Saturday, September 3, 2011

All Hands on Deck..Economy Imploding/DEFCON ONE imminent/gold and silver skyrocket

Good morning Ladies and Gentlemen:

The USA government released their jobs report and the report showed zero jobs was created.
I will discuss the numbers with you in the body of my commentary.First I would like to report that two banks entered the morgue last night taking their last breath before the FDIC entered and pronounced them dead:

1.  Creekside Bank of Woodstock Georgia
2.  Patriot Bank of Georgia,  Cumming Georgia.

The price of gold at closing comex time (1:30 pm est) came in at $1873.70 up a cool $47.70.
The price of silver fared even better rising to $43.02 for a gain of $1.54

Here are the final gold and silver prices from the access market:

gold: $1884.20
silver:  $43.25

gold and silver advanced to its zenith after the CME released its COT report which I will also discuss with you.

Let us head over to the comex and access the wild day of precious metals trading.

The total gold comex OI advanced by less than a 1000 contracts to 503,799 despite the huge run up in price on Thursday.  Bankers are covering their shorts with reckless abandon at higher and higher prices.  Some bankers are visiting their psychiatrists and some are jumping out of windows.  The rise in gold and silver are blowing up their derivatives.  The front options expiry month of September saw its OI fall from 579 to 509 for a loss of 70 contracts.  We had 76 deliveries on Thursday so we gained 6 contracts of gold ounces standing and lost zero oz to cash settlements.  The next delivery month is the October contract.  This contract month is a very low volume month as many investors seek the more popular December contract.  The October OI fell by a few contracts to 33,736.  The big December contract rose by over 800 contracts to 336,575. The estimated volume at the gold comex yesterday was very good at 193,980.  The confirmed volume on Thursday was lower at 147,977.

The total silver comex OI continues to contract.  On Friday, the OI fell to 111,735 from 112,243 for a loss of about 500 contracts with a huge rise in silver.  The silver bankers are joining the gold bankers in seeking medical help. The front delivery month of Sept saw its OI fall from 2418 to 1364 for a loss of 1054 contracts.
We had 550 delivery notices yesterday so we lost  504 contracts or 2,520,000 oz to the fiat bonus money supplied by JPMorgan's Blythe Masters. The big December contract remained constant at 76,939 contracts.
The estimated volume at the silver comex was 43,425 which is quite low.  The confirmed volume on Thursday was very anemic at 30,670 which kind of shows you how the bankers now are now loathe to supply any paper short.  You will see this in the COT report.

Inventory Movements and Delivery Notices for Gold: Sept 3.2011: 

Withdrawals from Dealers Inventory in oz
Withdrawals fromCustomer Inventory in oz
430  (Brinks,Manfra)
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in oz
8000 (Brinks)
No of oz served (contracts) today
30800  (308)
No of oz to be served (notices)
20,100  (201)
Total monthly oz gold served (contracts) so far this month
170,700 (1707)
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month
8560 oz

Again we had no gold ounces deposited by the dealer and no gold ounces withdrawn by the dealer. We did have another of our famous deposits into the customer of exactly 8,000.000
ounces of gold into Brinks.  Because of the exactness of this deposit you know that paper gold entered here and the vault is always Brinks.  We had the following withdrawals of gold:

1.  205 oz from Brinks
2.   225 oz from Manfra.

total withdrawal of gold: 430 oz.

The adjustments are also wild:

The paper 8000 oz of gold that entered the customer at Brinks were adjusted out of the customer and into the dealer.  It looks like the gold comex is becoming quite a joke.
The total dealer gold inventory registers tonight at 1.851 million oz.

The CME notified us that a rather large 308 notices were served upon our longs for a total of 30,800 oz of gold.  The total number of gold notices filed so far this month total 1707 for 170,700 ounces.  To obtain what is left to be served, I take the OI standing for Sept (509) and subtract out Friday's deliveries (309) which leaves me with 201 or 20,100 oz left to be served upon.  

Thus the total number of gold oz standing in this non delivery month is as follows:

170700 (oz served)  +   20100 (oz to be served)  =   190,800 or 5.9345 tonnes.
we gained 600 oz of gold standing from Thursday and lost zero to cash settlements.

And now for silver 

First the chart:

Withdrawals from Dealers Inventorynil
Withdrawals fromCustomer Inventory1,446,799 (HSBC,Brinks,Scotia)
Deposits to theDealer Inventorynil
Deposits to the Customer Inventorynil
No of oz served (contracts)  395,000 (79)
No of oz to be served (notices)6,425,000 (1285)
Total monthly oz silver served (contracts)4,010,000 (802)
Total accumulative withdrawal of silver from the Dealersinventory this monthnil
Total accumulative withdrawal of silver from the Customerinventory this month

 let us begin.

Again no silver was deposited to the dealer and no silver left the dealer.

For the second straight day we witnessed massive withdrawals of silver from the customer:

1.  669,579 from Brinks
2.  686,272 oz from HSBC
3.  90,948 oz form Scotia

total withdrawal from customer:  1,446,799 oz

we had no deposit into the customer.
We also had another of those strange adjustments:

14 oz of silver was added to the dealer HSBC
9 oz of silver was removed from the customer HSBC
5 oz of silver was thrown out the window.

The total dealer inventory in silver remains at 32.078 million oz
The total of all silver falls to 102.891 million oz.

The CME notified us that a total of 79 notices were filed on Friday for 395,000 oz of silver.
The total number of notices filed so far this month total 802 for 4,010,000 oz.
To obtain what is left to be filed, I take the OI standing (1364) and subtract of Friday deliveries (79) which leaves us with 1285 notices or 6,425,000 oz left to be served upon.

