Saturday, January 24, 2009

Market commentary.Jan 24.09....extremely important.  and Pritchard-Evans.
Good morning Ladies and Gentlemen:
This article came to me yesterday written by Pritchard-Evans on Wednesday.  England has now polevaulted to the top of the heap as far as countries in serious trouble.  Here is the article:
SERIOUSLY ALARMED  by  Ambrose Pritchard-Evans

The slide in sterling has turned "disorderly".

We can argue over whether or not the first phase of devaluation acted as a shock-absorber for a badly mismanaged economy, providing a cushion against debt deflation and the housing crash. But the latest dive has a very malign feel.

For the first time since this crisis began eighteen months ago, I am seriously worried that British government is losing control.

The currency has fallen five cents today to $1.39 against the dollar. It is now perched precariously on a two-decade support line -- the levels tested in 2001 and 1992. If it breaks that line, traders may send it crashing down towards dollar parity.

The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn. (on this, more later in a piece I'm writing today)

If the Government is forced to nationalise RBS and perhaps Barclays with their vast exposure in dollars, euros, and yen, it risks being submerged. It is one thing for a sovereign state to let its national debt jump in a crisis -- or a war -- perhaps even to 100pc of GDP. It is another to take on foreign debts on such a scale with no reserves. Yes, the banks have foreign assets as well to match the debts. But how much are these assets really worth?

This is the moment when the "rubber hits the road" -- to borrow from American argot -- the moment when the reckless debt experiment of our economic and political leaders comes back to haunt.

We cannot even do what Iceland did to save its skin. Reykjavik refused to honour the foreign debts of its buccaneering banks. It let them default, parking the losses in Resolution Committees. Small islands can do that. Iceland has fish instead, and lots of metals.

Britain cannot follow suit. The debts are too big. If London takes such disastrous action it will set off global panic and lead to an asset death spiral, drawing the entire world into deep depression.

What have our leaders wrought? The reckless conduct of City, the fiscal incontinence of Gordon Brown (3pc deficit at the top of the cycle), and the pitiful regulation of the UK housing boom have all combined to bring the country to the brink of disaster.

England has not defaulted since the Middle Ages. There is a real risk it may do so now.

And no -- just so there is no misuderstanding -- it would not have been any better if Britain had joined the euro ten years ago. The bubble would have been just as bad, or worse, as Ireland and Spain can attest. We have our disaster. They have their disaster. When the dust has settled in five years we can make a proper judgement on the sterling-EMU issue. Not now.

The Baby Boomers have had their moment in power. The most spoilt generation in history has handled affairs with its characteristic hedonism. The results are coming in.

The blitherly idiots..   end  



The situation in England is extremely dire.  The entire banking sector has 4.4 trillion dollars of foreign debt with reserves of only 60 billion dollars.

How on earth can they nationalize the Royal Bank of Scotland, Lloyds, and Barclays?

Since this was written the pound is now down to 1.379 to the usa dollar.  As in bank runs, when a country is in trouble its citizens flee its currency. The English and fellow Europeans have voted for the currency of choice and that is gold.  They even ridiculed the Swiss authorities who announced that they are alarmed at the rise in the Swiss Franc and that they will print enough Swiss Francs to help their exports.. The Swiss citizens are also buying gold, who are joined by the Russians, the Chinese and just about everyone who suspects their paper money is just paper.

And now for the Gold and the Day's Economic events:


Gold closed up by 37.00 dollars to 895.70 and continued in the access market closing a touch below 900.00.  Silver languished early in the session as the cartel tried to halt gold's rise by leaning on silver.  That too failed as silver finally ralllied to close up by 58 cents to 11.93. I would like to add that the comex volume on gold was huge.  The  opening on the comex saw 95000 contracts trade and by the end of the day, the total estimated volume was 195000.  They are generally 25-40% underestated all the time.  This was a stampede into gold and the cartel wall of defence crumbled.  They sought higher terrain at the 900 level and regrouped waiting for Monday's onslaught.

Oil also rebounded from a deficit of 2.00 to a rise of 2.50 to 46.70. Strangely this was all done with the dollar strong.

We thus had Europeans and the English all at once deciding to vacate their respective currencies in favour of gold, silver and oil.  They did not want the usa dollar as they knew full well that it too is toast.

This email came to our headquarters:


Another thought … this is somewhat self-serving in terms of analysis, but I think my long-held view that was has occurred in the US financial market world (and spread to other countries in Europe, etc.) is TOO BIG TO BAIL ... and that growing realization has began to freak out some serious folks in the investment community. Received this email just now…

["FWIW: My broker just advised he had a one hour in house conference call today that was to all RBC brokerage offices.
It was headed by the Chief Economist/Strategist at RBC.
The call my broker said was like hearing a description of Armaggeddon.
Power Points: The U.S. Banking System is close to collapse.
BAC and C are going to go to ZERO.
Anytime their will be a call from President Obama for what is called "Scram Down Legislation" for the immediate Nationalization of these major banks.
The fellow speaking, a George Cassidy said EVEN holders of Preferred Stock will be wiped out.
Mr.Cassidy felt this blockbuster "Scram-Down" Legislation is coming, and damned soon. Max"]
good friend

We are hearing problems at both Citibank and Bank of America.  Bank of America is the largest usa bank, followed by number 2 Citibank.

Many depositors are fearing a run on the bank so they are bailing.  Where are they going?   USA citizens have a real dilemma on their hands as the entire financial apparatus has imploded. In other words Ladies and Gentlemen:  GET READY FOR OUR LONG AWAITED BANKING HOLIDAY. 

I am on this one and will let you know shortly:

Some even more catastrophic news IS likely to surface next week. I have heard of smoke from a different source in that regard. My hunch is that "smoke" is what led to the retreat by The Gold Cartel today.


Strangely, the open interest on gold and silver did not rise appreciably on Thursday.  This was due to some cartel members vacating the steam room.  It was getting a little too hot for them.

The GLD just reported their gold inventory and it rose to 819 tonnes almost 275% higher in inventory that the supposed inventory at the Bank of England.( It rose 13.4 tonnes in two days) The top 6 holdings of gold  (supposedly) are as follows:

1.USA 8170 tonnes

2.Germany 3400 tonnes

3.IMF 3200 tonnes

4 France:   2500 tonnes

5. Italy      2400 tonnes

6.Switzerland 1100 tonnes

7.GLD  819 tonnes (private)

I would like to point out that the sponsors of the GLD are in serious financial trouble on both sides of the continent. First, Barclays is the guardian of the gold and has kept the gold at the Bank of England. Their stock is now trading in the pennies.  They also have a huge shortfall in the stock vs inventory.  In other words they have issued shares without the corresponding inventory of gold.  The shortfall is 25% of outstanding stock. This is very serious.  On top of this, we now find that 2 million oz of paper gold belonging to the GLD is housed at the comex.(eligible gold)

The sponsors on this side of the pond, State Street has seen its stock plummet by 68% this week as they announced huge losses on their holdings.

As many of you know from my previous commentaries, I doubt very much that the GLD has the inventory they say they do!!

Libor rates continue to climb instead of falling. The new libor rate is 1.17% climbing in a week from 1.089%..  Commercial paper continues to contract signalling banks around the world are reluctant to lend.  Obama is going to have his hands full trying to get these guys to fork over dollars.

The FTSE retreated this week due to the following:


U.K. Economy Shrinks Most Since 1980, in Recession

Jan. 23 (Bloomberg) -- The U.K. economy shrank more than economists forecast during the fourth quarter in the biggest contraction since 1980 as the financial crisis crippled the banking industry and mired Britain deeper in the recession.

Gross domestic product fell 1.5 percent from the previous quarter, the Office for National Statistics said in London today. Economists had predicted a 1.2 percent drop, according to a Bloomberg News survey. The economy has now shrunk in two quarters, the conventional definition of a recession….



and this from Europe and Asia:


Stocks in Europe, Asia, U.S. Futures Fall; Samsung, Pfizer Drop

Jan. 23 (Bloomberg) -- Stocks declined around the world, driving Europe's Dow Jones Stoxx 600 Index to the lowest level in more than five years, as concern deepened the global economic slump will erode earnings.

