http://www.lemetropolecafe.com/james_joyce_table.cfm?pid=6812Good morning to you all. Today I will comment on the events of yesterday and then give a summary as to what I believe will happen in the next few weeks.
Gold closed down by 4.70 to 923.60 and silver fell as well down by 34 cents to 17.67.
Yesterday, we saw the dollar fall as the usa index hovers near its low. It closed at 71.84 with the Euro closing up 66 basis points to 158.23 to the dollar. Crude oil basically finished unchanged at 110.40 a barrel and copper continues to bang against the all important 4.00 dollar per lb barrier. Gasoline however hit its record of 2.80 per gallon. Around the world gasoline prices are rising at the pumps. In Canada we saw gasoline hit 1.14 per litre.
The open interest on the gold contract rose marginally by 3400 contracts to 414601 basis Thursday. The silver OI declined by 900 contracts to 146000.
Judging from the see-saw action on gold on Thursday( with gold at one point climbing to $940.00 only to be hit by cartel selling once the afternoon fix was settled.) the increase of only 3400 contracts can only be short selling.
On Fridays action, again gold was all over the board as the cartel needed to calm the markets in the face of the lousy earnings at General Electric. General Electric reported a drop in earnings to 44 cents instead of the market expectation of 52 cents. The Dow fell badly down by 256 points and Nasdaq fell by 61 points.
Financial news of the day:
Early in the session we learned that import prices rose by 2.8% instead of market consensus of 2.0%. Import prices are rising by 14% year over year.
We then learned that the Michigan April Consumer Confidence fell badly to a 26 year low of 63.2, Most were expecting a reading of 69.00. The previous low 26 years ago was 62.5 in 1982 at a time when the usa was experiencing stagflation on low growth and high inflation. If you remember that period interest rates were at 16% and the economy was in the doldrums.
Today, the Michigan consumer confidence is echoing in the same scenario.
The earnings at GE were frightening. Approximately 40% of GE's earnings are financial and it seems that their OTC derivatives are getting wacked. Before, these derivatives were smoothing out GE's earnings. Not now!!
However, the big news of the day was not GE even though Wall Street thought it was the main story. The real story is the largest municipal bankruptcy in usa history is looming. It looks certain that Jefferson County, Alabama, will declare bankruptcy this week as they are in peril with their huge derivative loss. Jefferson county entered into a derivative arrangement with bankers involving a $3.2 billion interest rate swap to clean up their sewage problem. The interest rate swap was done to save them interest in the first few years. However the derivative trade went against them and they cannot pay. On top of this, MBIA lost its triple rating AAA status thus throwing Jefferson which houses Birmingham into peril. They are going to enter Chapter 9 bankruptcy which is identical to chapter 11 for commercial companies. Chapter 9 is designed for municipalities to stall for time as creditors seek compensation for their investments. It will be messy. The Orange County fiasco of 1994 will be relived!!
This will be the start of many municipalities going into Chapter 9 as their bond yields rise into the statosphere. We are seeing many municipal bonds trade near 20%. There is no way that these bonds can be:
1. redeemed.
2. rolled over with the higher interest rate.
the usa will see a plethora of munis go under.
On Thursday, we saw that the trade figures released by the Government showed a deficit of minus 63 billion. If you include the correct oil price the deficit was in reality 70 billion dollars. Stated another way, the total trade deficit for the usa is heading for 840 billion dollars.
The trade figure is just one half of the equation. You must add the service sector deficit which is running at 15 billion dollars per month to get at the total deficit. The trade and service sector deficit is called the current account deficit and it is heading for a yearly deficit of 1.02 trillion dollars. The GDP of the usa is 13 trillion dollars so, the ratio of current account deficit to GDP is running at an alarming 7.8%. Anything over 3% is cause for concern.
We are now witnessing many countries with current account problems. Iceland has a current account deficit /GDP of 16%.
Turkey and Greece have a deficit ratio of around 12%. Spain with no reserves at all, has a current account deficit ratio of 9.1%.
These countries are seeing their sovereign bonds trade at double digit figures. This cannot continue and eventually we will see a collapse of their sovereign debt.
As we speak, the world has not bid the interest rates for usa bonds up yet, but they will. The usa is inflating at 12% (Willliams Shadow Government figures) so a yield of 4% is suicide for bond holders. They will dump their bonds and seek gold and silver instead of financial assets.
There is no way, that bond holders will risk holding these securities.
The other big event of the week was the jobs report which showed the usa lost 80,000 jobs. The economy is weakening badly and the government coffers will not fill up with tax dollars. Deficits will continue to pile up as the economy suffers. However the usa must continue to spend on the war and other areas they deem as important.
At the Fed we are seeing a huge 50% of their assets being held in the toxic variety courtesy of their captive banker friends.
The Fed is now exploring ways to increase their reserves so as to take on more toxic junk. This will increase the debt ceiling as the money supply increases.
We are heading for hyperinflation and a huge global financial meldown.
The game ends when:
1. US bond yields spike northwards as everyone realizes that bonds are a bad bet. Then, all the financial assets not already imperiled will be blown up.
2. the last oz of gold is handed in through the leasing game. Then the gold derivatives held by the bankers implodes as well.
We will experience both.
Have a great weekend.