Thus the total number of silver oz standing in this delivery month is as follows:

4,010,000 (oz served) +  6,425,000 (oz to be served) =   10,435,000 oz vs 12,995,000 on Thursday.  We lost considerable silver to cash settlements yesterday.

To give you a little heads up for Tuesday in the delivery front:

gold:  another 213 delivery notices with 201 OI.  This means that a dealer was in great need of gold on Friday and exercised gold to deliver to a needy customer.

silver:  only 18.  Silver is in short supply.

Let us now proceed to our ETF's SLV and GLD and then our physical gold and silver funds:

Sprott and Central Fund of Canada.

The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.
Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.

First GLD inventory changes: Sept 3.2011:

Total Gold in Trust

Tonnes: 1,232.31
Value US$:


Total Gold in Trust: Sept 1.2011:

Tonnes: 1,232.31
Value US$:

we neither gained nor lost any gold into the GLD.

Now let us see inventory movements in the SLV: Sept 3:2011

Ounces of Silver in Trust314,503,353.900
Tonnes of Silver in Trust Tonnes of Silver in Trust9,782.15

 Sept 2.2011:

Ounces of Silver in Trust313,366,988.800
Tonnes of Silver in Trust Tonnes of Silver in Trust9,746.80

we gained 1.137 million oz of paper silver into the SLV

1. Central Fund of Canada: it is trading at a positive 0.9 percent to NAV in usa funds and a positive 1.2% in NAV for Cdn funds. ( sept 3.2011).
2. Sprott silver fund (PSLV): Premium to NAV stayed at a positive 20.13% to NAV sept 3.2011
3. Sprott gold fund (PHYS): premium to NAV rose to a 3.86% to NAV sept 3.2011).


The bankers still have some control over the central fund of Canada.
They are having their hands full with Sprott's as the silver fund exceeds 20% premium and the gold fund is now approaching 4%.  It kind of shows you the power of owning physical metal.

At 3:30 the CME released its COT report and the results are pretty stunning as the bankers are covering at higher and higher prices.  Let's have a look:

The Gold COT:

Gold COT Report - Futures
Large Speculators
Change from Prior Reporting Period

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, August 30, 2011

what a stunning report.

The large speculators that have been long in gold decided to take some profits and reduce some of those positions to the tune of 21,411.  They have made their fiat profits so they are happy but they would have been happier if they maintained their positions.

Those large speculators that have been short in gold certainly saw the tea-leaves and covered a huge 10,677 of their short positions at higher prices.  They are crying the blues with their losses.

And now for our famous commercials:

Those commercials that have been close to the physical scene and have been long in gold, added a smallish 1,326 contracts to their longs.  This could also be our banker shorts who go long on different months which is the same as covering their short positions.

Those commercials, like JPMorgan and friends who have been perennially short gold from 4 BCE to today, covered a stunning 11,755 contracts from their short side.  Please remember two important details:

1.  they covered at higher and higher prices in gold
2.  the report is from August 23-August 30 and does not include the big gains for the past 3 days.
The small specs seem to be getting into the action in gold:

Those small specs that have been long in gold pitched 3842 contracts from their long side.
Those small specs that have been short in gold covered 1495 contracts from their short side:

Our gold banker shorts are being cooked in their own juice. This is an extremely bullish COT report for gold.

 And now for our silver COT report:

Silver COT Report - Futures
Large Speculators

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, August 30, 2011

Our large speculators that have been long in silver and these guys are now considered to be strong hand players covered a tiny 2219 contracts from the longs as they took some profits.
They also wished that they had maintained their positions for the past 3 days.

Our large speculators that have been short silver also saw the tea-leaves similar to gold as they covered 2,051 contracts of their short positions.

And now for our commercials:

Those commercials that have been long in silver pitched 2,337 contracts from their long side.
This could also be our short bankers who buy long in other months which serve the same purpose as covering their shorts.

And now for our famous short bankers like JPMorgan and friends:
they covered a massive 4,288 contracts from their short side at higher and higher prices.

JPMorgan is sweating bullets this weekend.

I would also like to point out that the silver is in record backwardation in price of about 1.49 per oz from top to bottom in the future months.  It goes into real backwardation from March 2012 to 2015.  It is in slight contago for the first 6 months.  This is also a very bullish silver COT report.


Let us now see the big news of yesterday and how that will shape the price of gold and silver.
The big news of course is the release of the NON FARM PAYROLLS.  The number posted was a big fat zero.  That is no growth at all:

Courtesy Reuters official release:

WASHINGTON, Sept 2 (Reuters) - U.S. employment growth ground to a halt in August as sagging confidence discouraged already skittish businesses from hiring, keeping pressure on the Federal Reserve to provide more stimulus to aid the economy.
Nonfarm payrolls were unchanged, the Labor Department said on Friday, the weakest reading since September. Economists had expected a gain of 75,000 jobs. The report underscored the frail economy and kept fears of a recession on investors' radar.
"The economy is slowly grinding to a halt. The problem, however, on the policy side is that I wonder whether the numbers are truly weak enough to galvanize a political response," said Steve Blitz, senior economist at ITG in New York.
U.S. stock index futures extended losses on the data, while Treasury debt prices rose. The dollar extended losses against the Swiss franc, but rose against the euro.

Here is Jim Sinclair talking about the lousy job growth and what it did to markets around the world as well as John Williams new figures that show real unemployment at 22%

Jim Sinclair’s Commentary
Here is why you should subscribe to John Williams’ if you have not already.

CHART SHOCK: The REAL Unemployment Rate Is 22%

It's now above 23% with the August update. Details from John William's Shadow Stats.
Shadow Stats
The seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.
The U-3 unemployment rate is the monthly headline number. The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.

