fiction Adrenaline Shot

John Travolta ................ Bill Dudley, Governor, NY Fed
Eric Stoltz ..................... Ben S. Bernanke
Uma Thurman ................TBTF Wall Street Bank
Rosanna Arquette ............Timmy

Weekend Reading

If US based readers have spare time and four dollars it might be worth the effort to read this book. Its a fun read for the gold bugs, and is what I used to call 'airplane and waiting room' reading. Not strenuous but a good divert and an engaging story. Not to give it away, but I thought his gambit with the bags of silver coins was clever but somewhat implausible.

Full Faith and Credit by James R. Cook

If you are up for something more intellectually engaged and you can find them read When Money Dies by Adam Fergusson and Debt and Delusion by Peter Warburton.

I was in Moscow doing business when the rouble was dying after the collapse of the Soviet Empire. It made a lasting impression especially to see how the common person was reacting to it, each in their own way. A true vignette of human nature.

Option Expiration and A Few Dates and Facts Worth Noting

As a reminder today is stock option expiration in the States.

Precious metals options expiration for November will be next week.

The US 2010 elections will be held on the first Tuesday in November which is the 2nd.

The Federal Reserve will be meeting on Wednesday 3 November, and is widely expected to be announcing a new quantitative easing program, particularly after the preface which Mr. Bernanke delivered today.

As an aside October 2010 is unusual in that it contains five full weekends, a welcome rest before the great events to come.

This is among my favorite times of the year, as the heat of summer gives way to the pleasant warm days and cool nights of autumn, and expectations of the harvest holidays and family gatherings rise, culminating in Christmas week and the beginning of a new year. The cycle of nature cares little for the comings and goings of men.

And finally, an interesting graph showing the percentage of gold as an investment in global portfolios.

Guest Post: Peak Oil - There Is No 'Plan B' By Chris Martenson

ChrisMartenson.com
Future Chaos: There Is No "Plan B"
By Chris Martenson
October 13, 2010

Note: This article builds on my recent report, Prediction: Things Will Unravel Faster Than You Think. It explores the coming energy crunch in more detail by looking at existing government planning and awareness, and the implications of what international recognition of Peak Oil as early as 2012 might mean.

The hard news is that there is no "Plan B." The future is likely to be more chaotic than you probably think. This was the primary conclusion that I came to after attending the most recent Association for the Study of Peak Oil & Gas (ASPO) in Washington, DC in October, 2010.

The impact of Peak Oil on markets, lifestyles, and even national solvency deserves our very highest attention - but, it turns out, some important players seem to be paying no attention at all.

ASPO conferences tend to start early, end late, and be packed with more data and information than should be consumed in one sitting. Despite all this, I was riveted to my seat. This year's usual constellation of excellent region-by-region analyses confirmed what past participants already knew: Peak Conventional Oil arrived a few years ago, and new fields, enhanced recovery techniques, and unconventional oil plays are barely going to keep up with demand over the next few years.

But there were two reports that really stood out for me. The first was given by Rear Admiral Lawrence Rice, who presented the findings of the 2010 Joint Operating Environment (a forward-looking document examining the trends, contexts, and implications for future joint force commanders in the US military), which spends 76 pages summarizing the key trends and threats of the world. "Energy" occupies six of those pages, and Peak Oil dominates the discussion. Among the conclusions (on page 29), we find this hidden gem, which uses numbers and timing that are eerily similar to those that I put forth in my April 2009 report, Oil - The Coming Supply Crunch:

By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.

(Source)

While there are two "coulds" in that statement, the mere possibility that such an imminent arrival and massive shortfall could be true should give every prudent adult a few second thoughts about what the future may hold. If surplus production capacity disappears in just a couple of years, there is an entire world of planning that should take place beforehand at the international, national, community, and personal levels.

More on the JOE report in a minute. Next I want to turn to a presentation given by Rick Munroe, who did his best to discover where within the civilian governmental departments lie the plans for what to do in a liquid-fuel-starved future.

