Saturday, August 1, 2009

August 1.09 commentary.

Good morning Ladies and Gentlemen:
Gold had quite a stellar day yesterday climbing by 20.00 dollars to 954.50.  Silver also rose by 47 cents to 13.94.  The open interest on the gold comex fell on Thursday by 3000 to 367000.
Silver's OI rose by 1000 to 97000 contracts.
The COT continues to show commercials supplying the paper, however many speculators are coming into the rigged market thinking the end is near.
The dollar tanked badly yesterday to 78.29 and now one of the main pillars have been pierced: 
the breaking of the strong resistance usa index of 78.40.
The other pillars are the long bond below the 116.00 level;
the 10 yr bond at 115.00; and
the euro at  143.00
When all pillars are toppled, you will then see a rout on the markets.
The cabel are manipulating the market in full force.  They flexed their muscles playing host to the 150 strong Chinese delegation.
Their mission was to show strength in the usa stock market and to show appetite for absorbing 230 billion dollars worth of debt.
Surprisingly, yesterday bond prices rose by a full point and a half to 118.7 on the long bond.
Why?  the primary dealers gorged themselves with 1/2 of all treasuries, with the Government buying the rest.  Support was needed as primary dealers have been absorbing these issues on a
constant basis now for over 6 months.
The GDP came out yesterday and it showed a contraction of 1% over the quarter.  The previous quarter was revised downward.
Here is a commentary on that:

And then Garic…

Late yesterday afternoon the S&P 500 came off of its highs and the Treasury market miraculously started rallying after the auctions were finished. This morning the Government reported its preliminary Q209 GDP report where Personal consumption expenditures was reported to be weaker than expected, the S&P proceeded to sell off 4 points and the Treasury market continued its miraculous rally. Primary dealers who bought the largest weekly auction of Treasuries in the history of the world were miraculously bailed out. The mainstream media is unleashing propaganda that China showed up to buy the 7 year. Yet, the Treasuries own data shows China has been buying T-Bills, holding T-Notes and selling Mortgage Backed Securities for over a year. Once again the primary dealers have absorbed the largest and worst auctions in the history of the world and made over 1% on any of their purchases of the $120B in debt that taxpayers will owe. Meanwhile, the preliminary GDP report shows Private Domestic Investment falling at a 20% annual rate and Federal Government Spending rising at a 10% annual rate. Welcome to the Soviet Union. My point is once again every market is being tightly controlled and priced to benefit Wall Street and Washington while the real world continues to crumble. We are now past the 2 year mark of the worst financial and economic crisis in 70 years and the powers to be are still engaging in price fixing in all markets, printing however many dollars it takes to fix these prices and using the media to lie to the public about the real state of affairs. The level which Gold finds support continues to slowly march higher. The fundamental economic and monetary news continues to be incredibly bullish for holders of Gold.




Ok here are some numbers for yesterday:


The euro rose .0161 to 1.4251. The pound gained .0194 to 1.6698. The yen went with the other currencies today, rising .092 to 94.64.

Silver finally showed us some "oomph," which has been sorely missing. Perhaps the silver game is finally on. There have been so many false starts. The silver open interest dropped 929 contracts to 97,827.

Crude oil was up sharply, gaining $2.51 per barrel to $69.45.

The CRB rose 2.51 to 257.12.

U.S. economic news:

08:30 Q2 GDP (first read) reported (1.0%) vs. consensus (1.5%)

Q1 final was revised to (6.4%) from (5.5%) 
Q2 Personal Consumption (1.2%) vs. consensus (0.5%) 
Q2 Price Index 0.2% vs. consensus 1.0% 
Core PCE 2.0% vs. consensus 2.3% 



Here is the official news release on the GDP figures for 2009 and the revised and final figure for 2008:

U.S. economy barely grew in 2008-government

WASHINGTON, July 31 (Reuters) - The U.S. economy barely grew during 2008, at about a third the rate previously thought, the Commerce Department said on Friday, largely because plunging home values undermined consumer spending.

Benchmark revisions issued by the department showed gross domestic product expanded at a pedestrian 0.4 percent last year, instead of 1.1 percent as previously reported.

GDP measures the value of all goods and services produced within U.S. borders and is the broadest measure available of total economic activity.

Spending on residential construction tumbled 22.9 percent in 2008, instead of the previously reported 20.8 percent drop, the department said.

Falling home prices helped shrink household wealth, resulting in consumer spending falling 0.2 percent in 2008 rather than rising 0.2 percent as previously believed. Consumer spending accounts for over two-thirds of U.S. economic activity.

The sharp revisions to 2008 included a much steeper 2.7 percent annual rate of contraction in the third quarter instead of the 0.5 percent rate of decline reported earlier.

But fourth-quarter GDP was revised to show a 5.4 percent rate of decline, less severe than the previously reported 6.3 percent rate of decrease.