EUROPEAN STOCKS FALL … This morning’s weak employment report is having a negative impact on global stock markets. European stocks are down 3%. Chart 1 shows the German DAX to be the weakest of the three after having achieved a feeble rally over the last month. Chart 2 shows the French CAC Index failing at 3300 resistance. Chart 3 shows the London Times Index (FTSE) falling back below its mid-August peak at 5377. All three charts strongly suggest that the short-term rally in Europe has probably ended. U.S. futures are called to open sharply lower this morning as well. It looks like the U.S. rally has ended as well. Not surprisingly, bond prices are rising as bond yields drop. While economically-sensitive commodities are dropping, safe haven buying is pushing gold and silver prices higher. That should be good for mining stocks.
BOND YIELDS PULL STOCKS LOWER … Chart 4 shows the 10-Year Treasury Note yield (TNX) dropping close to its summer low. The solid line is the S&P 500. The chart shows that the recent rebound in stocks wasn’t confirmed by a rising bond yield. That’s another sign that the stock rally has probably run its course and that prices are headed back down.
GOLD STOCKS NEAR UPSIDE BREAKOUT… With gold and silver prices spiking higher this morning, it should be a good day for mining stocks which could be on the verge of a bullish breakout.. Chart 5 shows the Market Vectors Gold Miners Index (GDX) testing its highs near 64 for the third time. Technical odds for an upside breakout look very good.


The jobs number is generally a phony due to the plug addition of the B/D  (Birth Death)
To all newcomers, the BLS takes a figure of those who lost their jobs (Death) and these guys become entrepreneurs  (Birth).  They hypothesize on a number and it is always a huge number increase.  Yesterday the B/D plug was a monstrous addition of 87000 jobs. For the year so far they have added a fictitious 491,000 jobs.  What a joke:  (courtesy zero hedge)

Birth Death Adds 87K To Today's NFP Miss, 491K Jobs In Past Year Due To "Statistics"

Tyler Durden's picture

Take Green (i.e. double zero), and subtract from it the Birth Death adjustment and presto: you have reality, or what we predicted earlier today- a negative NFP print. Also, for the seasonal sticklers Birth Death has added 491k jobs in the past year: no seasonality here.
U.S. economic growth gauge sags in latest week: ECRINEW YORK | Fri Sep 2, 2011 10:31am EDT
NEW YORK (Reuters) - A measure of future U.S. economic growth slipped in the latest week, while the annualized growth rate tumbled to its lowest level since November, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index eased to 122.5 in the week ended Aug 26 from 122.7 the previous week. That was originally reported as 122.8 percent.
The index's annualized growth rate fell to minus 4.3 percent from minus 2.1 percent, hitting its lowest level since early November 2010.

Value1,740.00One-Year Chart for BALTIC DRY INDEX (BDIY:IND)


With the lousy numbers the world is producing we can now promise you QEIII will be upon us later this 
month.  It did not take the pundits long to announce this form of QEIII:

(courtesy Reuters)

US TREASURY OUTLOOK-Market expects Operation Twist in September
*After weak August payrolls data, confidence Fed must act
* Fed would sell short-dated Treasuries and buy long bonds

NEW YORK, Sept 2 (Reuters) - Bond investors see Federal Reserve action to boost the flagging U.S. economy as practically a done deal after Friday's dismal jobs report.
Government data showing the economy failed to create new jobs last month heightened speculation the Fed will launch a program this month to pump money into the economy by pushing down long-term borrowing rates.
The move, known to some in financial markets as Operation Twist, would probably involve the Fed selling shorter-dated Treasuries it holds its balance sheet and buying longer-dated bonds.
The Treasury market appeared to price in greater chances of this after the jobs report, with 30-year long bonds surging 3 points in price.
Goldman's call echoed in the Treasury market on Friday, with a flattening of the yield curve as traders increased positions in longer-dated bonds at the expense of shorter maturities.
Some analysts said even without the dismal jobs data the Fed's move would have been inevitable.
"We thought they were going to do it in August," said Ira Jersey, interest-rate strategist at Credit Suisse in New York."
"But I guess with some of the operational issues it raises they wanted to wait."
Operation Twist would take some fancy footwork, Jersey said, with the New York Fed likely having to hold two auctions in a single day.
In the first, the Fed would sell shorter dated securities.
It would then hold a second to buy bonds of longer maturities from primary dealers. Both auctions would settle the following day.
Hatzius, at Goldman, said such an operation would ultimately remove so much longer-dated debt from the market its effect would be almost as big as the Fed's last major easing program.
Referred to by many as QE2, the Fed bought $600 billion in Treasuries.
"This type of operation would be the equivalent of 80-90 percent of QE2 in terms of duration risk removed from the market," Hatzius said.

In operation twist, the Fed buys the longer maturities and sells its short 3 month or 6 month treasury bills and thus lengthens the duration of its holdings.

The problem here is how are they going to finance their huge 1.5 trillion dollar deficit?

Speaking of the debt and deficit, the USA has now reached their temporary debt limit, a month early:

(courtesy zero hedge):

Deja Vu All Over Again: Total US Debt Passes Debt Ceiling... In Under One Month Since Extension

Tyler Durden's picture

Remember when one month ago the US, to much pomp and circumstance, not to mention one downgrade,  announced a grand bargain raising the debt ceiling from $14.294 trillion to something much higher, with a stop gap intermediate ceiling of $14.694 trillion, or $400 billion more. Well, as of today, or less than a month since the expansion, total US debt is at $14.697 trillion. Yep - the total debt is again over the ceiling, which means the US debt increased by $400 billion in one month. Score one for fiscal prudence. And while the total debt subject to the limit is still slightly less, at $14.652, one week of Treasury auctions and will be time for Moody's to justify again why the US is a quadruple A credit.