To cut to the chase, it turns out that virtually every department that he contacted in both the US and Canada denied having any such reports. In one humorous exchange by email, Natural Resources Canada stated two things in the same email:

• “At this time the Department has no views on [Peak Oil].
• "There is no imminent Peak Oil challenge…."

It will be interesting to see how NRCan words their emails once they do develop a point of view.

The main conclusion from Rick's presentation was that Peak Oil is being examined closely and taken seriously by military analysts, but not civilian authorities. The few plans that do exist on the civilian side are decades old.

The implications of this are that North America "remains highly vulnerable to a liquid fuel emergency disruption" and, since because there are only a few dusty plans lying around, there will be greater chaos than necessary.

Now back to the JOE report.

OPEC: To meet climbing global requirements, OPEC will have to increase its output from 30 MBD to at least 50 MBD. Significantly, no OPEC nation, except perhaps Saudi Arabia, is investing sufficient sums in new technologies and recovery methods to achieve such growth. Some, like Venezuela and Russia, are actually exhausting their fields to cash in on the bonanza created by rapidly rising oil prices. (p. 26)

A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. (p. 28)

Well, the amounts needed from OPEC are quite, shall we say, 'ambitious,' as they amount to an additional two Saudia Arabias coming on line in order to make up the shortfall. A massive crunch is not otherwise avoidable. Let's be honest; there are no more Saudia Arabias to be found. Perhaps we could cobble one together out of thousands of smaller, less productive fields, but the likelihood of a few massive fields waiting to be found 1,100 feet underground is extremely remote. People in the business of actually producing oil know that producing from smaller wells takes more time, equipment, and manpower.

Meanwhile, I also happen to agree with their assessment that the details of the effects are difficult to predict but that the general theme will be one of reduced growth, and that's under the best of circumstances. More likely we'll have to figure out how to operate on zero or even negative growth.

So I came away from the ASPO conference pondering two completely polar trends that combine to create lasting discomfort. On the one hand, we have more and more private and military organizations coming to the conclusion that Peak Oil is imminent and will change everything, possibly disruptively. On the other hand, there appear to be no plans within the civilian government to deal with a liquid fuels emergency.

While we can expect that such plans will be tossed together when necessary, I would hope that Katrina taught us a few lessons about developing plans on the fly after the disaster has already arrived. Sure, things got done, but they were certainly suboptimal and led to more confusion and more chaos than if they had been carefully developed, practiced, and debugged.

The way that I understand the lack of planning on the part of the civilian side is that Peak Oil does not present any easy political wins, if any at all. Given the two-year planning cycle in DC, it's never a good time to bring up such an unpleasant subject. Politics trump necessity.

What can be rather easily predicted here is that when the next fuel crisis arrives, there will be more chaos than necessary. Some areas will get completely stiffed on their fuel allotments, while other areas will be reasonably well supplied. The reason that this can be easily predicted is because it more or less already happened in Europe during a protest by French fishermen inspired by high fuel prices. They blockaded ports in late May of 2008, and by early June, the action had spread across Europe. Shelves were quickly stripped bare of essential goods, tensions mounted, and petrol stations ran dry in a hurry.

And these were just the effects of a port blockade and tanker truck strike. What would happen with a real and persistent shortage of fuel? Well, if it were perceived to be due to a structural and permanent inability of the global oil market to meet demand, prices would rise stratospherically until demand was cut off. The only problem is, letting prices determine which industries idle back may not be the best plan.

Consider the case of agriculture. If full 'pass-through pricing' is the mechanism of rationing, which it currently is, then less food will be grown. With world grain stocks at historic lows, this is one area where we might not want to let Mr. Market dictate the activities of farmers based on fuel price. To do otherwise would require a plan of some sort, and none appear to be in effect.