The economy slipped into recession in December 2007 and came close to posting four straight quarters of GDP declines last year. Boosted by the government's $168 billion stimulus program, second-quarter GDP grew at a revised 1.5 percent rate -- less than the 2.8 percent rate previously thought…



This is the worrisome number:  the fall in personal consumption.   In plain English..the consumer is  just not spending and the consumer is 70% of total GDP:


Jul 2009 08:43 EDT DJ MARKET TALK: Consumption's A Worry In GDP Data

Worrying drop in consumer spending in 2Q has caught mkt's eye: real PCE was down 1.2% in 2Q vs increase of 0.6% in 1Q. Durables declined 7.1% vs increase of 3.9%, nondurables down 2.5% vs 1.9% rise. Service spending at least posted a gain of 0.1% vs drop of 0.3%. (ML)


The Milwaukee Managers Purchasing Index was released yesterday and this manufacturing area also showed contraction.  We saw Chicago also contract in their news release a few

days ago:

10:00 Jul Milwaukee Purchasing Manager's 45.0 vs. consensus 52.0
Jun reading was 50.0 
* * * * *




However business activity did pick up in the Chicago area  (not manufacturing):


US Midwest business activity rises in July

NEW YORK, July 31 (Reuters) - Business activity in the U.S. Midwest rose in July, a report showed on Friday, to its best showing since last September, when Lehman Brothers' failure pushed the banking sector to the brink of collapse.

The National Association of Purchasing Management-Chicago business barometer rose to 43.4 from 39.9 in June. Economists polled by Reuters had expected a reading of 43.0.

A reading above 50 indicates expansion.


This was the big news of the day, private Insured Mortgages Defaults are on the rise for June:


U.S. insured mortgage defaults rise in June

* Defaults rise, cures decline on insured mortgages 
* Deterioration slows from prior month 
* Weakness follows end of foreclosure moratoriums

NEW YORK, July 31 (Reuters) - Defaults on privately insured U.S. mortgages increased and the number brought up to date fell in June for a second straight month, reflecting further pressure in the nation's housing market, though the pace of deterioration slowed.

The Mortgage Insurance Companies of America, a trade group, said 88,362 insured borrowers were at least 60 days late on payments in June, up less than 1 percent from May and up 30 percent from a year earlier. Late payments often foreshadow foreclosure. The number had risen 8 percent in May.

Mortgages brought up to date totaled just 51,908, down 1 percent from May and the fewest since January, but up 20 percent from a year earlier. The month-over-month decline had 
been 10 percent in May.

Private mortgage insurance lets people buy homes with down payments of less than 20 percent, and guarantees that lenders will be repaid even if borrowers default. Insurance in force totaled $915.1 billion in May, the trade group said.

The industry has been tightening its standards after struggling with losses from having backed subprime and other risky mortgages, which have eaten into capital. While most major U.S. home loan providers adopted mortgage modification programs in the last year to keep borrowers in their homes, many foreclosure moratoriums expired in March.



Also note that mortgages brought up to date is down 1% from May as the usa is still facing massive defaults.  We are now approaching the height of the prime mortgages resets and the ARMS resets.  This will be devastating to the banks. 


Joseph Ackerman, the Chairman of the large Deutsche Bank reported a lousy quarter and reiterated that the economy has a long way to go to recover.  Here is the story:


Ackermann Says Bad Loans Are ‘Next Wave’ of Crisis 

July 31 (Bloomberg) -- Rising delinquencies among consumer and corporate borrowers are the "next wave" of the financial crisis and may affect banks that have avoided losses so far, said Deutsche Bank AG Chief Executive Officer Josef Ackermann. 

"This crisis has consisted of a series of earthquakes, with changing epicenters," Ackermann said late yesterday at an event in Zurich. "Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this." 

Deutsche Bank, Germany’s biggest lender, said this week it set aside 1 billion euros ($1.4 billion) for risky loans in the second quarter. The seven-fold increase in provisions and below- forecast revenue from trading sent the Frankfurt-based bank’s shares to the biggest decline in four months on July 28…-END-


This is Bill Holter's commentary for yesterday:

Bill H:

Bank holiday?

To all; being a long time soldier in the "Gold War", I can remember back 7 or 8 years when the cabal would smash Gold over the head with gobs of paper. This is still the preferred method but the effects are no longer as damaging to the psyche nor do they have any staying power. Back in the old days, once Gold got smashed it might take 2-3 months to right itself and get back to where the attack took place. This week is another example of a "paper attack" but here we are in the same week and Gold has already recovered. My how things have changed!

The bounce in the Dollar that had the Larry Kudlow's of the world jumping up and down doing their "King Dollar" dance has evaporated completely as the Dollar is again knocking on the door of a breakdown in price. The "show"of Dollar strength that was put on for the benefit of the Chinese is over. This show probably cost as much as he Olympics but couldn't even last a week and was not nearly as entertaining. Whether they used steroids or not, the Dollar is certainly frail and bares no resemblance to it's former Arnold like physique.

I have read several reports by the venerable Harry Schultz along with Bob Chapman and Jim Willie that state a "banking holiday" is scheduled for Sept. They say that U.S. embassies across the globe have been instructed to purchase and stock up on foreign currency (enough to last a year) prior to this time frame. It does make sense to me, as you all know this "bank holiday" scenario is one that I suggested will occur since late last year. If/when this "holiday" comes to pass, you must have currency and food put aside ahead of time. Another area that some take for granted are your safe deposit boxes. These will not be accessible during the holiday so if you have metal stored, don't count on being able to use it.