Samsung Electronics Co. slid 4.1 percent after the largest maker of memory chips reported its first quarterly loss. Infineon Technologies AG, Europe's second-biggest semiconductor maker, sank 4.2 percent as its Qimonda unit filed for insolvency. Pfizer Inc. retreated 3 percent in early New York trading after the Wall Street Journal said the drugmaker is in talks to buy Wyeth…. end

The Dow fell by 45 points even though it was down 200 points early in the session.  The cartel boys just did not want to leave the weekend of a too sour of a note.

As everyone knows, there has been a complaint filed by myself and others on the silver and gold manipulation at the CFTC.  Don Jack (from Lerners LLP) and I have been in communication with the Enforcement Arm of the CFTC.  You will find this section very interesting:

Silver investigation: Stakes are enormous

By Rob Mackinlay

If the US regulator’s current investigation into the silver futures market is looking at allegations of ongoing price manipulation it is the first of its kind – according to a former CFTC director of enforcement.

Previous Commodity Futures Trading Commission (CFTC) investigations have been into market manipulations that have already taken place. The potential for the
current silver investigation to halt an ongoing manipulation could have significant implications for the price of silver.

Geoffrey Aronow,
a partner at law firm Bingham McCutchen and Gregory Mocek a partner at McDermott Will & Emery, both former directors of the Division of Enforcement at the CFTC, said that the division would not be carrying out the investigation if there were not legitimate grounds for concern.

Aronow, who oversaw an
investigation into manipulation of the global copper market in the late 1990s, said: "I don’t know if this is allegedly ongoing conduct that an investigation will stop. Usually, an investigation occurs after the behaviour stops and the price moves back to where it’s supposed to be in an 'unmanipulated' market."

"Usually what’s happened is that the conduct has stopped. The evidence that there was price movement back to a new equilibrium is in fact part of the indication that there may have been a manipulation. Usually the return to a 'normal' equilibrium is pointed to as further evidence that there was manipulation. Now I don’t know if that’s the argument here."

However the existence of long-term manipulation is an issue of contention in itself. Aronow said: "One of the things I will observe is that anyone who has looked at manipulation would say they [manipulations] can only be maintained over the short-term. So most of the time what you have are short-term manipulations. Prices spike and that becomes part of the investigation."...






The long bond continues to decline in price (rise in yield).  This is  JPMorgan's Achilles Heal!! Here is the link to this:

Another HUGE plus in the days and weeks ahead for gold is what is occurring in the longer dated Treasury vehicles. Even with crisis alerts going off this morning, the yield on the 10 yr T note rose to 2.62%, which tells us the realization of what the US is doing fiscally and monetarily (in order to save the system) is kicking in too. The quid pro quo for the Treasury and Fed’s actions is on the horizon (much higher US interest rates) which will accrue to gold and silver in the weeks and months ahead.

In summary, we have no seen a drastic deterioration in the state of affairs of England and in the usa.  The English have guaranteed all depositors  and yet all their major banks are broke. ( Only HSBC  has it stock above 1 pound and yet these guys are in the fraud of silver manipulation, with their counterparts over here: JPMorgan.) 

On this side of the pond, rumours swirl on the nationalization of Citibank and Bank of America because of insolvency!

The volatility on gold played havoc to the derivatives with respect to JPMorgan.  They also are pulling their hair with respect to the falling bond prices. They are the largest derivative player in interest rates, and for that matter on all derivatives.  JPMorgan has 168 trillion dollars in derivatives listed with the comptroller.  Where there is smoke, there is fire.


I will report to you on Monday.  If anything urgent comes, I will send it down

















Thursday, January 22, 2009

Jan 22.09 commentary.

Good evening Ladies and Gentlemen:
Gold closed by 8.70 to $858.20.  Silver also followed suit rising by  6 cents to 11.35.  The open interest on gold continues to rise, adding a further
8500 contracts to  340,000.  The silver Oi hardly budged dropping 136 contracts to 86123.
In the gold arena, somethig has to giveway.  Either the crooks are overrun or the cartel will bomb gold.  The OI is continually rising unabated at the comex.
Speaking of the comex, still no change in the deliveries.  In silver 32 million oz remain to be delivered and in gold 1.4 million oz.
It just does not add up.
And now for economic news:
We first were greeted with the news on the jobless number.  They report every Thursday and todays number was not pretty:

Both gold and silver were slightly lower after the Comex opening and then HORRENDOUS U.S. economic news hit the tape at 8:30 EST…

08:30 Jobless claims for w/e 17-Jan 589K vs. consensus 543K
Prior week revised to 527K from 524K. Continuing claims for w/e 10-Jan 4.607M vs. consensus 4.534M. Prior week revised to 4.510M from 4.497M. end.

The  release of the jobless claims which showed a rise to a huge 589000 claims, on top of the continuing claims of 4.607 million.  The consensus was 4.534 million.  New jobless claims for the week totalled 62000.  Here is the full article published by the BLS:


U.S. jobless claims increased sharply last week

WASHINGTON, Jan 22 (Reuters) - The number of U.S. workers filing new claims for jobless benefits rose by a more-than-expected 62,000 last week, government data on Thursday showed, as a year-long recession continued to chill the labor market.

Initial claims for state unemployment insurance benefits increased to a seasonally adjusted 589,000 in the week ended Jan. 17 from a revised 527,000 the prior week, the Labor Department said.

It was the highest level of initial claims since a matching reading in the week of Dec. 20. The last time claims were higher was in 1982, when they notched a weekly rise of 612,000. Analysts polled by Reuters had forecast 540,000 new claims versus a previously reported count of 524,000 the week before.

A Labor Department official said administrative delays in reporting claims during the year-end holiday season by some states may have contributed to the large increase in claims.

The large volume of new jobless claims as companies lay off workers has strained the capacity of some states' employment centers.

The four-week average of new jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, was unchanged at 519,250.

This measure has risen steadily as the U.S. housing slump roiled financial markets and spread to the wider economy, forcing lay-offs as firms slash costs to offset weaker income.

The number of people remaining on jobless insurance after drawing an initial week of aid increased 97,000 to a more-than-forecast 4.607 million in the week ended Jan. 10, the most recent week for which numbers are available. Analysts estimated so-called continued claims would be 4.55 million.



After the release of the jobless claims, we got new starts on homes and December starts were pretty dismal;


U.S. housing starts, permits hit record lows in Dec

WASHINGTON, Jan 22 (Reuters) - New U.S. housing starts and permits tumbled to a record low in December, data showed on Thursday, accelerating a downward spiral that has left the economy mired in a recession.

Housing starts fell 15.5 percent to a seasonally adjusted annual rate of 550,000 units, the lowest on record, from an upwardly revised rate of 651,000 units in November, the Commerce Department said. That was the biggest percentage drop since January 2007, when housing starts fell 16.2 percent.

Analysts polled by Reuters had expected an annual rate of 610,000 units for December.

New building permits, which give a sense of future home construction, dropped 10.7 percent to 549,000 units, also a historic low, from 615,000 units in November. That was also sharply below analysts' estimates of 610,000.

Compared to the same period in 2007, housing starts tumbled 45.0 percent in December and permits fell 50.6 percent. Both were the largest year-to-year drops since January 1991.


The housing price index fell badly again in December down a full 1.8 on the index scale.

10:00 Nov Housing Price Index reported (1.8%) vs. consensus (1.2%)
Prior figure unrevised from (1.1%).
* * * * *

This is what one of our members had to say about the housing stock in the usa and its pricing:

This won't help reduce overall inventory of homes (new homes + existing homes + REO - bank owned homes + homes people want to sell but know they can't + coming walk away homes). If the truth were to be told, and I'm just estimating this based on the Government lie statistics, the real inventory of homes on the market is probably at least 2 years. One fictitious aspect of the Govt number (which is about 10 months' inventory) is that it is based on the trailing 12 month sales rate. With the month sales rate dropping like a stone every month, it's probably more accurate to forecast the future sales rate based on the rate decline in the last few months. So I would bet, and I do make that bet by shorting housing stocks, that the real inventory is more like 2 years. This means much lower prices and even more trauma in the mortgage back securities market.