That's the source of my discomfort. It's not necessarily that large organizations are beginning to share my sense of timing and impact of Peak Oil, although that will hasten the tipping point of awareness. It's that somehow I always thought that because Admiral Hyman Rickover knew well that this day would come (in the 1950's!), 60 years would have been sufficient lead time to assemble some credible plans.

No plans = unnecessary chaos.

The lack of planning also betrays a very common attitude, which might be summarized as, “We’ll deal with that when we get there.” I detect this attitude in a wide range of individuals and market participants, so it’s not at all uncommon. However, I think it's a mistake to hold this view. When (not if, but when) full awareness of Peak Oil arrives on the international stock, bond, and commodity markets we will discover just how narrow the doorways really are. Only a few will manage to preserve their wealth by squeezing through the doorway early; most will not make it through. As mentioned frequently on this site, our What Should I Do? guide for developing personal resiliency against a Post-Peak future offers a valuable resource for those just getting started in their preparations.

This thinking is explored in greater depth in Part 2 of this report (enrollment required), in which I discuss strategies to fill the official vacuum by developing our own plans for what we should do in response.

Gold Daily and Silver Weekly; SP 500 and NDX December Futures Daily Charts

Gold and Silver are in a relentless rally as the US dollar continues to drop. US equity indices continue to climb as well. This has the look and feel of a monetary reliquification rally such as we had seen in 2003-2007.

The Trends Are Extended, Start Thinking Consolidation and Reversals, But Wait For It

The trends are extended on quite a few charts. The action in the US markets is being artificially inflated and supported by monetization and liquidity so it *could* continue on for some time, even until the November election. It is being fueled by the expectation of a large quantitative easing by the Fed shortly thereafter. That QE, when it arrives, is likely to be sold if it is not significant enough to meet expectations.

I am more cautious on short term positions here, and have had some short hedges on in the overnight, but deftly. It is important not to exhaust yourself expecting a trend change before it is ready to happen, and one cannot anticipate exogenous events by definition. Still, the time is ripe for one to have a significant effect should it occur.

The long term trends are all intact, but we have reached a position where we might be looking for intermediate tops and consolidations.  The Fed is not infallible or omnipotent, but rather determined and capable within its limits.  The combination of government and the monied interests is powerful and ruthless.  Manage your money tightly and wait for the market to reveal its intentions if you are trading.

Gold and Silver, SP 500 and NDX December Futures Daily Charts

Gold met the intermediate measuring objective of 1375 today.  The slope of this rally is a bit strenuous and a consolidation of some sort, even a bit of a retracement, would not be out of order and might even be welcome for traders to catch their breath and square up positions. However, gold may not oblige as this breakout is particularly violent having built such a long and broad handle in its base formation. This bull market has a long way to go.

Silver is taking out $24 oz. in what is an extraordinary rally following JPM's closing of Blythe Master's proprietary trading group.

Financiers Offer Terms to the Rest of World in the Currency Wars

Anglo-American financiers to the Rest of World: We've a Gun to Our Heads, Better Surrender.

"To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world."

Destroy the world economy by trashing the global reserve currency? Yes we can.

I hate to make light of this because it does offer a useful vignette of the deployment of opposing lines and basic strategies in the currency war, at least from one perspective. Several years ago I forecast that the Bankers would make the world an 'offer they cannot refuse,' or at least that the Bankers think that they cannot refuse. Hank Paulson made such an offer to the US Congress, and now it appears that the financiers are extending a similar type of offer to the rest of the world.

And quiet flows the Don.

Financial Times
Why America is going to win the global currency battle
By Martin Wolf
October 12 2010 22:30

Currencies dominated this year’s annual meetings of the International Monetary Fund. More precisely, two currencies did: the dollar and the renminbi, the former because it was deemed too weak and the latter because it was deemed too inflexible. But, behind the squabbles, lies a huge challenge: how best to manage the global economic adjustment.