The seasonal patterns that have witnessed panics in the past is but weeks ahead of us. Never in the past has the U.S. entered this Sept.-Nov. time frame with such debt, delusion, nor financial frailty. In my opinion there has never in all of history been conditions as ripe as these for an outright financial and currency panic. Nor has there ever been a time when the fundamental reasons for owning Gold were even close to as widespread and strong as they are now. We know that mine and Central bank supply is drying up, we know that "funny business" is pervasive in the ETF's and COMEX warehouse inventory movements (lack of). We know that credit has imploded and the Treasury and Fed have layed their balance sheets on the line (otherwise known as the chopping block), you must trust now that 5,000 years of monetary history has validity. Gold IS money, paper is currency. No one has ever kept up with the cost of living by holding currency long term, they have by holding MONEY! Stay prepared and have a nice weekend. Regards, Bill H.




The following story came out of FASB.  They had their meeting and they are intent on establishing mark to market accounting against the wishes of the bankers.  This would be devastating to Wall Street.  Here is the update on the story I brought to your attention last weekend:

ul 31 2009, 1:15 pm 

Mark-To-Market Is Back: With A Vengeance!

Attention: This may be the single most important piece of news regarding the financial industry you will read this week. Maybe for the whole month. Maybe for the whole year. Okay I'll stop being melodramatic and get right to it. The Financial Accounting Standards Board (FASB) is in the process of making banks very unhappy. In a complete reversal from their revised policy released in April, it is considering vastly tightening mark-to-market requirements to include virtually all securities on a bank's balance sheet. Yes, it even wants the very, very illiquid stuff marked-to-market.

To understand a bit more about what how assets are valued, this entry I wrote a while back may help. Mark-to-market is an accounting concept requiring that banks mark the value of the assets on their balance sheets up or down depending on how their values change in the market. Right now, very illiquid assets do not have to be marked-to-market, so instead can be valued by the bank using internal assumptions.

Here's a blurb from FASB's July 15th board meeting:

The Board agreed to propose that all financial instruments will be presented on the balance sheet at fair value with changes in value recognized in net income or other comprehensive income with an optional exception for own debt in certain circumstances, which will be measured at amortized cost.

Why almost no one is reporting on this shocks me, because it's a huge deal. FASB is suggesting that all financial instruments -- the good, the bad and the ugly -- must be valued on a bank's balance sheet at their market value. Illiquid CDOs, property holdings, credit derivatives and anything else you can think of will all now be marked, mostly down, to what they would trade for in the market. Currently, banks can classify the most illiquid stuff on their balance sheet as "held for investment" or "held to maturity" and use whatever value they believe the assets are worth based on internal assumptions.

One of the only articles I could find about this was a good one by Jonathan Weil at Bloomberg from last Thursday night. I didn't write about it until now because it took me all week to have FASB verify that Weil's interpretation was correct. He realizes how big this news is. He provides a really great example of the implications:

Think how the saga at CIT Group Inc. might have unfolded if loans already were being marked at market values. The commercial lender, which is struggling to stay out of bankruptcy, said in a footnote to its last annual report that its loans as of Dec. 31 were worth $8.3 billion less than its balance sheet showed. The difference was greater than CIT's reported shareholder equity. That tells you the company probably was insolvent months ago, only its book value didn't show it.

Banks will be relieved to know that this accounting change will not have a major effect on net income as it appears on an income statement: 

The Board agreed to propose that changes in an instrument's value may be recognized in other comprehensive income on the basis of qualifying criteria related to an entity's management intent/business model and the cash flow variability of the instrument.

But not all the income statement news is good. Some potentially illiquid instruments' gain/loss will be included in net income:

The Board agreed to propose that changes in value for derivatives, equity securities, and hybrid instruments containing embedded derivatives requiring bifurcation . . . will be recognized in net income. The Board agreed to propose that for all financial instruments, interest and dividends will continue to be recognized in net income. Credit impairments, as well as realized gains and losses from sale and settlement, also will be recognized in net income. The classification of instruments will be determined at initial recognition of the instrument and will not be subsequently changed.

FASB's rationale for this change can be found in its project update. Here are its goals:

a. Reconsider the recognition and measurement of financial instruments 
b. Address issues related to impairment of financial instruments and hedge accounting 
c. Increase convergence in accounting for financial instruments.

These proposed changes certainly would satisfy those goals, especially part c). Right now, there can be huge divergence for how banks value similar illiquid assets, because their assumptions can provide whatever value they believe the assets are worth. FASB's project would change all that. It would let the market decide.

Would this change be good or bad? Well banks will think it's bad. Much of the revenue they see throughout the year will now be eaten away by accounting losses for these asset re-valuations.

Investors, however, should think it's good. This does create greater transparency and lessen the possibility that a company is hiding losses that bad assets might not realize until sale or maturity.