I agree with him.  The backlog is gigantic and the pricing of homes is going lower which means lower collateral value for our sinking banks.  I stand by the fact that the entire banks will lose 3.6 trillion dollars this year just on mortgage back securities.  Add another 3 trillion for derivative losses and you can see the mess the usa is in.

On top of this, we are seeing commercial paper fall in numbers again.  This is bad as the banks just will not loan.  And the reason they will not loan is because they are broke and also they do not trust any other bank knowing full well that they are all penniless!!!

On top of this, libor with respect to usa rates climbed to 1.16% from 1.13%.  Rates are climbing.

The Baltic Dry Index fell to zero.  In other words, ships are carrying zero cargo and thus the rate is zero.


On top of this, bond yields are rising despite the stock market tanking.  The world is waking up that dollar denominated instruments are not worthy of being bought:

12:38 Yield curve maintains bearish steepening bias
Despite the renewed carnage in stocks, longer-dated Treasuries remain under significant pressure with the bond down more than 2 1/2 points on the day. The 2/30 spread has widened another 13 bp today, and is out about 35 bp on the week. The spread is roughly 80 bp above late-December lows. While supply concerns surrounding the financial rescue plans have reportedly been the main driver behind the recent move, today's losses are also being chalked up to worries about the heightened sense of protectionism that seems to be emanating from the global nature of the crisis. Of interest, Timothy Geithner, President Obama's nominee for Treasury Secretary, said that the new administration believes that China is manipulating its currency. In addition, the WSJ ran a
story this morning highlighting the potential for a deterioration in relations between the US and China as the latter takes aggressive measures to reinvigorate export growth. That said, it is worth noting that while the yield on the bond has surged roughly 60 bp this year, the dollar index has gained about 5%.

Nokia reported in today and stated that  sales slipped by 10% and they were going to cut their dividend.

Microsoft reported that they will layoff 5000 workers due to declining sales and profits.

However, the big news came from China.   China announced that growth fell in the 4th quarter to 6.8%

dragged down by exports to the west;

China’s GDP Growth Slowed to 6.8% in Fourth Quarter

Jan. 22 (Bloomberg) -- China’s economy expanded at the slowest pace in seven years as the global recession dragged down exports, increasing pressure for more government spending and lower interest rates to buoy growth.

Gross domestic product grew 6.8 percent in the fourth quarter from a year earlier, after a 9 percent gain in the previous three months, the statistics bureau said in Beijing today. The figure matched the median estimate of 12 economists surveyed by Bloomberg News….

China's growth has dropped quite significantly over the past 6 months.  The West have slowed their purchases of goods.  Thus China has less USA dollars to cycle back,  China has already lowered banking reserves in dollars as they are now realigning their economy from an export nation to a consuming nation.

They have already cut back on purchases of Fanny and Freddie paper and other Government debt. They need the money for infrastructure. They are now cashing in their hoard of usa treasuries!!

As the economy begins to overheat in China, then this nation will remove its peg.  This will cause hyperinflation in the west.

Today, we heard from Tim Geithner, the Sec-Treasure designate.  In his senate hearings, he accused China of manipulating their currency.  China is very puzzled by usa rhetoric since the removal of the peg will be highly inflationary to the usa.  On top of this, if the usa prints 4 trillion dollars with little to no foreign support for the purchase of debt, you can bet the farm that hyperinflation would result from ChinaT lifting the yuan-usd peg.


Here is the section from the Geithner senate hearings:


09:46 Geithner says Obama to "aggressively" try to change Yuan policy--Bloomberg
Additional headlines say that Geithner states Obama "believes" China is "manipulating" currency, and wants "currency realignment" with China, adding that the country cannot get a "free pass" in trade violations.
* * * * *

The quid quo pro for China stopping its currency manipulation will be for you (Mr. Geithner) to let gold trade freely and let the dollar chips fall where they may. And then there is our own blatant dollar prop up intervention. Obama has his hands full. Geithner is just an actor hired to play in "The Stepford Wives 2," and the Chinese have to know it.


As most of you know, I have been highlighting to you the destruction on all the banks in the world.  I am now going to show you this in graph style.  Notice the market cap of all the banks in 2007 and now.  The green is the market cap today, the whole blue circle represented their market cap in  the second quarter of 2007 when the fun began:




This just came in.  Goldman Sachs is stating that Obama's stimulus pkg of 850 billion is not enough.  They need 2 trillion in stimulus.  Here is this earth shaking article:

Goldman Sachs: We Need a $2 Trillion Stimulus Plan. Save Us, Uncle Sam!

January 22, 2009 03:00 PM ET | James Pethokoukis | Permanent Link | Print

A whopping $825 billion stimulus plan is just enough for Goldman Sachs. But $2 trillion might be. Here a bit of what GS is saying (bold is mine):

The US economy urgently needs a large dose of fiscal stimulus to counter a sharp retrenchment in private-sector spending. ...  To fill this hole in demand, the federal government should become the spender of last resort, as monetary easing cannot do the job alone. 

We reckon that the appropriate level of stimulus is $600 billion (bn) at an annual rate, or 4% of GDP, with the remaining 2% filled by a narrowing in the current account deficit.  Moreover, with prospects for cyclical recovery in the private sector looking dim, this stimulus should stay in place through 2010 and be withdrawn only gradually thereafter. The bill recently introduced in Congress, priced at $825bn over two years, is a major step in the right direction but is apt to prove insufficient if our estimates are correct.  On the five-year view customarily used to score such programs, we could justify stimulus totaling $2 trillion.

Likewise, much of the prospective surge in federal debt that terrifies many market participants is already baked in the recessionary cake.  While stimulus will aggravate this increase, the United States starts from a fairly comfortable federal debt ratio of just over 40% of GDP at the end of fiscal 2008, lower than the G7 average.

Assuming that the final package is in the range now under consideration, we estimate that the federal deficit will reach $1.425 trillion in FY 2009, or 10% of GDP (based on CBO’s accounting for TARP and GSEs).   While the scale of the package driving this change has risen sharply in recent months, so has the rate at which the economy is losing momentum.



Please  remember that their deficit is slated to be 2 trillion dollars without the stimulus advances.  Also remember that foreign nations are cashing in their foreign reserves to help out in their deficits.  We may have 5 trillion in new money printed!!!


This just came in from Mr Mortgage:


Citi to Follow Chase out of Wholesale - The ‘Rest’ Are Next

Posted: 22 Jan 2009 04:56 PM CST

It looks like Citi is following Chase’s lead and is shutting down their wholesale lending (broker) and much of their correspondent (banker) divisions (not verified by Citi).  My source got word earlier this morning. Chase kept open correspondent by the way.  For those of you that did not catch my Chase report and take on where the mortgage industry is headed over the near-term...


If all the banking sectors are shutting down their lending operations, please tell me how on earth they are going to earn money?

The stock market fell badly today down by 105 points. The Toronto Stock Exchange fell by 280 points.It seems investors are not very happy about the following awful scenarios:


1. imploding bank shares

2. falling bond prices (higher yields)

3. imploding earnings on all companies

4. massive layoffs in the private sector

5. pending bankruptcies by many states such as California, Louisiana and Alabama

6. nationalization of banks in England

7. the bankruptcy of European nations like Spain, Greece, Iceland, and Italy.