Here is Goldman Sachs position as to why QEIII is needed
to pay off more bank bonuses at year end:

 (courtesy zero hedge)


Goldman Justifies The Need For More QE3, And Even More Record Wall Street Bonuses

Tyler Durden's picture

We end this busy day of economic buffoonery with Goldman's scorecard for August ("the US economy has not fallen off a cliff", which we translate as a B+, and "far better than expected"), which in turn explains why Goldman, and everyone else, now assumes QE3 (yes, Op Twist is QE3; get over it) is not only a given, but why in Goldman's esteemed opinion, the Fed has at least 3 rationales for pushing for more QEasing. Incidentally, these are as follows: "First, unemployment is far above the Fed’s long-term forecast in the low 5% range; the longer high unemployment persists, the greater the risk that an erosion of skills and labor force attachment will result in permanent supply-side damage. Second, economic growth has been woeful this year and there is no convincing sign of the second-half pickup in growth that the majority of Fed officials seem to expect. The payroll report in particular will weigh heavily in the minds of many Federal Open Market Committee members. Third, there is limited prospect for near-term fiscal stimulus from a gridlocked Washington." The only thing Goldman is avoiding, of course, is the wipe out in stocks that will make QE3 a virtual certainty, as we have been predicting ever since March. Goldman is also avoiding to mention that the only outcome of more QE will be another record year of Wall Street bonuses, all at the expense of more joblessness, higher gas prices, a 120% debt/GDP ratio, and overall sovereign insolvency. Oh well - in the meantime we continue, as we have for the past 2.5 years, to buy gold... or spam for the Econ PhDs out there.
Incidentally, just as amusing is our prediction fromNovember 2010:
Zero Hedge now believes a $5 trillion QE3 program will be announced by July 2011, when gold is trading at $10,000, the entire Treasury curve is at zero, and stock prices are meaningless courtesy of a DXY sub 50, and every commodity opening limit up daily.
Oddly enough, it was supposed to be a grotesque form of hyperbole. We are stunned to reread just how close we came to predicting everything to the dot.
From Goldman's Keynesian acolytes:
  • The US economy has not fallen off a cliff, despite the “confidence shock” precipitated by the debt ceiling impasse, the downgrade of the US sovereign rating, and the financial market turmoil of recent weeks.
  • The August employment report was weak but not recessionary. The payroll survey was very disappointing, with no job growth, a drop in weekly hours, and a decline in hourly earnings. But the household survey posted a decent gain and the unemployment rate held steady at 9.1%.
  • So far in the third quarter, “hard” indicators of economic activity look a tad better than our forecast of 1% real GDP growth (annualized), while “soft” measures such as business surveys look weaker. Recession remains a substantial risk but not our base case forecast.
  • The economy’s growth performance so far in 2011 would be disappointing in any year, and is woefully unacceptable given the high level of unemployment. So we expect the Fed to take further action at its September 20-21 meeting, most likely by announcing that it will extend the duration of its securities holdings by selling shorter-dated securities for longer-dated Treasuries.
  • We expect the impact of such a balance sheet “twist” to be similar to QE2. Given widespread speculation of further Fed action, and a very dovish set of minutes from the August meeting, we believe this impact is largely (though not completely) “priced in” to markets at this point.
In Search of Labor Day, Fed to Ease Further
The US economy has not fallen off a cliff, despite the “confidence shock” precipitated by the debt ceiling impasse, the downgrade of the US sovereign rating, and the financial market turmoil of recent weeks.
The August employment report was weak but not recessionary. The payroll survey was very disappointing, with no job growth, a drop in weekly hours, and a decline in hourly earnings. But the household survey posted a decent gain and the unemployment rate held steady at 9.1%.
So far in the third quarter, “hard” indicators of economic activity look a tad better than our forecast of 1% real GDP growth (annualized), while “soft” measures such as business surveys look weaker. Recession remains a substantial risk but not our base case forecast.
The economy’s growth performance so far in 2011 would be disappointing in any year, and is woefully unacceptable given the high level of unemployment. So we expect the Fed to take further action at its September 20-21 meeting, most likely by announcing that it will extend the duration of its securities holdings by selling shorter-dated securities for longer-dated Treasuries.
We expect the impact of such a balance sheet “twist” to be similar to QE2. Given widespread speculation of further Fed action, and a very dovish set of minutes from the August meeting, we believe this impact is largely (though not completely) “priced in” to markets at this point.
Despite a “confidence shock” precipitated by the debt ceiling impasse, the downgrade of the US sovereign rating, and the financial market turmoil of recent weeks, the economy seems to have staggered through August without a collapse. But with unemployment at unacceptable levels, growth below trend, and no clear evidence of a second-half pickup, we expect the Federal Reserve to take another substantial easing step at its September 20-21 meeting.
A Stagnant Labor Market
“Labor Day” is anything but in 2011, as the August employment report showed no growth whatsoever in nonfarm payrolls. The workweek shortened, average hourly earnings declined, and prior months’ payroll gains were revised down, making for a substantial disappointment that we would characterize as near-recessionary.
In contrast, the household employment survey was somewhat more encouraging, featuring a gain of 331,000 jobs in August (134,000 when adjusted to the payroll employment definition) and a slight uptick in the labor force participation rate. The unemployment rate was steady at 9.1% (see top exhibit on cover page).
Though the payroll and household surveys often diverge in a given month, both send an unambiguous message of weakness over the past few months, with household employment down slightly and payroll growth barely positive.
Little if Any Growth
A labor market in the doldrums is the natural result of listless GDP growth so far in 2011. We expect 1% growth for the third quarter, roughly the same pace as the first half of the year.
Recent economic news has offered a mixed picture of growth, roughly divided between “hard” indicators of economic activity and “soft” measures of sentiment. The “hard” measures—which include data such as retail activity, industrial production, and durable goods orders—currently imply a bit (though only a bit) of upside risk to our third-quarter growth estimate. Most surprisingly, reports from major retailers showed an uptick in August activity despite dismal confidence.
In contrast, “soft” indicators that focus more on sentiment or opinion have been weak for the most part. In particular, surveys of consumer confidence from the Conference Board and University of Michigan are at 30-year lows excluding the depths of the financial crisis. A number of business surveys have been extremely soft as well, in particular the Philadelphia Fed’s mid-month manufacturing survey, which fell to recessionary levels. But the bellwether business survey, the Institute for Supply Management’s manufacturing index, held roughly steady at 50.6 in August, a level more consistent with the soft-but-not-recessionary “hard” indicators.
Our Current Activity Indicator reads -0.5% with the August data in hand. Note, however, that the available indicators are skewed towards “soft” measures thus far.
Still Skirting Recession
On balance, the economy seems to have skirted recession so far. We recently evaluated a number of “rules of thumb” for recession as well as more formal regression models. The lower exhibit on the cover page shows a model incorporating indicators from the labor market (the change in the unrounded unemployment rate and the three-month change in payrolls), cyclical sectors (housing starts and the ISM manufacturing index), and financial markets (the S&P 500 equity index, the Treasury-Eurodollar spread, and the spread between the Moody’s BAA corporate yield index and long-term Treasury yields), as well as the trailing two-quarter real GDP growth rate. This model currently estimates a nearly 40% probability that the economy was in recession in August.
For estimating the likelihood of recession a few months from now, financial market variables take on greater importance. Exhibit 2 illustrates our financial conditions index, with and without an adjustment for oil prices. Despite the selloff in equities and widening in credit spreads, lower long-term interest rates and a weaker dollar have kept financial conditions slightly easier than early this year, with little net change in recent months. Thus, forward recession probabilities are lower if policymakers successfully evade additional near-term shocks from fiscal tightening (i.e. the yearend expiration of the payroll tax holiday) or financial stress (in particular, credit shocks related to the European debt crisis).
Fed to Try a Further Boost
We expect the Federal Reserve to launch another round of quantitative easing beginning at the September 20-21 meeting. Fed officials can offer several rationales for doing more. First, unemployment is far above the Fed’s long-term forecast in the low 5% range; the longer high unemployment persists, the greater the risk that an erosion of skills and labor force attachment will result in permanent supply-side damage. Second, economic growth has been woeful this year and there is no convincing sign of the second-half pickup in growth that the majority of Fed officials seem to expect. The payroll report in particular will weigh heavily in the minds of many Federal Open Market Committee members. Third, there is limited prospect for near-term fiscal stimulus from a gridlocked Washington.
Given the lack of unanimity on the FOMC and considerable opposition to asset purchases from some politicians, we think that “QE3” is likely to take the form of “going long” (extending the duration of the Fed’s balance sheet) rather than “going big” (expanding the balance sheet further), at least for now. We believe the impact of quantitative easing is proportional to the duration of Fed purchases. As we showed in a recent analysis, if the Fed sold all its securities maturing before mid-2013 and invested the proceeds in 10- and 30-year Treasuries based on the amounts available, it could achieve a market impact equal to 80%-90% that of QE2 without changing the size of the balance sheet. A further tilt towards 30-year securities could magnify the impact. Exhibit 3 (above) illustrates the current maturity structure of the Fed’s holdings and the market’s. Any manipulation of the portfolio is likely to take place over a period of a few months to minimize disruptions.
Further, QE is already priced into the market to a considerable extent. After all, the Fed went further than expected at its August 9 meeting, when it issued a conditional commitment to hold the funds rate at “exceptionally low” levels “at least through mid-2013”, and indicated the possibility of further action. The minutes from that meeting characterized this as a “measured” action and noted that “a few” members preferred a more aggressive move. A CNBC survey taken shortly after the meeting suggested that roughly half of market participants expected more QE; given the data flow since then and our subjective assessment from conversations with clients, a clear majority now expects it before the end of the year.