It also took me so long to get this piece out because I was waiting for the minutes to come out for a joint meeting between FASB and the International Accounting Standards Board (IASB) that occurred last Friday in London. They still aren't out, but Deloitte's unofficial minutes indicate that FASB's proposal was discussed. IASB's standard is not as conservative. From the minutes it seems IASB remains a little unconvinced that FASB's suggestion is a good one. It is waiting to see a more detailed exposure draft. My favorite quote:

The FASB needed more time to complete its deliberations, but acknowledged the pressures on the IASB and the reasons it was pursuing the project in the way it was.

Yes, FASB understands those pressures all too well. They're called angry bankers.

The FASB spokesperson I spoke to explained that in August, FASB will decide whether to release a final exposure draft of this proposal. If it decides to do so, it will request feedback from the public. Then it will take that feedback into consideration and potentially release a new rule sometime in the fall. Watch for it, because these changes would shake the financial world.

(In the meantime, for anyone interested here's some much deeper detail on their proposal -- opens .pdf.)



Late Friday night came a report that the big Texas banking chain Guaranty Trust with 161 banks in Texas and California in trouble with the regulators.

They could not raise funds and their mortgage loans are underwater.  They have 34 billion in assets and deposits.  The FDIC cannot find a buyer for them


speak to you on Monday


Thursday, July 30, 2009

July 30.09 commentary...

Good evening Ladies and Gentlemen:
Gold rose today by 7.20 to 934.70 and silver rose by 22 cents.
The Dow rose at one point over 180 points on good earnings.  It also got a spark when it was reported that the bond auction for
7 year bonds went well.  However the Dow fell badly in the last hour and it finished up by 83 points.
Here is the commentary on the bond auction:
13:03 7-yr auction yields 3.369% with 91.73% allotted at the high
Bid/cover 2.63 vs. average of the past 5 auctions 2.40 
Indirect participation 62.5% vs. average of the past 5 auctions 39.98% 
In reaction: 
2-yr (flat at 1.06% 
10-yr 3/32 to 3.64% 
 You note the huge indirect participation of 62.5%.  In essence the entire bond issue was bought by the usa government.
Jobless claims were slightly better than expected:
U.S. jobless claims rise slightly above forecasts 

WASHINGTON, July 30 (Reuters) -The number of U.S. workers filing new claims for jobless benefits rose slightly more than expected last week, but a gauge of underlying labor trends fell for a fifth straight week, government data showed on Thursday. 

Initial claims for state unemployment insurance benefits rose 25,000 to a seasonally adjusted 584,000 in the week ended July 25. The four-week moving average for new claims, considered to be a better gauge of underlying trends as it smoothes out week-to-week volatility, fell by 8,250 to 559,000. 

This was the lowest level since late January. The weekly moving average has declined for five straight weeks. 

A Labor Department official said the trend in claims was now back to where it would have been without July distortions caused by the timing of auto plant shutdowns. 

Analysts polled by Reuters had forecast new claims rising to 570,000 from a previously reported 554,000. 

The number of people staying on the benefit rolls after collecting an initial week of aid fell by 54,000 to 6.20 million in the week ended July 18, the latest week for which the data is available. This was the lowest since early April and marked the third straight week that this measure had declined. 

Here is the real story:
Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 35%

Unadjusted Year Over Year: Labor Department Initial Jobless Claims Up 35%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

  • Associated Press Headline And Lead: "New jobless claims rise more than expected... The number of newly laid-off workers filing first-time claims for jobless benefits rose last week, the government said, though the increase was mostly due to seasonal distortions."
  • Labor Department News Release: click here.
  • Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 507,464 in the week ending July 25, a decrease of 78,111 from the previous week. There were 376,123 initial claims in the comparable week in 2008."
  • My Spreadsheet (click Download 20090730yoy).

Here's my uneducated interpretation - On the crap detector front, AP quotes the US as saying that rising claims are "mostly due to seasonal distortions". Looking at the fine print of the data, on this week (next to last in July) from 2000 to 2008 the seasonally adjusted number fell (usually around 5,000 jobs) in every year and yet this week it rose 25,000 jobs! And we are supposed to think that this is an anomaly due to seasonal distortions! Government statistics appear to be "all spin, all the time".

Yes, there is a lot of seasonality here. Look back at previous years the seasonality indicates falling absolute unadjusted initial claims at this time of year and then staying low until late September. The next couple of weeks will be telling regarding how low this year's seasonal bottom will get. The unadjusted number is still way over the roughly 332K value for end of July 2001 when the previous recession was bottoming and the 338K value in 2002 when the stock market bottomed. I think the outlook is for continued economic contraction and increasing unemployment based on this data.

Here's a chart of the initial jobless claims since I started gathering them. The diamond dark blue line is the one that I think is key and having it fall to 400,000 would point to a bottoming of the downturn.

Here's a chart of the initial jobless claims for 2000 thru 2002. The stock market bottomed in the previous recession in the summer of 2002.