8. implosion of the car industry in the usa

 AND IN THE WORDS OF Yul Brynner :

etcetera etcetera and etcetera!!!!!

have a great evening









Wednesday, January 21, 2009

Jan 21.09 commentary:  and  Evans-Pritchards.
 The big news of the day came from Obama.  He wants complete transparency in all  Governmental activities.    Click here to view the full video:
Obama is leaning on Freedom of Information as a right of a citizen and that government cannot block information from reaching public hands.  It would be interesting to see how the Federal Reserve acts with the whole Bloomberg FOIA request.  Bloomberg excercized their FOIA right to receive information on the allocation of tax payer TARP funds. We have given a FOIA on gold sales and gold swaps with respect to the ESF>
I phoned Bill Murphy tonight and told him to reissue the FOIA and copy the NY Post  (John Crudele) and Bloomberg..  He will also copy Bart chilton.
Here is an article today from the Washington Post:
New Obama Orders on Transparency, FOIA Requests
In a move that pleased good government groups and some journalists, President Obama issued new orders today designed to improve the federal government's openness and transparency. The first memo instructs all agencies and departments to "adopt a presumption in favor" of Freedom of Information Act requests, while the second memo orders the director of the Office of Management and Budget to issue recommendations on making the federal government more transparent.
"The Government should not keep information confidential merely because public officials might be embarrassed by disclosure, because errors and failures might be revealed, or because of speculative or abstract fears," Obama said in the FOIA memo, adding later that "In responding to requests under the FOIA, executive branch agencies (agencies) should act promptly and in a spirit of cooperation, recognizing that such agencies are servants of the public."
His memo on government transparency states that the Obama Administration "will work together to ensure the public trust and establish a system of transparency, public participation, and collaboration. Openness will strengthen our democracy and promote efficiency and effectiveness in Government." The order directs the yet-to-be-named chief technology officer to work with the OMB director to develop an "Open Government Directive" in the next four months.
Just in case new OMB director Peter R. Orszag needs any suggestions, the Sunlight Foundation -- a group dedicated to improving government transparency -- has several.
"I'm pretty damn pleased that the issue of transparency in government is such a high priority for the new administration," said director Ellen Miller. Each agency should do an audit of its information and data how it makes it available, Miller said. The administration should also redefine the definition of "public information" to mean that government information is not public until it is posted online in an easy-to-download format.
"The devil is in the details," Miller cautions, noting that the new new memos and executive orders had not been posted on the new White House Web site by late afternoon Wednesday.
Obama today also froze the salaries of senior White House staffers and issued executive orders on presidential records and new ethics guidelines for presidential appointees. 
:  This important passage came from Evans Pritchard of the UK Telegraph came today and it illustrates the perilous state of England and its banks:

Soft UK Cannot Take Iceland's Option

The British government faces an excruciating choice. It cannot let Royal Bank of Scotland and its fellow mega-banks go to the wall. Yet it risks being swamped by the massive foreign debts of these lenders if it takes on their dollar, euro and yen exposure by opting for full nationalisation.


By Ambrose Evans-Pritchard

Last Updated: 3:34PM GMT 21 Jan 2009


Britain has foreign reserves of under $61bn dollars (£43.7bn), less than Malaysia or Thailand. The foreign liabilities of the UK banks are $4.4 trillion – or twice annual GDP – according to the Bank of England. The mismatch is perilous.


It is why sterling has crashed 10 cents from $1.49 to $1.39 against the dollar in two days. The markets have given their verdict on Gordon Brown's latest effort to "save the world".


Credit default swaps (CDS) measuring risk on British debt have reached an all-time high of 125 basis points, just below Portugal. The yield spread on 10-year Gilts over German Bunds has doubled to 53 basis points since last week.


Standard & Poor's has quashed rumours that it will soon strip Britain of its AAA credit rating – an indignity averted even after the International Monetary Fund bail-out in 1976. But there was a sting yesterday as it responded to the Treasury plan for the banks. "Market confidence in the sector has eroded to such a degree that it is not clear whether these measures by themselves will bring about a material improvement," the IMF said. "As a result, full nationalisation of some banks remains a possibility in our view."


Spain was relegated from AAA to AA+ on Monday, and Spain's public debt is a much lower share of GDP.


"If Spain can get downgraded, then the risks for the UK are self-evident," said Graham Turner, of GFC Economics. "The increase in the UK gross public debt burden – 11.8 percentage points in just one year – is troubling. The market rightly fears the long-term fiscal costs of a collapsing banking system.
Please note:  the have under 43 billion pounds of reserves and the UK banks are liabilities of 4.4 trillion dollars or twice their GDP.
The mismatch is perilous and will bring down the financial world..
And now for my regular commentary:
Gold closed down by 4.10 to 849.50 but silver stayed strong all day closing up by 14 cents.  The open interest on gold comex rose by 13000 contracts to 331000 as the cartel are digging in their heals.  The OI on silver went up by 1000 contracts to 87000.
In economic news today, the following were noteworthy:

04:34 Federal Home Loan Banks under pressure - WSJ
The Journal reports that in recent weeks, several of the home-loan banks have suspended dividends or warned that they may come up short of capital requirements. According to the article, this dynamic raises the possibility that some home-loan banks may to cut back on their lending, charge more for credit or sell some of their financial assets. The 12 regional home-loan banks have significantly ramped up their lending (roughly $1T as of 30-Sep from $641B at the end of 2006) as other sources of credit have dried up.
Reference Link (subscription required)
* * * * *

20:04 Housing downturn expected to worsen - WSJ
Citing a consensus of building-industry economists, the Journal notes that the US housing downturn is expected to deepen further this year, with no broad recovery seen until at least 2010. The paper adds that according to the economic outlook of the National Association of Home Builders released Tuesday, single family housing starts, which fell 40% to 617K in 2007, are expected to drop to roughly 441K this year, the lowest since records have been maintained. The article notes particular concerns about the huge overhang of unsold homes, which now stands at 11.5 months, as well as tighter lending standards, which are likely to prevent many consumers from taking advantage of declining housing prices and mortgage rates.
Reference Link (subscription required)
* * * * *

Today, they released the housing sentiment and again it was at the low end of the spectrum:

US Jan home builder sentiment sinks to a new low

NEW YORK, Jan 21 (Reuters) - U.S. home builder sentiment sank to a new low in January as concerns about the faltering economy and reluctant home buyers hurt confidence in the market for newly built single-family homes, an industry group said on Wednesday.

The National Association of Home Builders said its preliminary NAHB/Wells Fargo Housing Market Index was 8 in January, down from 9 in December. That is the lowest level on record since the gauge was launched in January 1985.

Readings below 50 indicate more builders view market conditions as poor than favorable. The January index was below expectations of 9, based on a Reuters survey of economists.

The U.S. housing market is suffering the worst downturn since the Great Depression as a huge supply of unsold homes, tighter lending standards and record foreclosures push down home prices.

"Clearly, conditions in the nation's housing market aren't getting any better, and they aren't going to get any better until the federal government takes substantial action to encourage qualified buyers to get back in the market," NAHB Chairman Sandy Dunn, a home builder from Point Pleasant, West Virginia, said in a statement.

Speaking from NAHB's annual convention, the International Builders' Show being held in Las Vegas this week, Dunn noted that "The Obama Administration and the new Congress have a tremendous opportunity and responsibility to enact legislation that can spur home buyer demand and jump-start the national economy."

The gauge of current single-family homes sales fell to 6 from 8. The index of sales expected in the next six months, however, increased to 17 from 16. The prospective-buyer traffic measure also climbed, rising to 8 from 7, the group said.


Today, the Dow advanced by 287 points as the market rejoiced that Obama is going to solve the banking dilemma  for good.

Obama must decide to use the original TARP plan by buying all the troubled assets and putting them into a bad bank or buy insurance.

Geithner today in testimony was not specific.  However the Street rejoiced anyway.


With the losses by the banks exceeding 3.6 trillion dollars and this does not include credit default swaps, I have no idea what these purchasers of stock are thinking.  And to boot:  Jamie Dimon of JPMOrgan purchased stock of JPM at 23.90 on Jan 16.09., right after release of their annual report. His purchase was opver 11. million dollars.

Strangely, they CEO of Bank of America also bought stock in his company the same day that they released financial news.  Both companies stock fell badly right after their announcements. 


It looks to me that they used TARP money to buy their own stock.   With Europe imploding and JPMorgan owning all the credit default swaps, I cannot figure out what on earth is happening. 


This is what Bill Holter had to say on this matter last night:


Bill H last night:

Treasuries fall on debt concerns!

To all; the above title was printed today on CNBC. This is a huge change, in the past CNBC was ALWAYS BULLISH ALL THE TIME! I sense that the media has turned predator and the market is obliging by collapsing. Financials imploded today with Citigroup down 20%, Bank of America down 29%, Goldman Sachs down 19%, and JPMorgan, the Fed's bank, got hammered for more than 20%! The above title is something I have written about several times in the past, it is here and now!