Lee Adler has given this great commentary on the shape of the USA economy showing tax revenues are 

plummeting  (excise taxes and corporate taxes):

(courtesy zero hedge/ilene and Lee Adler of the Wall Street examiner)

Bloody September

ilene's picture

Bloody September  

The following paragraphs are free excerpts from today’sWall Street Examiner Professional Edition Treasury update. 
As I estimated last week, the Treasury needed more cash than originally scheduled, or originally forecast by the TBAC. It announced a big cash management bill on Monday, and another one on Thursday to be auctioned next week. That should be enough for now, but revenues appear to be going off a cliff, with declines in withholding taxes now at the point where withholding is down year to year in real terms. That’s after being up strongly in May. It suggests that the US “conomy” entered recession over the past couple of months. Meanwhile, while the evidence suggests that the conomy has already been in recession, mainstream conomist pundits continue to argue about whether the conomy will have a double dip or not. While they are trying to figure it out, the damage to the financial markets is fait accompli, and will get worse.
Month to date excise taxes as of August 31 were down by 10%, compared with virtually unchanged at the end of July. Part of this was due to the temporary expiration of the aviation excise tax from July 23 to August 5, when it was reinstated. Since the tax was again being collected since August 7, most of the decline in the tax does appear to be due to less driving, drinking, smoking, air travel, and firearms purchases, in other words, all the fun stuff, among other things. The data suggests that the economy fell off a cliff in August.
Federal Excise Taxes Chart- Click to enlarge
Corporate taxes were down 23%, month to date versus last year. This is a sharp deterioration from the year to year change at the end of July when it was only down 17%. Because these are estimations based on the most recent quarterly activity, they suggest weakening economic activity. However, we must note that July and August are not months when quarterly taxes are due. The last big collection month was June. September is the next.
This is scandalous considering the outsized corporate profit reports. We have a serious problem of corporate undertaxation in the US, and an even bigger perceptual problem thanks to the politicians who call for no new taxes on “job creators.” The problem with that little rhetorical flourish is that the truth is that they are job destroyers and job exporters. If they are creating jobs, they certainly are not in the US.