Commercial paper continues to contract because banks refuse to lend to each other. They are making enough money buying government bonds and making a spread of 3%:

US commercial paper outstanding falls in week -Fed 

NEW YORK, July 30 (Reuters) - The U.S. commercial paper market contracted for a third straight week, eroded by the impact of the global credit crisis and protracted economic downturn, Federal Reserve data showed on Thursday. 

For the week ended July 29, the size of the U.S. commercial paper market, a vital source of short-term funding for routine operations at many companies, fell by $27.6 billion to $1.066 trillion outstanding, from $1.093 trillion outstanding the previous week. 

The market is the smallest since at least early 2001, when the Federal Reserve began compiling data in its current form. 

The market has shrunk dramatically; to half the peak of some $2.2 trillion outstanding in August 2007 when the credit crisis broke out. 

Asset-backed commercial paper outstanding rose modestly by $900 million in the latest week to $437.8 billion outstanding, after falling by $4.6 billion in the previous week.


Foreclosures for June continue to rise:

Dave from Denver…

Foreclosures hit record level in June

My thesis earlier this week that a massive increase in prime mortgage foreclosures is going to cause a second, more deadly drop in the financial system is starting to grow some muscle:



 There is a great article that I would like everyone to read at


The author is Jim Willie and he discusses today that very shortly usa debt will be issued in Yuan.  A very scary  article:

( to get the graphs you have to go to the article at gold-eagle yourself)

USGovt Yuan Bond Threat



The tables are fast turning against the deeply indebted USGovt officials. USA Inc is in deep trouble. Its productive engines in both finance and industry are either wrecked or sputtering, even as its debt burden grows exponentially. Debt default litters the landscape. Next its sovereign bonds will be have to be sold to some extent outside the US$ Sphere, which will put at great risk its stock, namely the USDollar itself. Let's call them USGovt Dragon Bonds. The custodians desperately seek creditors to supply much needed capital in order to fund the gigantic and growing USGovt debts, which by the way are grossly understated. The last resort is to monetize the USTreasury Bond issuance, a process well along. With the aid of the USDollar Swap Facility, the USFed has been able to secretly bid on USTBonds from foreign soil, have it appear like foreign bids, and conceal the continued and broadening monetization initiative. The United States is boldly defying the creditor nations, printing money, and buying its own debt. When more fully revealed, the USDollar will suffer the consequences. A sense of betrayal will surely come, much like discovery that the CIA has been flooding the globe with counterfeit $100 bills, or Wall Street has been flooding the globe with counterfeit Fannie Mae Bonds. Closer to home, it is akin to selling lemonade has been secretly watered down, or putting lawn mower clippings into the reefer batch before sale.

Andy Xie is a former colleague of Stephen Roach at Morgan Stanley, and now a board member of Rosetta Stone Advisors. He is an Asian financial expert. He believes the USFed is locked in a tight corner, while the investment community suffers from a massive blind spot. He wrote, "The United States has no way out but to print money. Dollar weakness reflects the market's wavering confidence in the Fed. If the wavering continues, it could lead to a dollar collapse. Markets are trading on imagination. The world is setting up for a big crash, again." Contrast with a comment made by Jeffrey Immelt, the CEO of General Electric. He believes the US should take a cue from the Chinese, who are growing fast, invest in industry, and make things. Wow, what wisdom! So the great financial engineering movement promoted by Greenspan and Wall Street mainly produced big bond fees and a wrecked banking system. Yes, without any equivocation or doubt, tragically. The financial engineering devices were based upon innovation in leverage and fraud without benefit of tangible production, serving as the vast illusory machinery atop a gigantic system totally dependent upon inflation. It imploded. Another alternative exists, beyond Xie's radar. In addition to hidden monetization will come issuance of USGovt bonds outside the US$ Sphere. When the news breaks, it will hit like a tsunami.

Talk is everywhere one turns that the USGovt has little recourse but to print money and cover their debts. Such moves shift the risk from the USTreasury Bond to the USDollar in clear fashion. The Chinese Govt and Bank officials have been extremely vocal in the last few months, especially in the last few weeks. They abhor and are angry at both the rising USGovt deficits and the rising risk from direct monetization of those deficits in debt issuance. One could fill an entire page with warnings by the Chinese against American profligacy, reckless policy, and more. Every week contains major news wire stories, which do not receive proper attention in the US financial press. The Chinese are noticing even more dangerous developments, such as ineffective official stimulus, unproductive rescue of dead banks, endless credit derivative covered costs (AIG and Fannie Mae), entirely new programs with staggering price tags (health care), refused disclosure of disbursed Congressional funds, and tremendous waste, all of which not only result in gargantuan government deficits, but add risk to the USDollar from a failure standpoint. The criminal angle is increasingly being discussed in the open. Goldman Sachs has exposure from Ultimate Insider Trading software tools that were stolen, now being torn apart in London and Germany for evidence discovery. Perhaps worse, the US Federal Reserve is under challenge by the US Congress (in charge of its contract) for disclosure and audit that could eventually reach the US Supreme Court.