Today was a CRASH in the U.S. banking sector plain and simple, however today was different from what we have seen for the last 18 months. Let me explain, today the Treasuries got sold off, and sold off hard. The Dollar was strong vs. foreign currencies but Gold was very strong vs. the Dollar. The "scared" money was certainly aimed at the Gold market. This means that Gold started a Moon shot today in foreign currency terms of a roughly 4% gain, I say moon shot because Gold has broken out to the upside and has made all time highs in many different currencies. It has not made a new high vs. the Dollar on the paper markets [COMEX], however it is very close in the physical markets. I believe this is the beginning of Gold's real move to the upside, what we have seen so far has only been a warm up. I believe that the above title "Treasuries fall on debt concerns" is only the beginning, and a run on the Dollar and a financial panic out of Treasuries is now imminent. The question is now being asked "but what about the solvency of the U.S. Treasury?", this is not good. The question will begin to spread until an outright panic begins, sad to say, THIS IS IT!

The solvency of the U.S. Treasury is now in question, this is how a hyperinflation [panic out ] of a currency begins. Hyperinflations are overissuances of money, but the symptoms first show up as nothing less than a loss of confidence in the government that issues a currency. Once confidence is lost it is all over. The confidence breaking questions are being asked today, the panic is beginning. Strap on your seat belts because this ride will be more extreme than anything anyone has ever financially experienced before. Be prepared, Bill H.

Then this today:

Good afternoon Bill,
Royal Bank of Scotland cannot help making news; today its impact on government borrowing in December was announced and it is not pretty.

The BBC reported, "Britain's public finances took a big hit in December from the government's recapitalisation of Royal Bank of Scotland Group (RBS). The public sector net cash requirement, which is the amount the government needed to borrow to fund its spending, hit £44.2bn, the highest on record. Almost half of that came from bailing out RBS, with another £2bn spent on shoring up Bradford & Bingley. Borrowing since April has been the highest since records began in 1946".  end

As for Gold, the GLD released its figures for week ending Jan 20.09 and gold inventory rose above 800 tonnes for the first time:

SPDR Gold Trust holdings rise 7.65 T to new record

SINGAPORE, Jan 21 (Reuters) - The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust , said it held a record 802.90 tonnes of gold as of Jan. 20, up 7.65 tonnes from 795.25 tonnes on Jan. 15.

For details on gold holdings by the ETF listed in New York
and also co-listed on other exchanges, click on:

Holdings in the trust, which issues securities backed by physical stocks of gold, began to climb again in December as weak prospects for the global economy ignited demand for bullion as a safe-haven asset. .

Following are changes in SPDR holdings
Date: Total tonnes

Jan 20 802.90 Jan 15 795.25
Jan 14 790.66



To give you an idea of how much gold these guys have in comparison to say England:


England  (supposedly)  316 tonnes

GLD (private)  802 tonnes.


i.e. they hold almost 250% more gold than the Bank of England.


This is creating havoc for the cartel as massive physical gold is leaving usa shores. The gold is leaving for the following places:


1. China

2. Russia    (10 tonnes per month)

3. GLD.


It won't be long until the usa runs out of gold.


Got to go .

speak to you tomorrow



Tuesday, January 20, 2009

Jan.20.09 commentary....President Obama takes office!!

Good evening Ladies and Gentlemen:
Gold closed up by $14.50 to 853.40.  Silver did not participate.  It fell by 5 cents to 11.15.  As for gold, the open interest rose again on Friday up by 4000 contracts as gold rose prior to the long weekend. Silver's Oi rose by 1500 contracts to 87000.
We are still getting no change in the comex silver and gold.  There are approx 32 million oz of silver waiting for delivery and 1.4 million oz of gold.
And now for economic news. 
As everyone is aware, today Obama became the 44th President of the usa.  Many thought the Dow would rise.  Throughout the last 8 years whenever Bush spoke or he was attending a major function, the Dow would rise and gold would be hammered.
Not today.
During the weekend, we heard that the Royal Bank of Scotland was going to show a huge loss of 41 billion usa dollars for the quarter.
Immediately on Monday morning, the pound broke 1.49 to the dollar and on Monday evening it fell to 1.45.  Today it broke 1.40 to close at 1.379.
The Euro broke 1.30 to the dollar.  Yet, the dollar could not escape bad news as well.
Famed Professor Nouriel Roubini explains:

Roubini Predicts U.S. Losses May Reach $3.6 Trillion

Jan. 20 (Bloomberg) -- U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is "effectively insolvent," said New York University Professor
Nouriel Roubini, who predicted last year's economic crisis.

"I've found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers," Roubini said at a conference in Dubai today. "If that's true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis."..   end


These losses are for the subprime, prime and commercial mortgage losses.  They do not include credit default swaps which are off balance sheet. The losses in this arena are astronomical if you include JPMorgan.

Roubini is stating that the banks and near banks have total equity of 1.4 trillion dollars.  The losses of 3.6 trillion in the usa would bankrupt them.

If you add the derivatives of the big three, JPMorgan, Citibank, and Goldman Sachs, you can appreciate the danger the usa is in. This is why this statment from Bill Murphy is important:

A long held view on my end has been that the financial market problems which have been created are TOO BIG TO BAIL. Based on recent developments, it would appear the acknowledgement of such is very close at hand. Midas has also been reporting over a month that JP Morgan is blowing up because of derivatives and counterparty risk issues … meaning that those doing business with Morgan want to close out their transactions, thereby creating enormous tensions and stress … so much stress that the Fed is all over Morgan trying to hold the Fed's bank together … for a failure of Morgan, the Fed's bank, would have catastrophic consequences for the US financial market system. After all, JP Morgan is THE favored major money center bank in the US, lauded day in and day out by The Muppets on Planet Wall Street.

In other words, JPMorgan and citibank are just too big to bail out.

Warren Buffet, yesterday described the usa situation as  an "Economic Pearl Harbour".

I  have highlighted the link for you:


Buffett says US in 'economic Pearl Harbor'



Today, the big banks traded as if  Armageddon arrived..  Here are a list of the major banks and their closing prices:




The action of major US banks today was worse than terrible…

*JP Morgan (JPM) flopped, making a new low close of $18.09, down $4.73. OUCH!

*Goldman Sachs (GS) traded just as bearishly losing a stunning $13.85 to $59.20, and not far from a new low.

*Bank of America (BAC) continues to streak for zero, losing $2.08 to $5.10.

*Wells Fargo (WF) sank $2.08 to $5.10.

*And Citigroup (C)? It looks hopeless. It lost 70 cents to $2.80 ... cutting its dividend after the close to 1 penny for the next three years. That ought to thrill shareholders


Please note that the big derivative boys had an awful day, with JPMorgan closing down by 4.73 to 18.09.  Goldman Sachs fell by a whopping 13.85 to 59.20..  Bank of America  streaking to the zero line losig 2.08 to 5.10 and Citibank breaking 3.00 to 2.80.


Over in England, our favourite Royal Bank of Scotland closed at 10 pence with Barclays and Llloyds both closing at around 68 pence.  Jim Rogers  went on TV today and echoed that everyone should bail out of Sterling.  England is toast. 

So is the usa.


I thought this is right on!!.  As far as the Madoff situation is unfolding, it looks like their will be many players involved and the scandal will intensify.

Two banks went into forclosure on Friday.  That puts the number of banks up to 25.


Two U.S. banks fail, first casualties in 2009

WASHINGTON (Reuters) - Bank regulators closed two small banks on Friday, the first U.S. banks to fail this year but the latest in an upsurge that began last year as the struggling economy and falling home prices took their toll on financial institutions.

The Federal Deposit Insurance Corp said National Bank of Commerce of Berkeley, Illinois and Bank of Clark County of Vancouver, Washington were closing with other banks taking over their insured deposits.

In 2008, 25 banks were seized by officials, up from just 3 in 2007…  end


During the long weekend, there were other noteworthy events that took place.   S and P lowered its ratings on Spain and the Irish central bank took over Irish Anglo Bank.  After the takeover, a scandal surfaced due to massive loans to its Chairman.  Here are the highlights:


"Spain lost its triple A credit rating from Standard & Poor's on Monday when the ratings agency downgraded the country's long-term sovereign debt because of its deteriorating public finances. S&P lowered its rating by one notch to double A plus, arguing that the global economic crisis had highlighted "structural weaknesses" in the Spanish economy that were inconsistent with triple A, the highest rating. The decision underscored the strains within the eurozone between relatively robust northern economies and those in the south – Spain, Portugal, Italy and Greece – that would benefit from a devaluation of the common currency."