The following sent gold flying in Europe yesterday ahead of the NFP numbers:

ECB Doesn’t Rule Out "PIIGS" Gold as Collateral for Gold Backed Eurobonds, Sends Gold Soaring. From GoldCore: ECB Doesn’t Rule Out "PIIGS" Gold as Collateral for Gold Backed Eurobonds.

Gold and the Swiss franc are higher today as risk aversion has returned with global stock markets falling on concerns the US employment figure later today will disappoint and confirm that the US economy continues to weaken.
Gold is trading at USD 1,853.50, EUR 1,300.10 , GBP 1,143.30, CHF 1,446.50 and JPY 142,320 per ounce. Gold’s London AM fix this morning was USD 1,854.00, EUR 1,301.23, GBP 1,143.81 per ounce. The gold fix was higher than yesterday’s in all currencies - USD 1,815.50, EUR 1,270.73, GBP 1,118.95 per ounce.
Today, the President of the ECB, Jean- Claude Trichet did not rule out a gold backed euro bond in an interview with ‘Il Sole 24 Ore’ published on the ECB’s website.
The comments were a response to former Italian Prime Minister Romano Prodi who proposed - in Italian national daily business newspaper ‘Il Sole 24 Ore’ last week - the creation of a euro bond backed by member states’ gold reserves.
Prodi was President of the European Commission from 1999 to 2004.
Trichet was asked about "the creation of a fund guaranteed by the gold reserves of countries that would issue bonds to buy back national debt and make new investments."
Trichet did not answer the question directly but said "at this stage, we have the EFSF bonds, which are bonds with a European signature. The main message of the ECB Governing Council to governments is to implement rapidly, fully, comprehensively the decisions taken by the European heads of state and government on 21 July."
Reuters reported today in an article entitled ‘Gold sales would not solve Europe’s debt troubles’ that "Europe’s most indebted nations are under heavy pressure from their richer neighbours to sort out their finances, but they are unlikely to mimic the impoverished gentlefolk of old by selling off the family silver — or in their case, gold – to do so."
Reuters recount how senior German lawmakers and politicians have advocated so called ‘PIIGS’ nations sell their gold to fund "bailouts".

Reuters says that the "demands ignore the fact that this gold is not the property of the PIIGS' governments to sell."
"Foreign exchange reserves are held and managed by central banks, not by governments," said Natalie Dempster, director of government affairs at the World Gold Council. "Forex reserves are set aside for specific purposes - defence of currency, payment of external debt obligations and payment of imports."
"In the past you could have had incidences where governments might try to overstimulate their economies by running exceptionally loose monetary policy before an election," she said. "That is a reason why it is critical, in an advanced economy, that central banks are independent", said Dempster.
With regard to Prodi’s proposal to create a euro bond backed by member states' gold reserves, Reuters said such proposals remain little explored according to analysts.
GFMS' Klapwijk said that "it has slightly surprised me that some of them haven't looked harder at some creative uses of gold in terms of gold-backed bonds, which might be a useful way of trying to lower the cost of borrowing."
"But again, they come up against the fact that the scale of the borrowing required is so large that there are probably other ways of trying to deal with the problem rather than using gold. That would probably be a drop in the bucket."
Separately the Central Bank of Ireland has said that it will not disclose whether the gold reserves of Ireland (a paltry 6 tonnes) have been swapped or loaned out or had any other receivable status recorded against them (see Commentary below).
A senior administrative officer for financial control at the Central Bank of Ireland responded to an inquiry regarding the custody and ownership of Ireland’s gold reserves: "The bank is not, however, in a position to provide further information, nor to outline its investment strategy in relation to the gold holdings." Gold’s lack of counter party and debasement risk and its safe haven status is resulting in it being slowly remonetised in the global financial and monetary system.
Gold’s status as a finite monetary reserve makes it ideal collateral today especially with the risk of contagion in the Eurozone and wider global financial system.

the problem of course is where are they going to get the gold back that they have already leased.


The next big news of yesterday was the fact that major lawsuits were being prepared against the banks for their folly into the mortgage fiasco:  (courtesy New York Times)

U.S. Is Set to Sue a Dozen Big Banks Over Mortgages

The federal agency that oversees the mortgage giants Fannie Maeand Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.
Joshua Lott for The New York Times
A foreclosed home in Arizona. The Federal Housing Finance Agency suits will argue that banks failed to perform due diligence and missed evidence that borrowers’ incomes were inflated or falsified.