In his foreword to the new World Economic Outlook, Olivier Blanchard, the IMF’s economic counsellor, states: “Achieving a ‘strong, balanced and sustained world recovery’ – to quote from the goal set in Pittsburgh by the G20 – was never going to be easy ... It requires two fundamental and difficult economic rebalancing acts.”

The first is internal rebalancing – a return to reliance on private demand in advanced countries and retrenchment of the fiscal deficits that opened in the crisis. The second is external rebalancing – greater reliance on net exports by the US and some other advanced countries and on domestic demand by some emerging countries, notably China. Unfortunately, concludes, Professor Blanchard, “these two rebalancing acts are taking place too slowly”.

We can consider this rebalancing on two dimensions. First, the erstwhile high-spending, high-deficit advanced countries need to de-leverage their private sectors on the journey to what Mohamed El-Erian of Pimco, the investment company, called “the new normal”, in his Per Jacobsson lecture. Second, the real exchange rates of economies with robust external positions, strong investment opportunities, or both, need to appreciate, while expansion of domestic demand offsets the consequent drag from net exports.

Aggressive monetary policy by reserve-issuing advanced countries, particularly the US, is an element in both processes. The cries of pain now heard around the world, as markets push currencies up against the dollar, partly reflect the uneven impact of US policy. Still more, they reflect the stubborn unwillingness to accept the needed changes, with each capital recipient trying to deflect the unwanted adjustment elsewhere.

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

If you wish to understand how aggressive US policy might become, read a recent speech by William Dudley, president of the Federal Reserve Bank of New York. He notes that “in recent quarters the pace of growth has been disappointing even relative to our modest expectations at the start of the year”. Behind this lies deleveraging by US households, in particular. So what can monetary policy do about it? His answer is that “very low interest rates can help smooth the adjustment process by supporting asset valuations, including making housing more affordable and by allowing some borrowers to reduce debt interest payments. Beyond this ... to the extent that monetary policy can ‘cut off the tail’ of the distribution of potential adverse economic outcomes ... it can help encourage those households and businesses with money to spend to do so”.

Above all, today’s low and falling inflation is potentially calamitous. At worst, the economy might succumb to debt-deflation. US yields and inflation are already following the path of Japan’s in the 1990s (see chart). The Fed wants to stop this trend. That is why another round of quantitative easing seems imminent.

In short, US policymakers will do whatever is required to avoid deflation. Indeed, the Fed will keep going until the US is satisfactorily reflated. What that effort does to the rest of the world is not its concern.

The global consequences are evident: the policy will raise prices of long-term assets and encourage capital to flow into countries with less expansionary monetary policies (such as Switzerland) or higher returns (such as emerging economies). This is what is happening. The Washington-based Institute for International Finance forecasts net inflows of capital from abroad into emerging economies of more than $800bn in 2010 and 2011. It also forecasts massive intervention by recipients of this capital, albeit at a falling rate (see chart).

Recipients of the capital inflow, be they advanced or emerging countries, face uncomfortable choices: let the exchange rate appreciate, so impairing external competitiveness; intervene in currency markets, so accumulating unwanted dollars, threatening domestic monetary stability and impairing external competitiveness; or curb the capital inflow, via taxes and controls. Historically, governments have chosen combinations of all three. That will be the case this time, too.

Naturally, one could imagine an opposite course. Indeed, China objects to the huge US fiscal deficits and unconventional monetary policies. China is also determined to keep inflation down at home and limit the appreciation of its currency. The implication of this policy is clear: adjustments in real exchange rates should occur via falling US domestic prices. China wants to impose a deflationary adjustment on the US, just as Germany is doing to Greece. This is not going to happen. Nor would it be in China’s interest if it did. As a creditor, it would enjoy an increase in the real value of its claims on the US. But US deflation would threaten a world slump.