And now for the Irsh Anglo Bank story:


Below is an extract of an article from today's Times which explains the amazing scandal and cover up of loans to directors at Anglo-Irish Bank. The sums are much less than Madoff, but it is every inch as corrupt. The full story is here.


Best wishes,

"Angry shareholders in Anglo Irish Bank demanded High Court proceedings and resignations as new details emerged today of secret loans to its directors while the Government struggled to assure markets that it was "business as usual".

At an extraordinary general meeting at Mansion House in Dublin, scheduled before the Government's announcement late last night that it was nationalising Anglo Irish, Donal O'Connor, the chairman of the bank, apologised for the manner in which loans in excess of €84 million (£75 million) to Sean FitzPatrick, the former chairman and chief executive, were handled, calling it wrong and unacceptable.

"These events are traumatic and painful for each of you, for shareholders and staff, and I apologise on behalf of myself and the board," Mr O'Connor told the meeting.

He revealed that in total there was €179 million of loans to directors, including €84 million to Mr FitzPatrick.


Mr O'Connor said that Mr FitzPatrick's loans were at the normal commercial rate and in accordance with the bank's normal underwriting criteria.

He also explained that the transfers of the loan balance out of the bank before audits — which took place in eight consecutive years up to 2007 — happened because the bank did not have a focus on such activity and failed to identify it as a risk area.

However, when he acknowledged that the auditors were not aware of the past transactions, he was booed from the floor.

Mr FitzPatrick used the secret loans to invest in Anglo Irish Bank shares, property funds, wealth management products, investment property, film finance and pension products.

He concealed the loans by moving them to another bank before the end of the financial year so they would not have to be disclosed in the annual report.

In 2007, his loans stood at €129 million. He owes €84 million.

The bank said its legal advice was that concealment of directors' loans did not breach company law, but that is being reviewed by the stock exchange, the financial regulator and the office of the director of corporate enforcement."


We have been hearing for the past few days two scenarios for a banking rescue:


1.  the formation of a bank bank to buy out the toxic junk.  (like the original TARP plan)

2. the purchase of insurance by the central banks against the toxic junk. 


England is leaning on the second proposal:  Here is a commentary on this rescue:

This credit crisis seems to have numbed everybody's senses, including mine; the scale of the rescues are unbelievable. Below is a quote from (and a link to) what seems to be an authoritative article in the Telegraph here today which explains another new UK rescue plan and puts the extent of the bank bail-outs into context so far - "two-thirds of GDP".

"In an attempt to restore confidence within the financial sector, the Treasury will tell the banks of its plan on Saturday. It aims to announce details of the rescue package publicly early next week.

The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders' bad debts.

Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government's total commitment to solving the banking crisis to almost £1 trillion in taxpayers' money that has either been spent or pledged.

That equates to about £33,000 per taxpayer. The total sum is equivalent to more than two-thirds of Britain's annual GDP of £1.4 trillion."

Please note that the rescue is equivalent to 2/3 England's GDP.


As far as the usa is concerned, they still have to figure out who they are going to deal with the huge derivatives on their balance sheet.

Besides, the losses are greater than their total equity.  In other words these two empires has seen their financial sectors in total disarray and is on the brink of total collapse.


I hope you all read Decharbonnel's paper that I sent you yesterday.  It is quite clear that China is now entering an inflationary phase for their economy.  They have relaxed all banking restrictions and reserve requirements.  They will , no doubt, cash their usa treasuries to finance infrastructure.


In order to combat high inflation, the Chinese will remove the peg but this will hyperinflate the usa as China is the main supplier of stable goods to the usa.  This could not come at a worse time for usa citizens.


speak to you on Wednesday,






Monday, January 19, 2009


. Sunday, January 18, 2009

*****Hyperinflation will begin in China and it will destroy the dollar*****

by Eric deCarbonnel

The conventional wisdom on China is dead wrong. Specifically, there is a widespread belief, as expressed by Goldman Sachs, that "China will keep the yuan trading within a narrow range in 2009 due concerns about exporters." Worse still, others are even predicting that China will devalue its currency! The sheer wishful thinking is astounding! The idea that "China will keep the dollar peg to help its exporters" ranks all the way up there with "Housing prices always go up" and "You can spend your way to prosperity".


If you have learned nothing else in the last year and a half, you should have learned that if something sounds too good to be true, that is because it IS too good to be true. The media overwhelmingly presents China's dollar peg as a win-win situation: Americans get cheap imports and low interest rates while China gets a strong manufacturing sector. While commentators do sometimes debates whether China will keep lending us money forever, they never talk about the REAL problem with the dollar peg.

Below is a chart which shows how China's dollar peg works. See if you can spot the downside that the media never seems to mention.

The US's trade deficit requires China to print money!

The little discussed downside of the dollar peg is all the money China has to print to maintain it. China's Central Bank puts the extra dollars it receives from its trade surplus into its growing foreign reserves and then prints yuan to pay Chinese exporters. This results in an increase in China's base money supply by an amount equal to the increase in its foreign exchange reserves. While China's ability to keep accumulating US reserves is endless, its ability to keep its money supply under control is not.

The true threat to the dollar peg

If there is one development which could force China to drop its dollar peg, it is out of control inflation. Rampant inflation would result in millions of citizens starving and would create widespread social unrest. Keeping food prices low is a matter of political survival for Chinese authorities. So, facing the choice between losing their grip on power and losing the dollar peg, they will not hesitate for a second to sacrifice the dollar to save their own skin.

So far China been able to contain inflation, but…

In recent years, China has been able to contain the inflationary effects of its trade surplus by soaking up or "sterilizing" all the extra liquidity (printed yuan). These sterilization efforts mostly involved:

A) Raising the reserve requirements of commercial banks. In essence, the PBOC (People's Bank of China) prints money to fund its trade surplus and then increases the amount of yuan banks have to keep as reserves at the Central bank, preventing the printed cash from reaching the economy. As of May of last year, commercial banks' reserve requirements were at 16.5 percent

B) Selling RMB-denominated sterilization bills. The state owned and controlled banking system has been forced to absorb the majority of these bills. As of May of last year, the value of sterilization bills reached 10 percent of bank deposits.

Taken together, these two steps have immobilized roughly 26.5 percent of Chinese commercial banks' deposits. This shows the magnitude China has had to intervene so far, as the value of sterilization instruments outstanding has been increasing at roughly the same rate as its foreign reserves.

PBC Foreign Reserves and Sterilization Instruments (US$ Billions)

While China has been able to contain inflation to single digits for the last decade, that is about to change. All economic forces are aligning in China for a surge in inflation.

1) China has abandoned its sterilization operations

Currently, the PBOC has abandoned its sterilization efforts all together:

A) The PBOC has lowered reserve requirements by 2 percentage point for China's big banks and by 4 percentage point for all other banks.

B) The PBOC has scaled back sterilization efforts by reducing liquidity-draining three-month and 52-week bill sales from once a week to once every two weeks. As a result of these decreasing sales, the clearing house for China's interbank bond market expects PBOC's 2009 bill issues to be down over 70%, which will increase the Chinese base money supply by 2 trillion yuan.

These actions signify that the PBOC has ceased sterilizing its currency interventions and is focusing on (imaginary) deflation risks. A flood of cash has been unleashed, and a tsunami of pent-up inflation will soon hit China.

2) China is running record trade surpluses

China's imports are crashing much faster than its exports. In December, Chinese imports fell 21.3% while exports fell only 2.8%. As a result, China has been running record trade surpluses these last three months: $35 billion, $40 billion, and 39 billion.

The reason for China's surplus is obvious when you think about it. Consider the following list of goods a country can exports and ask yourself what would hold up best during a severe global economic downturn.