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The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.
The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.
The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.
Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.
In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.
Private holders of mortgage securities are already trying to force the big banks to buy back tens of billions in soured mortgage-backed bonds, but this federal effort is a new chapter in a huge legal fight that has alarmed investors in bank shares. In this case, rather than demanding that the banks buy back the original loans, the finance agency is seeking reimbursement for losses on the securities held by Fannie and Freddie.
The impending litigation underscores how almost exactly three years after the collapse of Lehman Brothers and the beginning of a financial crisis caused in large part by subprime lending, the legal fallout is mounting.
Besides the angry investors, 50 state attorneys general are in the final stages of negotiating a settlement to address abuses by the largest mortgage servicers, including Bank of America, JPMorgan and Citigroup. The attorneys general, as well as federal officials, are pressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure.
And last month, the insurance giant American International Group filed a $10 billion suit against Bank of America, accusing the bank and its Countrywide Financial and Merrill Lynch units of misrepresenting the quality of mortgages that backed the securities A.I.G. bought.
Bank of America, Goldman Sachs and JPMorgan all declined to comment. Frank Kelly, a spokesman for Deutsche Bank, said, “We can’t comment on a suit that we haven’t seen and hasn’t been filed yet.”
But privately, financial service industry executives argue that the losses on the mortgage-backed securities were caused by a broader downturn in the economy and the housing market, not by how the mortgages were originated or packaged into securities. In addition, they contend that investors like A.I.G. as well as Fannie and Freddie were sophisticated and knew the securities were not without risk.
Investors fear that if banks are forced to pay out billions of dollars for mortgages that later defaulted, it could sap earnings for years and contribute to further losses across the financial services industry, which has only recently regained its footing.
Bank officials also counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy. Other experts warned that a series of adverse settlements costing the banks billions raises other risks, even if suits have legal merit.
The housing finance agency was created in 2008 and assigned to oversee the hemorrhaging government-backed mortgage companies, a process known as conservatorship.
“While I believe that F.H.F.A. is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again,” said Tim Rood, who worked at Fannie Mae until 2006 and is now a partner at the Collingwood Group, which advises banks and servicers on housing-related issues.
The suits are being filed now because regulators are concerned that it will be much harder to make claims after a three-year statute of limitations expires on Wednesday, the third anniversary of the federal takeover of Fannie Mae and Freddie Mac.
While the banks put together tens of billions of dollars in mortgage securities backed by risky loans, the Federal Housing Finance Agency is not seeking the total amount in compensation because some of the mortgages are still good and the investments still carry some value. In the UBS suit, the agency said it owned $4.5 billion worth of mortgages, with losses totaling $900 million. Negotiations between the agency and UBS have yielded little progress.
The two mortgage giants acquired the securities in the years before the housing market collapsed as they expanded rapidly and looked for new investments that were seemingly safe. At issue in this case are so-called private-label securities that were backed by subprime and other risky loans but were rated as safe AAA investments by the ratings agencies.
In the years before 2007, “the market was so frothy then it was hard to find good quality loans to securitize and hold in your portfolio,” said David Felt, a lawyer who served as deputy general counsel of the finance agency until January 2010. “Fannie and Freddie thought they were taking AAA tranches, and like so many investors, they were surprised when they didn’t turn out to be such quality investments."
Fannie and Freddie had other reasons to buy the securities, Mr. Rood added. For starters, they carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed.
In addition, by law Fannie and Freddie were required to back loans to low-to-moderate income and minority borrowers, and the private-label securities were counted toward those goals.
“Competitive pressures and onerous housing goals compelled them to operate more like hedge funds than government-sponsored guarantors, ” Mr. Rood said.
In fact, Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.
As of June 30, Freddie Mac holds more than $80 billion in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans. Freddie estimates its total gross losses stand at roughly $19 billion. Fannie Mae holds $38 billion of securities backed by Alt-A and subprime loans, with losses standing at nearly $14 billion.


and the lawsuits commence:  (courtesy zero hedge)
Two Down, Many More To Go - Bank Of America Sued For $31 Billion In Mortgage Losses
Tyler Durden's picture

  • And so it begins:
  • FHFA Sues Barclays over mortgage securities over losses for $4.9 billion: RTRS
  • FHFA Sues Merrill Lynch Bank of Americal over mortgage securities over losses for $30.85 billion: RTRS
Put a fork in Bank of Countrywide Lynch.
In the meanime, just about 10 more banks to go.
  • FHFA Sues Nomura for $2 billion in losses: RTRS
Update 2:
  • Citi... and so on.
Complete summary:
  • Federal housing finance agency sues Barclays PLC BARC.L - court filing 
  • Federal housing finance agency sues Barclays over losses on $4.9 billion rmbs 
  • Federal housing finance agency sues Bank of America Corp BAC.N - court    filing
  • Federal housing finance agency sues Bank of America Corp over losses on more    than $6 billion securities
  • Federal housing finance agency sues bank of America's Merrill Lynch unit over    losses on $24.85 billion securities
  • Federal housing finance agency sues Nomura Holdings Inc 8604.T - court    filing
  • Federal housing finance agency sues Nomura over losses on more than $2    billion securities
  • Federal housing finance agency sues Citigroup Inc C.N - court filing Federal housing finance agency sues Citigroup Inc over losses on $3.5 billion    securities

The Imminent Failure Of The Eurozone

Econophile's picture

This article originally appeared on the Daily Capitalist.

You know those movies with the bomb set to a timer ticking down to øø.øø where the sweaty hero nervously cuts one wire at a time while holding his breath and then at øø.ø1 he stops the bomb? Well Europe is like that except that the bomb goes off and kills everyone.