Prof Blanchard is clearly right: the adjustments ahead are going to be very difficult; and they have also hardly begun. Instead of co-operation on adjustment of exchange rates and the external account, the US is seeking to impose its will, via the printing press. The US is going to win this war, one way or the other: it will either inflate the rest of the world or force their nominal exchange rates up against the dollar. Unfortunately, the impact will also be higgledy piggledy, with the less protected economies (such as Brazil or South Africa) forced to adjust and others, protected by exchange controls (such as China), able to manage the adjustment better.

It would be far better for everybody to seek a co-operative outcome. (Co-operative outomce is code for 'obey our will and give obesiance to the financiers' - Jesse).  Maybe the leaders of the group of 20 will even be able to use their “mutual assessment process” to achieve just that. Their November summit in Seoul is the opportunity. Of the need there can be no doubt. Of the will, the doubts are many. In the worst of the crisis, leaders hung together. Now, the Fed is about to hang them all separately....

The theme for the next ten years is self-sufficiency.

Gold and Silver, and SP 500 and NDX December Futures Daily Charts

"As a dog returns to its vomit, so the Fed returns to its folly." Prov 26:11

Financial Times
Fed tilts to more monetary easing
By James Politi in Washington and Robin Harding in St Louis
October 12 2010 19:15

The likelihood that the US will soon launch a fresh burst of “quantitative easing” has increased, as minutes from the Federal Reserve’s latest meeting revealed that officials were nearing an agreement on the need for additional monetary stimulus. The official record from the September 21 gathering of the federal open market committee, which sets interest rates, showed that “many” officials thought a new round of monetary easing might be necessary to breathe life into the sluggish US recovery...

Net Asset Value of Certain Precious Metal Trusts and Funds

The gold premiums are highly contracted.

This could be the result of arbitrage hedging which we have discussed in the past. Essentially one could buy the futures and sell short PHYS and pocket any premium differential.

Traditionally it had been a sign of a lack of 'exuberance' in the specs over the future price moves.

The premiums tended to expand during speculative public buying AND short squeezes in the unit trusts.

Over Ten Million Served

...since February of 2008.

Thank you for your patronage.

SP 500 and NDX December Futures and Gold Daily Charts

Selling in the London and NY paper markets is being met by determined buying. Today was another record high close as the bear raid was 'stuffed.'

The equity markets are being managed higher on thin volumes led by the SP 500 futures.

Columbus Day (US) and Thanksgiving Day (Canada)

As a reminder Monday 11 October 2010 is Columbus Day in the US and the bond markets and banks will be closed, although the stock market will be open. It is not a settlement day for stocks however.

It is also Thanksgiving Day in Canada, and the equity markets and other financial markets will be closed. This may lead to thin trading in some of the mining and oil stocks.

Robert Reich: Aftershock

US Dollar: Long Term Trend and Triffin's Dilemma

AEIR
Triffin’s Dilemma, Reserve Currencies, and Gold
By Walker Todd

Nearly 50 years ago, Yale University economist Robert Triffin identified the inevitable future deterioration of the dollar in his book, Gold and the Dollar Crisis: The Future of Convertibility (1960). Essentially, Triffin argued, under the Bretton Woods system in which the U.S. dollar was the world’s principal reserve currency (instead of gold, for example), the United States had to incur large trade deficits in order to provide the rest of the world with the liquidity required for functioning of the global trading system.

Unfortunately, Triffin wrote, U.S. trade deficits eventually would undermine the foreign exchange value of the dollar because foreign accounts would hold an increasing quantity of dollars. Restating Triffin's argument in contemporary terms, as the proportion of dollar claims held abroad versus U.S. gross domestic product (GDP) increases, the foreign exchange value of the dollar must decline if dollar interest rates do not increase at about the same rate as the foreign dollar claims.

Issuing the reserve currency gives domestic policy makers an advantage by making it easier to finance either domestic budget deficits or foreign trade deficits because there always is a ready bidders' market for any financing instruments from that issuer. Issuing the reserve currency enables the domestic population to consume more goods and services from whatever source than otherwise would be feasible. And issuing the reserve currency gives foreign policy officials of that nation the upper hand in determining multilateral approaches to either diplomacy or military action.