*** Commodities (Oil, gas, steel, etc)
*** Capital goods (Airplanes, Caterpillars, Machinery for new factories, Machinery for new mining/oil exploration projects, etc)
*** Durable goods (SUVs, CARs, appliances, business equipment, electronic equipment, home furnishings, etc)
*** Luxury goods (brand name products, designer clothing, artwork, etc...)
*** Cheap consumer goods (everything you buy at Wal-Mart)

The answer is that the demand for cheap consumer goods will hold up better than anything else. This can easily be seen in the retail sales this holiday shopping season. Wal-Mart, which imports 70% of its products from China, was the only retail to post a year-on-year increase in sales. So while the world economy might be imploding spectacularly, demand for Wal-Mart's cheap Chinese goods is holding up quite well. The implications of this is that while China's exports will fall, they will fall less than those of any other country.

The current trade surplus is still completely unsustainable. If China's continues running a 40 billion dollar trade surplus all year, its base money supply will double by the end of 2009. Also, since China has halted the appreciation of the yuan, its trade surplus is unlikely to shrink as demand for cheap consumer goods is set to remain strong.

3) The Chinese economy will shrink in 2009

Consistently amazing economic growth is the biggest factor which has helped China contain inflation. Inflation happens when the money supply is growing faster than the economy, and china's economy has been growing fast. This economic growth has helped absorb the enormous quantities of yuan that have been printed to support the dollar. However, this will change in 2009. Due to falling global demand, China's economy is set for zero, if not negative, growth which will remove a significant mitigating force against inflation and amplify the inflationary impact of China's printing press.

Side note: China's economic strength is underestimated

It is important to note that, while economic growth will go probably go negative, China's economy will not crash. The strength of the Chinese economy is widely underestimate in the media today. In addition to the resilient worldwide demand for its cheap consumer goods, China is also benefiting for import substitution at home. This is why imports to China are falling so fast: Chinese are switching to cheap domestic product instead of expensive foreign imports. So while there has been a sharp drop in Chinese demand for big-ticket brands (Dior, Chanel, Hermes, etc…) and others luxury items, knock-offs and other cheap goods are still flying off the shelves. Chinese consumers are downshifting, but they are still spending strong, as reflected by the 21% year-over-year growth in 2008.

However, despite China's strong fundamentals, the current worldwide downturn is too strong for it to escape. The worldwide financial carnage is so severe that even the demand for cheap consumer goods will decrease. As a result, while China may outperform every country on Earth, its economy will still suffer in 2009.

4) Deflation in China would be too good to be true

China has been in a constant war with the inflation caused by the dollar peg. Economic growth and sterilization operations alone have not been enough to absorb the growing liquidity, and China has been forced to turn to ever more drastic steps in its efforts to contain inflation. These stifling policy measures together with its sterilization efforts have enormously suppressed domestic demand and have distracting the government from developing key services enjoyed by other developed nations. This suppressed domestic demand has also distorted China's economy, as reflected by the undersized service sector, and has lowered the quality of life for Chinese citizens.

Chinese financial repression and market socialism

In its losing battle with inflation, China has adopted stifling policy measures to suppress domestic demand and keep prices down:

(these are only a few of the anti-inflation measures China has adopted)

A) Strict price controls. (ie: Large wholesalers must seek central government approval if they want to raise prices by 6 percent within the space of 10 days or by 10 percent within a month.)
B) Credit ceilings. (limits on how much commercial banks can lend)
C) Floors on lending rates and ceilings on deposit rates
D) Strict rules governing lending decisions
E) Tight land purchase and lending requirements
F) Direct government intervention to limited expansion in certain industries (ie: aluminum, steel, autos and textiles sectors in 2004)
G) Penalty taxes on anyone buying and selling real estate in a short period of time.
H) Forcing local government to cut back spending by delaying approval of their investment projects
I) High sales taxes.
J) Etc...

Suppressed domestic demand has distorted China's economy

The distortions caused by sterilization operations and stifling policy measures are best seen when comparing China's and the US's economy:

A) US home buyers get tax incentives VS Chinese home buyers get tax penalties
B) US gets artificially low interest rates VS China's artificially high interest rates
C) US's "service economy" VS China's "service-less economy"
D) Etc…

In the US, the overvalued dollar and easy credit environment have caused the service sector to become oversized, artificially raising America's standard of living. In contrast, China's suppressed domestic demand has led its service sector to become undersized, artificially decreasing its standard of living.

Focus on inflation has lead to a lack of key government services

With Chinese authorities sidetracked by their export oriented focus and battle with overheating, the development of key government services enjoyed by other developed nations has been neglected. As a result, Chinese citizens' lack of social security, free education, and available consumer credit, which has forced them to save far more than their Western counterparts, leaving them with less disposable income.

Deflation would be a godsend to China

Chinese authorities must be thrilled about the prospect of fighting deflation instead of inflation. Fighting deflation would allow China to:

A) Scale back its increasingly costly sterilization efforts.
B) Lower interest rates.
C) Get rid of all the controls which are distorting domestic property markets.
D) Promote consumer spending without worrying about the inflationary impact.
E) Develop a comprehensive social security net.
F) Increase funding of public education.
E) Accelerate the development of a system to rate people's credit.
F) Encourage growth in underdeveloped domestic sectors (housing, health care, education, entertainment, etc)
G) Etc…

Most of the steps above are already being taken by Chinese authorities. Unfortunately, there are no free lunches. The possibility that China can maintain a highly inflationary currency peg, reverse years of anti-inflation policies, release a flood of sterilized yuan back into circulation, and go on a Western-style stimulus/bailout binge without experiencing double digit inflation is zero.

5) No deleveraging

There is no chance of real deflation happening in China. None. The Strength of China's Banking System makes it impossible.

A) Apart from Bank of China, Chinese banks have little exposure to overseas debt. So, although toxic US securities were sold to banks around the world, China's capital controls protected its banking system from America's bad debt

B) As a side effect of the country's sterilization operations, 26.5 percent of Chinese commercial banks' deposits were placed with the central bank last year (reserve requirements and forced underwriting of PBOC bills).

C) Unlike Western banks, who have been enjoying a credit bonanza for decades, Chinese banks have only recently gotten into the credit game, after years of being ridiculed for being overly cash-centric. Because of this late entry, Chinese banks completely missed the subprime party.

D) China is also in the enviable position of being one of the few countries which doesn't need to deleverage. While Western banks were going insane with high leverage and off-balance sheet financial vehicles, Chinese banks were doing the opposite, as can be seen on the chart below (from Tao Wang of UBS).

E) China has been waging a war against NPLs (non-performing loans) in the last few years. For example, with heavy penalties having been imposed on bank managers responsible for new NPLs, Chinese banks have become much more concerned about the loan safety than profitability. This battle again NPLs has paid off. As of September 30, 2008, nonperforming loans totaled only 2 percent for Chinese banks, compared to the 2.3 percent for FDIC-insured banks in the US. Loan loss provisions have also improved substantially, with provisions of Chinese banks amounting to an impressive 123 percent of their NPLs.

F) Finally, China's money supply itself is underleveraged when compared to the rest of the world. For example, the US's M2 to M1 ratio is 65% higher than China's. The Chinese M2 to GDP ratio is also more 160 percent, perhaps, the highest in the world.

When considering the strength of Chinese Banks and underlying strength of China's economy, no debt deflation is possible.

If there is no chance of deflation, then why is China's cpi slowing down?

There are three main reasons for the slowdown in China's cpi:

A) The bursting of the commodity bubble. Because of speculator dominated futures markets in the US, commodity prices were boosted to artificial level going into the summer of 2008. As these inflated commodity prices fell back down to Earth, they caused a temporary worldwide slowdown in inflation.

B) In the second half of the year, deleveraging and hedge fund redemption caused the outflow of a large amount of hot money from China. This outflow temporary depressed asset prices.

C) The unwinding of the commodity bubble spread deflation fears worldwide and caused the velocity of money to drop.

6) Deflation fears are paralyzing China's money supply

"deflation fears" have slowed the Chinese money supply to a crawl. While they are still spending, Chinese consumers are delaying big purchases and downshifting to discount stores. Businesses are strapped for cash, and scared Chinese banks are dumping riskier borrowers, like credit-card holders. China is experiencing one of the brief deflationary periods which typically precede hyperinflation.