Our planet has a problem. Its leading economies, the U.S., Japan, and the E.U. are declining. That is, about one-sixth of the world's population is losing ground. These big economies are the ones that lead the rest of the world, including China. Countries like China, India, and Brazil, depend on the health of the big economies to keep buying their products and commodities so they can grow and generate wealth for their citizens. 
What is especially concerning is the blow-up that is about to happen in Europe. It is not something that is happening "over there." In a world that is so interconnected financially and by trade, a sinking Europe is everyone's concern.
Their problems are much the same as ours with a twist. Their governments and central banks have also pursued reckless monetary and fiscal policies and now, effect is following cause. They have more or less followed the same policies as has the U.S., much to the same end. They spent large, engaged in Keynesian fiscal stimulus in a bailout attempt, ran up huge debts and deficits, and their economies are in decline.
The twist is the European Monetary Union (EMU), known as the eurozone. It is as if here in the U.S. there was no federal government and each state was truly sovereign, but there was a Federal Reserve Bank. Some states spend more than others, funding deficits by borrowing huge sums to support programs their citizens wanted. The profligate states want the Fed to buy their debt and float them loans created out of thin air, or otherwise they will go belly up and they will take down many states' banks. The responsible states know they will be stuck with the bill.
The EMU started on the idea that it would bind the EU closer. In essence it was a political decision rather than an economic decision. They passed a stern rule that said no state could run of deficits of more than 3% of their GDP. Except for Estonia, Finland, and Luxembourg, all countries, including Germany, now exceed the limit. Thus their politicians sacrificed fiscal probity for political gains.
They have hit the wall: Greece will soon default on their sovereign debt. On Tuesday, yields on one year Greek bills  reached 60%.  It is a sign that investors have no faith in the Greek government's ability to repay their debt. 
The EU, ECB, and the IMF are trying to establish a European Financial Stability Facility (EFSB) in order to further bail Greece out. They have already pledged €110 billion and they are trying to put another package together of €109 billion. But Finland insists that Greece puts up additional collateral, which is not possible. Since the collateral would be part of the bailout money, it would be, in essence, Germany and France guaranteeing Finland's contribution.
Greece has missed every fiscal target it or its saviors has had. They are trying to get their deficit down to 7.6% of GDP through more austerity measures, but it looks like they will miss again (est. 8.5+%). Basically they are asking the Greeks to do something they don't want to do, and they will no doubt take to the streets again in protest.
If they default, then that opens a can of worms. European banks, other than Greek banks, hold €46 billion of Greek sovereign debt. Belgium's Dexia hold Greek sovereign debt equal to 39% of its equity; for Germany's Commerzbank, it's about 27%. On top of that, EU banks are into private Greek companies for about €94B (France, €40B; Germany €24B). According to the Wall Street Journal, the total market cap of all EU banks was just €240. The same article also points out additional unknown liabilities to insurers and investment banks. 
The International Accounting Standards Board (IASB) haswarned banks they need to write down, or mark-to-market, the Greek debt they hold. Whether they do or don't doesn't matter. The fact is that these banks are undercapitalized and in trouble. Their "stress tests" are a fiction. Liquidity is starting to shrink in their banking system because of these jitters. Rabobank, for example, said it is growing cautious about interbank lending – now limited to overnight loans. More banks are stepping up to the ECB window for funds. Overall, credit is starting to tighten. Nervous Greek depositors are withdrawing funds from their banks. Rich Greeks never trusted their banks.
In other words the Europeans have created a problem that they can't solve, easily at least.
Here are their alternatives:
1. Keep bailing out Greece, with the specter of Italy and Spain being the next target of market forces as EU economies cool off. This is not appealing to Germany and France who know their taxpayers will have to put up most of the money.
2. Have the ECB buy as much Greek debt as necessary to keep Greece afloat. The problem with that is inflation and the prospect that they may be setting a bad precedent for other countries. 
3. Have the EU issue bonds guaranteed by individual countries, which again is mainly Germany and France. Same problem as No. 1. As Sarkozy said they don't wish to guarantee debt they don't control – the spenders have no incentive to curtail spending.
4. Opt for a fiscal union whereby Brussels controls spending and taxation. Or, at least, as Sarkozy and Merkel propose, coordinate their fiscal and tax policies and pass a balanced budget amendment in each country. Good luck with that. Chances: zero.
Which one of those policies will best satisfy these three necessary goals required to ameliorate the worst damage:
  • Remove the need for the ECB to buy bonds continually on secondary markets;
  • Ensure that troubled countries have access to financing;
  • Prevent the strong countries from being dragged down by the weak.
Which one of the above policies will prevent Greece from defaulting, will let the rich countries off the hook, will create enormous liquidity in the eurozone, and will bail out the banks?
The answer is the obvious one, the one that won't hit the taxpayers of the EU's powerful economies, that reduces the net effect of debt to sovereigns, that bolsters the reserves of nearly insolvent banks (at least on paper), and puts the problem off for another day. That would be solution No. 2— quantitative easing, or monetization of Greek debt.
It also lets the taxpayers of Germany, France, and Belgium, whose banks hold lots of Greek public and private debt, off the hook because Greece will be able to repay their obligations in devalued euros. That is, the taxpayers in those countries won't have to pay the tab to refloat their banks. Or, at least as big of a tab as if Greece defaulted.
This plan solves nothing except in the very short-term. The day after tomorrow, inflation will melt away much of the eurozone's sovereign debt as well as private debt, and savers will be robbed of their capital. Capital will be destroyed and consumed by price inflation. Their economies will continue to stagnate, unemployment will remain high, tax revenues will eventually decline in real terms, and they will again be facing the same problems they face today. There is no way to avoid it. 
The EU faces an insolvable problem, but it is one they created. You can't have a monetary union without a fiscal union. At least when no nation is obligated to play fair. They either terminate the EMU or paper it over. There is no other practical fix, at least when economies of member states are declining. They are the poster child for the failure of Keynesian-Monetarist economics.

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