This last reason probably is why U.S. policy makers clung to the original Bretton Woods format for about 10 years beyond the point at which it still was viable, with the whole apparatus finally collapsing in August 1971.

Let us reconsider the effect of reserve currency issuance on domestic and foreign trade for a moment. Unless the issuing authorities can discover a way to allow their currency to depreciate more or less in proportion to the growing foreign trade deficits—by reducing interest rates or otherwise stimulating domestic inflation, for example—then a sustainable equilibrium becomes impossible.

Either the currency remains overvalued (good for the reserve currency status) and the trade deficits continue to increase, or the currency maintains fair external value (implicitly, a proportional devaluation, which is bad for the reserve currency status) and the trade deficits either stabilize or shrink. This latter proposition is what Professor Triffin was writing about in 1960, and it has been called Triffin's dilemma ever since.

Lewis Lehrman and John Mueller revived the discussion of Triffin's dilemma, without calling it that, in an article that appeared on December 15, 2008, in National Review Online. They suggested that the proper international reserve currency should be gold. I agree and wrote as much in a commentary, in the Christian Science Monitor, November 17, 2008.

Lehrman and Mueller argue correctly that no country willingly should volunteer for the reserve currency role. Such an endeavor necessarily leads to the same pattern of persistent overvaluation and trade deficits that plagued the United States since European currencies became generally convertible in 1959. Our abandonment of the international gold exchange standard in August 1971 accelerated and intensified our external deficits and the volatility of exchange rates.

Among advanced economies that were key members of the old Bretton Woods system, tolerating large amounts of external claims in their currencies always was a sore point because they wanted to avoid de facto reserve currency status and the curse (Triffin's dilemma) that accompanies it.

In the last two decades, roughly since the fall of the Berlin Wall in 1989, European countries have adopted the euro and allowed large external claims in euros to arise. The Japanese bubble of the 1980s finally burst and relieved the reserve currency pressure of large external claims there until the last couple of years. Recently prosperous nations like China, India, and Brazil linked their currencies to the dollar and managed exchange rates so as to avoid the accumulation of large external claims. Thus, none of the most likely candidates is volunteering for reserve currency status...

SP 500 and NDX December Futures Daily Charts

Wall Street is now starting to rally higher on bad economic news, pricing in a new round of monetary stimulus from the Fed. Unfortunately this is being done on thin volumes by cynical speculators, setting up possibly hazardous market conditions.

Gold Daily and Silver Weekly Projected Charts

The correction was brief and correlated to equities.

Tavakoli: Biggest Fraud in the History of the Capital Markets

Washington Post
'This is the biggest fraud in the history of the capital markets'
By Ezra Klein
10/8/2010

Janet Tavakoli is the founder and president of Tavakoli Structured Finance Inc. She sounded some of the earliest warnings on the structured finance market, leading the University of Chicago to profile her as a "Structured Success," and Business Week to call her "The Cassandra of Credit Derivatives." We spoke this afternoon about the turmoil in the housing market, and an edited transcript of our conversation follows.

Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?

Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.

EK: And how much danger are the banks themselves in?

JT: When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one.

EK: My understanding is that this now pits the banks against the investors they sold these products too. The investors are going to court to argue that the products were flawed and the banks need to take them back.

JT: Many investors now are waking up to the fact that they were defrauded. Even sophisticated investors. If you did your due diligence but material information was withheld, you can recover. It’ll be a case-by-by-case basis.

EK: Given that our financial system is still fragile, isn’t that a disaster for the economy? Will credit freeze again?

JT: I disagree. In order to make the financial system healthy, we need to recognize the extent of our losses and begin facing the fraud. Then the market will be trustworthy again and people will start to participate.

EK: It sounds almost like you’re saying we still need to go through the end of our financial crisis.