The Chinese are in town to meet with the USGovt officials on continued debt support. The public will surely NOT be told what is discussed. One informed contact wrote this morning that the US lies as a terminal patient in the Intensive Care Ward, and seeks a death with dignity from its Chinese creditor doctors. The challenge to China is to protect its main core of US$-based reserves, and to protect future investments. Incremental commitments must come with new more concrete protective measures. The financial markets are NOT factoring this in! They seem to operate on a 'Business as Usual' assumption that is dying rapidly.

In the past, the USGovt has actually boasted of a policy to inflate debts away by permitting inflation, and to anticipate debt repayment in cheaper dollars. In other words, permit the foreign creditors to take losses on the loan balance in real terms, a major betrayal. A double blow occurs when the USDollar falls and USTreasury yields rise, in the foreign creditor accounts. THE FOREIGNERS RESENT THIS POLICY TO THE EXTREME. Harken back to the 1970 decade, when the Arabs quadrupled the crude oil price. They reaped huge new windfall profits, as they realized enormous trade surpluses. But they were duped into recycling surpluses into USTreasury Bonds, probably with reminders of USMilitary protection. They suffered 30% losses on up to $100 billion in USTBonds invested. They remember. When USGovt officials promote a plan to inflate debts away, they are announcing a planned betrayal of foreign creditors. Nowadays, the US has much less financial power, prestige, and influence to force feed a policy to the creditor nations. The creditors are in revolt, are organizing, and have taken action at the grass roots level.

Times have changed in the entire psychology of credit support for the USGovt and USEconomy in a manner that is shocking, if not revolutionary. The creditor nations have begun to discuss new terms of continued support. Foreign creditors are noticing Uncle Sam groveling and in growing desperate and confusion. Behind the curtains, the Chinese have clearly struck some important deals. Rumors are ripe that in a March trip to Beijing, Secy State Hillary cut a deal promising Eminent Domain on US property in return for continued USTreasury Bond support. So maybe a shopping basket of thousands of homes, hundreds of commercial buildings, scads of idle industrial plants, and a few million acres of farmland are soon to be seized by the Chinese in exchange for USTreasury Bond debt. One must wonder. The American people, i.e. USA Inc shareholders, will be the last to know in this criminal syndicate environment, a hatched cloud from the Fascist Business Model. Seemingly on a quarterly basis, something must be handed to the Chinese for continued USTBond support. The USTreasury officials and USFed have lied through their teeth about avoiding direct monetization. If the Chinese have half a brain individually, they can see the back-door monetization with collusion of foreign central banks. The Chinese are in town for the next concession. One can only wonder. Well, the Jackass has a good idea of what comes next. It is just a matter of time.

The concept can be described in very simple terms. The vehicle is devastating in its effects and consequences. What are they exactly? The USGovt might soon issue bonds, except not in US$ denomination, but rather in Yuan currency. Out of the gate (with debt signposts), the USGovt must purchase gigantic swaths of Yuan and pay with USDollars. The result is a quantum decline in the US$ exchange rate relative to everything holding the Yuan together. The Chinese decided in 2005 to tie their Yuan currency to a basket of currencies, led by the US$, the Euro, the Yen, the British Pound, and a small additional group. So the direct purchase of Yuan by the Untied States, the newest upcoming member of the Third World, will have numerous profound effects to lift other currencies.

The direct consequences of USGovt Yuan Bonds would be vast, visible, lethal:

  • The USDollar exchange rate would fall with each debt issuance
  • The loan balance in USGovt debt would rise with a declining USDollar
  • The Yuan currency would be further established as a global reserve alternative
  • Continued trade settlement in Yuan terms would be enabled
  • Rise in entire cost structure to the USEconomy from commodity pricing
  • The risk of USTreasury Bond default grows with each passing new issuance

The Chinese want protection and assurance against the falling USDollar and even the growing principal risk of USTreasurys. Higher bond yields mean principal bond loss. Both currency and bond loss mean a powerful combined loss. Beijing wants protection and security in exchange for continued debt support. A Yuan-based bond issuance by the USDept Treasury, sold by the USFed would accomplish this to some degree. In a few years time, if the US$ exchange rate is 15% to 30% lower, the loan balance in Yuan terms would be unchanged. The cost to the USGovt grows by that percentage however. If the yield rises, then protection can be locked by means of making the debt securities of shorter maturity, like two to five years.

The Chinese have already been shifting their USTBond portfolio from long-term to short-term maturity. This has been the driving factor behind the rising 10-year USTreasury yield and the steeper yield curve. Perversely, the US banks enjoy a benefit. They can amplify their Carry Trade, borrow at the short end, invest in the long end, pocket the 2% to 3% difference, and even store their booty of bonds at the USFed itself. This is one reason the US banks are not lending to Main Street firms and households. They are too busy playing the USTBond Carry Trade under the aegis of the discredited US Federal Reserve. And the topic of Bank Consolidation has not even been raised, whereby the big US banks reverse the carry trade by buying up distressed regional banks. Maybe the Chinese will become involved in that racket as a fringe benefit. Maybe they have been tipped off to purchase stock in the giant pharmaceutical firms who will reap windfall profits as the swine flu is spread by means of faulty vaccines and forced inoculations.