Deflation fears in China also provide the perfect example of how a slowdown in the "velocity of money" and makes prices fall. Right now, Chinese banks are hoarding cash and delaying payments on personal credit cards. Only a year ago, most banks paid credit-card transactions in 14 days, but now merchants are having to have to wait 20, 40 or even 90 days to get paid. With lenders making credit-card transactions as unattractive as possible, many merchants are refusing to take credit cards from Chinese consumers. Think about that for a second, all that purchasing power from Chinese credit cards wiped out due to nothing but fear itself.

The important point to note about the price deflation caused by the deflation fears is that it will reverse sharply once inflation picks up. Banks will begin paying credit cards normally, and merchants will start accepting them again. The enormous amount of purchasing power which disappeared will reappear just as suddenly, causing a wild jump in inflation.

7) Sterilization operations have become a loss generating ventures

Until last year, China's sterilization operations had been profitable, since the rate of interest that Beijing earned on foreign exchange reserves (mainly US Treasuries) had been higher than the rates it was paying on its yuan-denominated sterilization bills at home. However, now that the fed has lowered US interest rates to zero for the foreseeable future, China's dollar peg has become a loss-making policy. When inflation hits china and interest rates rise again, China's losses from its currency sterilization will become staggering.

8) China likely to attract a flood of hot money in 2009

China has had a problem with hot money inflows in the past, and those problems are likely to get worse this year. Hot money refers to the money that flows regularly between financial markets in search for the highest short term interest rates possible. This hot money has found ways around China's capital controls and flows freely in and out of China to the authorities great frustration.

When hot money flows into china, it forces the PBOC to print money the same way as the trade surplus does. At the beginning of last year, these hot money inflows were one of China's biggest problems, bringing inflation up to 8.6 despite the authorities best efforts. The country's hot money problem ended temporarily with the bursting of the commodity bubble.

In the second half of last year, deflation fears and hedge fund deleveraging cause much of this hot money to leave China and seek the "safety" of US treasuries. This small exodus is what is responsible for the brief fall in China's foreign reserves. However, the outflow of hot money from China has ended, and it now looks set to reverse.

In the next month or so, rising inflation will start pushing up Chinese interest rates at a time when central banks around the world have set their rates at or near zero. Since the entire world knows that the yuan is undervalued, these higher rates will make China the most attractive destination on Earth for those seeking safe high yielding interest rates, and the hot money problem will return with a vengeance.

9) Chinese authorities are pulling out all the stops

Chinese authorities are pulling out all the stops to get the country back on track. In order to prop up economic growth, Chinese authorities have:

A) Raised tax rebates for exporters of everything from high-tech and electronic products (motorcycles, sewing machines and robots, etc) to some rubber and wood products.
B) scraped export taxes for some steel products, aluminum, rice, wheat, flour and fertilizers
C) Cut the lock-up period beyond which people can resell their property without paying a business tax from five years to two years.
D) scraped the urban property tax for foreign firms and individuals
E) Allowed people to buy second homes on the same preferential terms normally reserved for first time buyers.
F) Announced plan to spend 900 billion yuan over three years to build affordable housing
G) Cut the deed tax payable by first-time buyers of homes smaller than 90 sq m is to 1 percent.
H) Announced measures such as cash subsidies and tax cuts to encourage home purchases
I) Announced plans for a 4 trillion yuan (586 billion) stimulus package to boost domestic demand through 2010.
J) Announced plans to invest 5 trillion yuan roads, waterways and ports in the next three to five years (over 2 trillion yuan more than originally planned).
K) Approved 2 trillion yuan for railway investment
M) Announced a tax break for public infrastructure projects.
N) Abolished the 5 percent withholding tax on interest income.
O) Scraped the 0.1 percent tax on purchases of equities.
P) Instructed Central Huijin (a government investment arm) to buy shares of listed Chinese firms.
Q) Encouraged state-owned firms to buy back shares.
R) Raised minimum grain purchase prices by 15 percent
S) Approved landmark reforms that give peasants the right to lease or transfer their land-use rights
T) Issued a stimulus package for its auto sector, including a tax cut
U) Set a price floor for air tickets
V) Handed out cash gifts to brighten their mood before the Chinese New Year
W) Etc...

10) Banks are flooding the economy with new loans

Chinese authorities are pushing banks to extend credit and help fight "deflation". To encourage this money supply growth and new lending, the PBOC (the People's Bank Of China) has halted sterilization operations and has cut the benchmark one-year lending rate by 2.16 percent and the deposit rate by 1.89 percent. Also, as part of these efforts, Chinese officials are reversing decades of financial repression and freeing up their banking system.

As China lifts restrictions on lending, banks are flooding the economy with new loans. Credit ceilings under which commercial banks have been operating have now been removed, and credit controls have been relaxed to give banks more leeway in making lending decisions. Chinese lenders will now be able to restructure loans and adjust the types and maturities of debt. Banks are being pressured to use this new financial freedom to "promote and consolidate the expansion of consumer credit".

In addition to stimulating consumption, credit constraints are being relaxed to give loan access to small and medium privately owned businesses, which have until now been mostly shut out of credit by the state-owned financial system. As part of this effort and in order to help banks overcome their deflation fears, China has said it will tolerate more bad debt. This step is particularly significant, as the heavy penalties imposed for the creation of new non-performing loans has been a big restraint on credit expansion.

Finally, the commitment of Chinese authorities to fight deflation is so great that regulators have stated they will support the sale and securitization of loans. I repeat, China is moving towards securitization of loans! The adoption of securitization holds the potential to enormously accelerate money supply growth.

China's efforts to boost lending are working. In December, China's M2 money and loan growth soared. Just look at the graph of Chinese money supply growth below.

Does it look like China is headed towards deflation to you? (this chart will become much scarier once January's numbers are added in)


I view hyperinflation in China as absolutely guaranteed. Zero doubt. China is dismantling all the measures it has put in place over the years to fight inflation. It is dropping restrictions on purchasing property, eliminating price controls, getting rid of loan quotas, lowering interest rates, ceasing its sterilization efforts, etc… It is also pulling out all the stops to boost government spending and new loan creation.

Meanwhile, China's 40 billion dollar trade surplus means that its base money supply looks set to double in 2009. There is also the fact that China's money supply is frozen due to cash hoarding and will cause inflation to increase when it accelerates. Finally, the commodity bubble has finished bursting, and China's economy looks set to shrink.

Every economic factor in China suggests an enormous wave of hyperinflation will begin early this year. While I have written about
the threats facing the dollar, this will be the event that finally ends the US's borrowing binge and destroys our currency.

Hyperinflation in China will be a monumental event

Because China makes most of the world cheap consumer goods, it will export its hyperinflation around the world. This means that no fiat/paper currencies will survive this with its purchasing power intact. Some will lose all value (dollar) while others will survive while experiencing a loss of purchasing power (yuan, euro, yen, etc...).
The only money that will retain its full value in the face of Chinese hyperinflation is gold.

China will sink the dollar to save the yuan

Once hyperinflation kicks into gear, Chinese authorities will find it impossible to bring it under control without sacrificing the dollar. Since hyperinflation would hurt Chinese exporters as much as losing their US exports, China will face a clear cut decision. By dumping the dollar peg and selling its USD holdings, China will help contain domestic inflation in many ways:

1) China will no longer be printing massive quantities of yuan to support the dollar.
2) By selling dollars in exchange for yuan, China will be able to take those yuan out of circulation, shrinking its monetary base.
3) Since the yuan will strengthen enormously again foreign currencies, Chinese exports will fall and that means there will be a lot more goods available for domestic consumption.
4) Since the yuan will be stronger against foreign currencies like the dollar, Chinese imports will rise. That means cheaper commodity prices across the board.
5) Dropping the dollar peg will make the yuan a major reserve currency. That means lower interests rates in China as foreign central banks build up yuan reserves.

Those expecting deflation are in for a surprise

Western nations who are lowering interest rate very sharply, without fearing inflation, are mainly concentrating on the domestic dynamics of their economies and the value of their currency. My bet is that no one is even considering the possibility that inflation could be imported from China, and, when cheap Chinese imports stop being cheap anymore, it will catch everybody completely by surprise.


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