JT: Yes, but I wouldn’t say crisis. This can be done with a resolution trust corporation, the way we cleaned up the S&Ls. The system got back on its feet faster because we grappled with the problems. The shareholders would be wiped out and the debt holders would have to take a discount on their debt and they’d get a debt-for-equity swap. Instead we poured TARP money into a pit and meanwhile the banks are paying huge bonuses to some people who should be made accountable for fraud. The financial crisis was a product of our irrational reaction, which protected crony capitalism rather than capitalism. In capitalism, the shareholders who took the risk would be wiped out and the debt holders would take a discount but banking would go on.

Non-Farm Payrolls: US Economy Doing a Great Imitation of a Developing Double Dip

The September Non-Farm Payrolls report was not good news.

This is a remarkably unnatural US economic recovery, with gold, silver, and other key commodities soaring in price, the near end of the Treasury curve hitting record low interest rates, and stocks steadily rallying as employment slumps and the median wage continues to decline.

The US is a Potemkin Village economy with the appearance of prosperity hiding the rot of fraud,  oligarchy, and political corruption.

As monetary power and wealth is increasingly concentrated in fewer hands, the robust organic nature of the economy and the middle class continues to deteriorate.

This is what is happening, and monetary policy cannot affect it.   The change must come from the source, which is in political and financial reform.   And the powerful status quo is dead set against it.



The long term trend of employment has not yet turned lower which would make the second dip 'official' from our point of view. But the prognosis does not look good.

Federal Reserve Issues 'Cease and Desist' Order for HSBC North America

What could a TBTF bank possibly do to deserve an official reprimand from their friends at the Fed? Bank Secrecy Act and Anti-Money Laundering (BSA/AML) related it appears, protecting flows of secrets and cash.

I hope it is not related to HSBC's position as the primary custodian for GLD and helping to 'start of the gold rush' back in 2009 by kicking out all the small fry to make room for more unemcumbered and leaseable London-ready bullion.

"WHEREAS, the Federal Reserve Bank of Chicago (the “Reserve Bank”) reviewed and
assessed the effectiveness of HNAH’s corporate governance and compliance risk management
practices, policies, and internal controls, and identified deficiencies..."

Press Release
Federal Reserve
Release Date: October 7, 2010

The Federal Reserve Board on Thursday announced the issuance of a consent Cease and Desist Order between HSBC North America Holdings, Inc. (HNAH), New York, New York, a registered bank holding company, and the Federal Reserve Board. The order requires HNAH to take corrective action to improve its firmwide compliance risk-management program, including its anti-money laundering compliance risk management.

Concurrent with the Federal Reserve Board's enforcement action, the Office of the Comptroller of the Currency announced Thursday the issuance of a Cease and Desist Order against HSBC Bank USA, N.A., McLean, Virginia, for violating the Bank Secrecy Act and its underlying regulations.

A copy of the Board's order is attached.

Attachment (pdf)

SP 500 and NDX December Futures Daily Charts

There is not a lot of doubt in my mind that this action in the US stock indices is indicative of bubble liquidity, but unfortunately underpinned by weak, cynical hands and thin volumes, and unrelated to economic fundamentals. Some of this is the effect of the upcoming November elections.

You will know the economy is improving when the median wage and employment start increasing. There is no evidence of this yet. Jobs creation remains below the level of population growth.

The Fed created a monetary bubble in 2004-07 which resulted in a bull market in stocks, and spawned a massive housing bubble and bank fraud overhang, the latter of which remains unremediated and a serious impediment to genuine economic growth.

Any serious exogenous event can now lead to a significant correction without direct Fed intervention of a scale much greater than their current POMO activity. Fraud and insider dealing is pervasive, and the Congress is largely under the influence of the banks and corporations because of the existing process of campaign financing.

Gold Daily Chart

Gold corrected back to trend as we noted it might the other day, and said we were taking profits in gold and silver on the short term trades only.