The USGovt Yuan Bond will be a significant blow to the US financial sector from a psychological standpoint, a deep undercut to US supremacy and arrogance.China has not been able to supplant the USDollar from the top down within banking circles. The Yuan Bond will serve as the sword that shatters the highest tables finally, their first phalanx attack. The grassroots approach in international contract trade settlement, the bottom up, has already seen much progress. In time, the US$ fortress will be pretty, shiny, and full of cheesy fake marble, as it washes away to the sea. Less US$ demand will be seen in international trade contract settlement as a result, A KEY UNDERMINE TO THE USDOLLAR. Combine with more sales of USDollars to purchase Yuan necessary for the new bonds, to make for a deadly mix. We are talking about potential avalanches of US$ sales. The US$ exchange rate is at very high risk.

When other foreign creditors observe the USGovt Yuan Bond completion, they will want to execute the same. Prepare on the second round for Euro Bonds, Yen Bonds, maybe even Ruble Bonds and Loonie Bonds, as the Europeans, Japanese, Russians, and Canadians will want protection. They can demand it. The Chinese are the primary spearhead against the USDollar and its primacy as global reserve currency. Other nations will follow. The impact of the USGovt Yuan Bonds will be doubled when additional issuances are ordered and executed. The USFed will therefore morph into an agency that also purchases Chinese Yuan currency. Usually that means Chinese Govt sponsored debt securities, but also Chinese Corporate debt securities. Later, the Chinese will figure it out, and issue Mortgage debt securities, even Automobile and Credit Card debt securities. Thus the practical impact will be vast development stimulus for the Chinese Economy, as the USEconomy will slide into a Third World zone of under-development, deprivation, and destitution. China will assume the role of a predatory creditor nation, with the full privilege of either influence or abuse at their disposal. Reality thus strikes soon. Welcome to the post-Lehman era, with gratitude to Wall Street. Never lose sight of the role the US Federal Reserve has had in the destruction of the financial, economic, and implicitly political structure of the United States, now the Untied States.

Some precedent is forming. The US-based discount retail giant chain Wal-Mart has sold $1.1 billion in Samurai Bonds, denominated in Yen currency. The bonds hit the Japanese market in two tranches comprised of ¥83.1 billion in fixed-rate bonds and ¥16.9 billion in floating-rate bonds. The fixed-rate bond coupon was set at 55 basis points above prevailing yen swaps, while that of the floating-rate bonds was set at 60 basis points above the six-month LIBOR offered rate for yen. So Wal-Mart must be watchful of the US$ exchange rate relative to the Yen. US corporations will watch and learn, perhaps with a certain amount of dismay and trepidation. Government debt will follow like night follows day. With Japanese bonds called Samurai Bonds, one should expect the Chinese bonds to be called Dragon Bonds. The name is suitable, since the hot dragon breath will burn US$ paper globally.

The Japanese are bracing politically for a shun of typical obedient USTreasury purchases, or at least an altered course. In May a prominent Japanese politician called for no more loans to the USGovt based in USDollars, only in Japanese Yen. At the same time, some influential currency traders in Tokyo predicted that the US$ exchange rate would fall by 50% against the yen. Listen to an audio tape from the British Broadcasting Corp (CLICK HERE) to hear the debate and to learn details of how Asian business has suffered. The benefit to the US in both business and finance has come at a chronic Asian heavy cost. To shore up the shaky USFed primary bond dealer crew, they signed up two Canadian banks. What suckers! They also signed up Nomura Securities in Tokyo as primary dealer, making it the third firm to join the network of securities firms that underwrite the USGovt debt this year. Nomura was a primary dealer from 1986 through 2007, when it ended the role following a $656 million loss on US home loans. They are back for more losses.

We have come a long way from January when accusing China of currency manipulations, when accusing them of saving too much money and inflicting damage on the USEconomy, both absolute utter nonsense and extremely harmful propaganda. The USGovt officials and US bank officials have a remarkable ability to blame other nations for their own incredibly self-destructive policies and track record. These actions are without precedent, to insult and lay blame improperly on a creditor nation when the United States insolvent financial condition teeters toward bankruptcy, held up by more interventions, more fraud, and more phony money. Such accusations were delivered against China, immediately after the historic bank system breakdown in the United States tied directly to lending standard insanity for US home loans, insane bond leverage and packaging by Wall Street firms, corrupted debt rating agency with profound collusion, and a USFed central bank totally asleep at the wheel for half a decade. The entire financial system within the United States suffered a near fatal heart attack from a designed inflation policy combined with total carte blanche on reckless, predatory, and often illegal bank practices. The US bankers have since declared numerous errors committed, which is a euphemism for grand fraud. Even the London economist clowns admit a collective error from excess enthusiasm, a euphemism for grotesque structural defects and reckless policy errors.