This consolidation was predictable given the extension above trend. Long ago we said we expected gold to move to 1375 and consolidate after the breakout from the handle in the cup formation. This is of a common pattern. We may have already seen this consolidation off the spike up.

Gold will remain in a bull market until the fundamentals change in the real economy with regard to honest stores of value. If you do not understand this by now you may not do so until it is too obvious to do anything about it.

Gold Chart: A Time and Price Projection

It is important to keep in mind that this is a trend projection.

An exogenous event or a change in environment such as a liquidity crisis and equity market crash will test and can certainly alter this trend. As traders we must be mindful of what the market tells us.

As you may recall, I like to use these kind of charts as indications of the progress of a market, rather than hard and fast rules.

For example, the correction we see today in gold is to be expected as we ran well above trend over the past few days. Is this the consolidation we have been expecting around 1375? Very possibly.  That objective was set months ago and is more an indicative target than a hard buy or sell stop.   After a breakout from a cup and handle, price almost always gets ahead of itself and undergoes a consolidative correction.  So, there we may now be.

The equity market SP 500 December futures appear to be hesitating ahead of tomorrow's Non-Farm Payrolls report.  It was at the top of a short term trend channel at 1163 with its lower bound at 1136.  The breakdown of the NDX yesterday was indicative.  That range in the futures is 2025 to 1965.   A break of trend in the SP futures will set up a test of big support at 1120.  The Feds seem to be all over these markets, so I prefer to play it tight, light, and short term until we see a confirmed change in trend.

It is the relationship of the current price to the chart that is most important, with time as a factor.

Gold Daily Chart

Gold and Silver Daily Charts

Gold broke out of its trend channel today on the same monetary euphoria that seemed to drive US equities.

Prior resistance is now support, so we would look for the top of the trend channel to provide some level of potential lift in the case of a consolidation or pullback around the 1325-1330 level. Breakouts from cup and handle formations can be violent, and it would not surprise this chartist to see that run to the first target of 1375 before gold consolidates properly. I would hope gold would take a more leisurely route higher to that second target of 1455 and beyond, our long term minimum objective for the cup and handle, since the big parabolic peaks are almost always followed by deep corrections.

This gold chart gave us a 'buy or die' signal at 1,156 which was an almost perfect 50% retracement of the big rally off the bottom. That buy signal now shifts to 'neutral' as we approach the intermediate objective of the breakout which is 1375 before a consolidation or a pullback. Keep in mind that the minimum measuring objective of 1450 was set in May 2010 although the details are periodically revised as new data is obtained from the chart. It has been a long road since then. Now things get a little more complicated.

Ben Davies' Interview on King World News is a credible hypothesis into what may be happening over the next two years or so. I always assume these large macro changes take time, but there are periods when they reach a tipping point or a sea change and the progress of such changes can accelerate significantly. The markets may be signaling such a major development.

One thing I am sure of is that as this situation plays out and as gold and silver rally higher, the reasons given by some as to why the precious metals should not be doing what they are doing, rising higher in price, will become increasingly strident, insistent, and at times unintentionally funny because they are so disconnected and inappropriate compared to reality.

It requires intelligence and maturity to realize when you are wrong, but it is a mark of character to be able to admit it, gather yourself together, and go forward again successfully, dealing with things as they are. Self-deception is a powerful ally to failure, and rationalization can be remarkably inventive and seemingly inexhaustible. Everyone is admittedly wrong sometimes, except for the deluded, the naive, the con-man, and the narcissist.

Silver is 'taking no prisoners' from the bear camp in its own powerful breakout that continues to extend beyond our expectations. I am of a mind to take some profits off the table for the short term trades, but I certainly would not get in front of this juggernaut just yet, or more seriously hedge the long term positions. That time may come, and the market will let us all know when.

The Guardians of the Realm

How's Your Confidence Now?

 

How About Now?