Yet in the wake of all this failed policy, repeated crises, deep embarrassment from falling off the pedestal, the American leaders saw fit to accuse China of currency manipulation, excessive savings, and irresponsible export of boatloads of funds into the US debt and inflation machinery. If the truth be known, the Chinese merely served as a device to provide the excessive debt collateralized by the US housing sector a round trip back to the USEconomy. The US households used the home equity funds to spend on Chinese exported finished products. The Chinese cooperatively and dutifully recycled their trade surpluses into USTreasury Bonds and USAgency Mortgage Bonds.Creditors led by China are now angry enough at baseless accusations in the past to make tougher rules for continued credit support.

The blame game is the grand footnote in the mythology chapters, after events go awry. The Chinese obediently permitted the US debt machinery to provide the desired destructive impetus to support the USEconomy, all at US request. Between the years 2002 and 2004, US firms at the urge of the USGovt installed over $23 billion in direct foreign investment. The battle cry for the US economists and bankers was to realize benefits within the USEconomy by means of 'Low Cost Solutions' in reckless heretical style. It served as the mythological ideological chapter of those years. How did that work out, Mr Greenspasm? How did that work out, Mr Rubin, who pushed for the Chinese Most Favored Nation status? How did that work out, Mr Paulson? The United States not only has told mythology stories for years, but has integrated them into the USEconomic fabric and the US mindset. Ignorant and untrained, the US sheeple continue to accept the heretical drivel as fact, since the clowns uttering policy have PhD and Wall Street pedigrees of highly questionable value. Past performance, nearly total failure, is not relevant. Hmm! The latest mythology chapters have been centered on the nonsensical Green Shoots and a contradictory Jobless Recovery, both false, both baseless, both convenient.

The credit market seems asleep once again at the wheel. A horrible USTreasury auction just was completed on Wednesday morning, with dreadful bid action, and surely too much volume. A whopping $250 billion in official USTreasury auctions is planned for this current week, which must seem like a misprint. That volume requires greater monetization, greater stock losses, or newer innovative programs to encourage foreign creditors. The bigger apparent misprint is the USGovt deficits. The Wednesday auction was for $39 billion, almost four times a typical entire month from over a year ago. It fetched only 1.92 bid/cover ratio, when a 2.20 ratio had been seen recently, with 2.689% in paid yield. One must be a moron to find USTBonds a safe prudent investment these days. Then again, there are plenty of blockheads who still manage funds. A few years ago these same nitwits bought mortgage bonds since they paid a higher yield. Look at the chart of the 10-year USTNote yield. It has reached a point of needed conclusion, where a near-term rising trend meets a long-term nearly flat trend. The relative strength is looking good. The stochastix index indicates a possible uptrend thrust. Watch the 20-week moving average (in blue) for a bullish crossover above the 50-wk MA (in red). By bullish is meant rising yield, which leads to falling bond principal value.

Typically, when the USTreasury Bonds lose value, the principal beneficiary is Gold. Today, the financial markets are still celebrating an increase in home sales and a home price index that is no longer falling. OVERLOOKED ARE MANY KEY THREATS TO THE USTREASURY COMPLEX, EACH BENEFITS TO GOLD. They overlook the tremendous hidden home supply covered up by the banks, in REO properties withheld from the market. They overlook the miserable USTreasury auction, with more bad auctions to come. They overlook the 96% decline in US corporate profits since October 2007, in a gutted USEconomy. They overlook the skyrocketing USGovt debt finance needs, sure to continue even worse. They overlook the global revolt against the USDollar as reserve currency, where broad initiatives have considerable support, enough at least to chip away at the throne for the US$ trade settlement. They overlook the ineffective stimulus to date, and the criminal disbursement of Congressional funds, most likely for Wall Street benefit purposes. They overlook the nearly universal global debasement (if not destruction) of money and the financial structures, and the failed central bank franchise model. So, easily translated, the Gold price is a bargain made even cheaper by a $10 discount offered today. Paper money is gradually being recognized as ruined.

The Gold price shows a clear rising trend when viewed from a certain perspective. With a price discount today, it has come down to the 20-week moving average in a move toward greater stability. It has also come down to a clear but unorthodox uptrend line of support, with five touch points to render it meaningful. Pressure mounts on the 1000 resistance level. What will take the Gold price finally over 1000? Very difficult question. Certainly, some kind of disturbance to the system, something factored incorrectly in recent months, a shock, a scandal. Perhaps a breakdown in an important sacred structure like the COMEX for gold or the USTreasury auction system. The billionaires of the Arab world, who largely control far more Western banks than people notice, have been deeply involved with independent third party gold bullion bank audits since the spring. Many gold accounts have been sold and replaced illegally by paper certificates by New York and London, the epicenter of financial fraud and theft. The blood on the floor has been cleaned up quietly. With certainty, threats to aggrieved parties have been delivered. The pressures mount toward a breakdown.

A sequence is clear. The gold cartel digs in its heels and defends a given level. They dump paper gold on the market periodically in defense of the in defensible. The sequence has the strange characteristic of lower highs and higher lows each time. A resolution is demanded. The gold cartel is fast running out of physical gold with which to fill their rifles and artillery cannons. Being shot with a paper bullet from a rifle surely hurts, but the effect to stop a rush of angry investors cannot be stopped by paper gunfire. Beware of upcoming shocks.


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